Survival of the fittest in Middle East and North Africa

If you are a firm that launched at the “birth” of the Middle East and North Africa private equity industry around the millennium and are still investing today, then you have – to some extent – proved your staying power.

Firms now on their second generation funds have survived the swing from abundant capital post-9/11, a swell in Gulf government spending, regional stock and real estate market booms and oil price highs of more than $140 a barrel, to market corrections, a credit crisis and the political ructions of the Arab Spring that continue today.

Key among the changes in fortune is declining growth, with the GDP of regional giant Saudi Arabia forecast to grow only 1.2 percent this year, according to the International Monetary Fund. With oil trading as of mid-May at below $50 a barrel, investors are hoping a new economic reform agenda will ameliorate the situation.

In Egypt, historically one of the most active private equity markets, political upheaval and currency risk have given investors pause.

Managers such as UAE-based firms The Abraaj Group, Gulf Capital and, more recently, Samena Capital, have stayed the course, expanding assets under management by diversifying across strategies and geographies, and looking to nearby markets for additional sources of dealflow.

Abraaj is close to reaching the $500 million target on a Turkey-focused fund that follows hot on the heels of its second North African vehicle that closed on $375 million in July 2015, smashing its $250 million target.

Such is the volume of dealflow in North Africa, the fund was almost fully invested nine months after it closed, Abraaj partner and head of MENA Ahmed Badreldin says.

Sectors targeted by Abraaj North Africa Fund (ANAF) II include healthcare, fast moving consumer goods and education; these consumer-driver investment themes are popular among private equity investors. But this fund, Badreldin notes, has a more specific investment focus than its predecessor.

One of its goals is to build the region’s largest hospital group through its Egyptian/Tunisian healthcare platform North Africa Hospital Holdings Group. The platform, established in March 2015, is an example of the increasing use of buy-and-build strategies in the region.

Another goal is to buy majority stakes. “Our preference in North Africa is to do control investments and less minority. ANAF I was all minority except one.”

In contrast to active North African markets, the volume of transactions in the Gulf is low and assets are “still quite pricey”, Badreldin says. “Healthcare is expensive in the Gulf. In education you have a number of specialised funds, which drives the price up. In food, you have to be selective.”

Food is a crowded sector. One recent investment was Gulf Capital’s acquisition in May of 100 percent of Saudi Arabian food and beverage distributor Multibrands Trading Company. On the private debt side, Gulf Capital is also looking at a bakery business, as well as logistics, oil and gas services and petrochemicals.

Gulf Capital is raising its second generation credit fund, Gulf Credit Opportunities Fund II, and has received $205 million of commitments toward the fund’s $250 million target, which it expects to reach by June. The fundraising has benefitted from investor awareness of the dislocation between local banks’ ability to lend and local businesses’ need for finance, says Gulf Capital senior managing director and head of Gulf Capital Credit Partners Walid Cherif. Broadening its appeal, it has partnered with Africa-focused investment bank Serengeti Capital to target sub-Saharan opportunities in addition to MENA and Turkey.

“The Africa strategy that we started in Fund II to give us some diversification in the portfolio… that will also give other investors in Europe and the US the opportunity to get exposure to the Middle East and Africa, [and] a potentially emerging market private debt strategy,” he says.

Duet-CI Capital – a partnership of London-based Duet Group and Egyptian investment bank CI Capital investing in Egypt – is seeing increased competition for deals driven by the emergence of well-funded private equity firms from sub-Saharan Africa.

This is an additional challenge in a market already destabilised by a number of internal upheavals. The devaluation of the Egyptian pound in March by 13 percent, its largest drop in 13 years, was the latest to have a direct impact on investors. Another, is a freeze on privatisation.

Although the Egyptian economy is starting to see some recovery, thanks in part to government investment in infrastructure, firms are still cautious. “We need to be even more selective in terms of sectors, companies and promoters that we look into,” says Duet-CI Capital senior managing director Amr Helal.

However, there is proprietary dealflow. Duet-CI Capital Egypt Opportunities Fund, a $300 million vehicle launched in 2014, is near to finalising its first investment into a logistics company.


