Saudi Arabia is not well-known for its amusement parks, but that is one of many things the kingdom is trying to change.
In late April, it broke ground on a huge entertainment complex southwest of Riyadh, which will host motor sports, safari and water parks and a Six Flags theme park, with the intention of pulling in 17 million visitors by 2030.
The hub is among the mega-projects being funded by Saudi’s Public Investment Fund as part of the Vision 2030 plan, which aims to diversify the kingdom’s economy and develop sectors such as health, education, infrastructure, recreation and tourism.
The apparent change in the Gulf has caught the interest of investors and GPs alike. Among them is Karim El Solh, chief executive of Abu Dhabi-based Gulf Capital.
“If you told me five years ago, come invest in tourism and entertainment in Saudi Arabia, I would not have believed it,” he says. “These are new industries and they’re very promising now. Clearly there’s a new momentum in the region, and that’s very exciting for us.”
The point of these efforts is to move the country away from its dependence on oil, a need underlined amid the damage done to Gulf economies in recent years following a slump in oil prices.
That economic slowdown has, however, provided an opening for private equity, says El Solh, as bank liquidity has dried up and the booming initial public offering market of ten years ago has ground to a near-halt.
“Suddenly, private equity has become a provider of growth capital liquidity for business owners looking to secure funding. It is becoming more prevalent and more readily accepted”
Karim El Solh
“Suddenly, private equity has become a provider of growth capital liquidity for business owners looking to secure funding. It is becoming more prevalent and more readily accepted,” he says.
That has drawn in other international dealmakers, including Evercore and rival Houlihan Lokey, which both set up shop in the United Arab Emirates in the fall. The latter cited not only liquidity needs in the region, but a “rapidly improving regulatory and legal environment” in its decision to open a Dubai office.
In Q1 2018, GPs completed 14 deals across the MENA region, the most since Q3 2016, according to data from EMPEA. However, 2017 was the weakest of the last four years for both dealmaking and fundraising, and Q1 2018 has passed without a fund close.
Helmut Schuehsler, chief executive of TVM Healthcare Partners, which has been active in the Middle East for 10 years, says the challenge for a private equity firm in the region is twofold.
First, most international investors don’t have a specific strategy for the Middle East, while the development finance institutions, which do, don’t view the wealthy Gulf countries as aligning with their mandate.
“For international institutions, the Middle East is an opportunistic decision; you have to convince them one by one,” he says.
For TVM, that has increasingly meant embedding its Gulf Cooperation Council healthcare investments into a wider geographic mandate. Its latest fund, TVM Healthcare MENA III, expected to close this year, will seek healthcare deals not just in the Middle East, but in South-East Asia and India.
Another challenge lies in misunderstandings about the region from outside.
“The perception of the Middle East is becoming more and more like a woodcut – black and white, and very rough – but in reality, it’s a highly intricate pencil drawing. It’s not one region. It’s hugely diverse – even the spoken language is different from Casablanca to Muscat – and there is no political cohesion.”
One of the clearest demarcations within MENA has traditionally been between North Africa and the oil-exporting nations of the GCC. GPs doing business in the GCC tout that region’s political and economic stability and investment-led economic growth model. Governments with spending power can be a double-edged sword, however.
“In the UAE for example, especially in Abu Dhabi, the government has more financial power, if they decided to crowd out private healthcare with public spending, they could do it tomorrow,” says Schuehsler. “So what we’re looking for is a visible, continuous commitment to support private sector healthcare and to make very clear which sectors in the industry they want the private sector to pick up.”
Schuehsler meanwhile cites as a concern the discord between Qatar and the rest of the GCC, which he says has “destroyed a fundamental belief by international investors that this is a unified bloc of countries that can sort their issues out internally”.
Combined with war in neighbouring Yemen and the sabre-rattling between Saudi and Iran, it creates a difficult picture.
Those perceptions matter. Schuehsler recounts having spoken to a group of European investors who were interested in a co-investment opportunity in an Egyptian company.
“Their investment committee meeting was scheduled for Monday, and on Sunday 19 people were killed in Egypt in a bomb blast, so on Monday the board said, ‘You know what? No thanks’. There is a clear impact that all these things have on the behavior of investors around the world.”
But as El Solh points out, headlines aren’t everything. “Negative news can scare potential investors, but if you look beyond the headlines, you have some really nice growth stories in places like Saudi, Dubai and Abu Dhabi and even Egypt.”
In the Gulf in particular, the major changes driving growth go beyond grand visions of entertainment hubs or government funded mega-projects. In 2006, Gulf Capital focused on oil and gas, construction and infrastructure.
“Today, we’ve taken this entire playbook and thrown it away – we’ve reinvented how we invest,” says El Solh. That means moving from oil and gas toward renewables, especially solar, and away from cyclical industries toward defensive ones, like food, consumer and healthcare.
“Consumer is the new oil, but we have to go and mine it,” he says. “We have, in the Gulf, the youngest population in the world, the fastest growing population in the world, and the wealthiest population in the world. And that population is very tech-savvy, with a very high internet penetration.”
Some of its most recent transactions – acquiring a controlling stake in a healthcare-focused tech firm and a strategic stake in the leading payment services company in Saudi Arabia – bear this out. The latter deal also aligns with a government initiative to promote the fintech sector amid Vision 2030’s goal of a cashless society, another ambitious target.
“The Gulf is in transition, but this is a region that’s changing for the better,” says El Solh. “What’s happening with Vision 2030, the leadership is making very-needed reforms. It’s launching new industries, liberalising the economy and bringing women into the workforce – and these are all very exciting changes.”
Schuehsler, too, is tentatively optimistic.
“The big changes in Saudi, if they go through, will be better for the entire region, not just in terms of the economy, but in terms of social and human rights,” he says. “But the jury is still out. The political will is there to change dramatically, but that needs to be translated into daily action in all the administrative bodies of the country, and that’s not going to happen overnight.”