Private equity’s last frontier

A recent white paper published by PEI shows allocations to the MENA region are rising slowly, but investors expect to get paid for the additional risk.

A majority of international limited partners (LPs) have not invested in Middle East and North Africa (MENA) and remain cautious about entering the asset class there, especially in the short term. A recent global LP survey undertaken by PEI, whose full findings are revealed this month in a white paper entitled “The Final Frontier: An Investor Perception Analysis of MENA Private Equity”, has highlighted however that many of the most enterprising (and arguably least risk-averse) types of private equity investor – including the fund of funds groups, investment advisors and commercial asset managers with long-standing exposure to the asset class – have been making inroads in recent years.

Of the limited partners we interviewed, a significant 32 percent said they currently had a formal allocation to MENA private equity. The figure reflects the strong bias towards funds of funds and investment advisors in our overall sample – excluding them leaves just 13 percent of respondents (pension funds, development agencies and sovereign investors, among others) with an existing allocation to the region.

When asked about plans to develop their portfolios geographically going forward, no less than 43 percent said they were expecting to have a MENA allocation in place by 2012. Put another way, no less than 11 percent of those polled predicted that in the next two years they would enter MENA private equity for the first time.

In our interviews, we asked every LP to forecast whether their target allocation to MENA private equity would rise, fall or remain the same over the next several years. Here, too, the responses suggest that on the whole, limited partner support for the region is going to increase: 31 percent of investors, including several whose allocation to the region is currently zero, said allocations would increase.

A number of respondents cited a range rather than an exact percentage to describe allocation plans. We took the median of all stated ranges to then calculate the average allocation to regional private equity for the overall sample and found it to currently stand at 1 percent of total private equity capital. Repeating the calculation based on the expected allocation levels for 2012 showed that the average allocation to MENA between now and then is expected to rise to 1.6 percent.

This optimistic outlook notwithstanding, our respondents also made it abundantly clear that to attract a greater share of global capital going forward, MENA private equity will continue to find itself competing with other regions and must deliver returns in excess of 20 percent. As one LP put it, MENA private equity will be judged “in the round” with its emerging market competitors, particularly Asia and Central and Eastern Europe.