Overall, fundraising targeted at the region was robust in 2015, totalling $4.9 billion of capital raised compared with $2.6 billion the year previously and $2.9 billion in 2013. Despite the uncertainty, increasingly sophisticated regionally-based GPs with a track record are able to attract foreign LPs.

In addition to its typically strong Gulf investor base, Gulf Capital’s Cherif says the credit fund is talking to an Asian sovereign wealth fund that already has a relationship with the firm on the core private equity side and is in “advanced discussions” with a European LP.

“We would obviously like to have a diversified pool of investors and constantly talk to investors inside and outside the region,” he says.

Local GPs like international LPs, as they are willing to write larger cheques and are familiar with the asset class, says Dubai-based Wassim Moukahhal, senior vice-president at Samena Capital. “They know it’s long term. They understand the J-curve.”

In contrast, many locally-based LPs, which include high net worth individuals and family offices, have stepped back from private equity.

“Regional LPs take a very cautious view of private equity, especially traditional LP/GP structures, because they incurred losses earlier,” Moukahhal says.

One consequence is the local LP base, which always included sovereign wealth funds, pension funds and insurance companies, has become more institutionalised. “Pension funds are more active and SWFs have structured themselves in a much more focused way,” Moukahhal says.

Having learnt from experience, local LPs are seeking more control; demand for co-investments is greater than ever.

“LPs realise that they need oversight and a more hands-on approach,” Moukahhal says.
“Some have built their own internal teams, even mid-sized family offices have built their own internal capabilities to execute co-investments alongside managers.”

Samena, which invests in the region through its first and second generation special situations funds, has direct experience of the trend. Its $250 million investment in 2014 in RAK Ceramics was a co-investment alongside large family offices and sovereign wealth funds in the region.

Gulf Capital’s credit strategy is considering its first co-investment, recognising that teaming up will allow it to pursue larger transactions. It typically makes investments of $10 million-$30 million, but is “seeing some larger opportunities” that it does not want to miss out on, including a $50 million deal it has in its sights. “It is a new thing for us,” Cherif says.

Over the past year, international GPs, whose interest in the region remains selective, have also sought out local partners. In April 2015, Texas-based TPG made its first foray into the region alongside Abraaj, co-investing in Saudi Arabian fast food company Kudu.
Foreign competition for deals “is not something that we as local managers are worried about”, says Moukahhal. He notes that only a “handful” of the right type and size of opportunities exist to attract the attention of foreign GPs.

Samena sees more competition from foreign strategic buyers, such as Coca-Cola, Pepsi and Kellogg’s, which, just like the established private equity firms in the region, can boast the clear advantage of having teams on the ground.


The announcement in mid-January that the US, EU and UN had decided to lift the bulk of the trade and financial sanctions imposed on Iran in return for concessions on its nuclear programme has raised the curtain on an as yet untapped private equity market.

The investment potential created by a young economy of 80 million people in which private business has been starved of capital, is enormous. And the appetite to invest is strong.

Tehran-based funds Turquoise Partners and Griffon Capital were ready and waiting. Since the sanctions announcement, both firms have begun fundraising in earnest, talking to investors, primarily in Europe, for their debut vehicles.

“We have some small commitments that were dependent on the sanctions [news],” Turquoise head of private equity Jhubin Alaghband told PEI in January.

Turquoise has partnered with a Swiss bank to manage its $150 million vehicle for which it had already secured about $30 million-$40 million in soft commitments from high net worth individuals. “Appetite from Europe is greater than the rest of the world,” he said.

Both firms intend to exploit the pent-up domestic demand for goods and services. Griffon’s Iran Consumer Opportunity Private Equity Fund is targeting $130 million to be invested in tickets of $10 million-$20 million.

Speaking on an investor call in April, Griffon managing partner and head of private equity Xanyar Kamangar said that conditions are ripe for the next 12-18 months to invest in the fragmented consumer sector as spending is constrained and Iranian private companies are currently valued at a 20-25 percent discount to their public market counterparts.

“In private equity it’s easiest to buy very cheap and that is where we are right now,” he said.

Others are more hesitant. “It’s a no-brainer that it’s a very attractive market, but the economy is still struggling,” says Samena Capital’s Dubai-based senior vice-president Wassim Moukahhal, highlighting that the banking sector requires significant reform.