Executive Insight – GVCA

Smaller investments will be big news in 2011

 

It is telling that the most exciting event in private equitythis year was the Celebration of Entrepreneurship event in Dubai — also knownas Wamda, the equivalent of the West’s eureka. It brought a much neededfreshness and vigor to a private equity industry that is in search ofexcitement and vision.

The private equity industry landscape has changeddramatically in the past two years as the mood has swung from celebration tohumility. Fundraising and deal-making activity shrunk in 2009 by as much as 85percent and did not recover, as many, including yours truly, hadprophesied. 

The number of funds that are active and investing has alsoshrunk to less than a dozen in the Gulf Cooperation Council from a peak of morethan 50, with many fund managers unwillingly switching from being deal makersto caretakers. Some funds have already closed down shop while others are facingup to the fact that, after their current ventures wrap up, there aren’t any tofollow.

Over the past four years, successful managers raced to raisebigger and bigger funds (as big as $4 billion) and few managers remainedfocused on the smaller opportunities, which constitute the mainstream of thecorporate landscape in the Arab world. Constrained by their current mandate,the remaining mammoth funds are now facing a new challenge: access to qualitydeal flow. These large funds are starving for new investment opportunities thatcan deliver the promised returns and are facing the grim scenarios of eitherreturning some of the cash raised to investors or investing in sub-pardeals.  

Funds raised in the MENA, by size

Going back to Wamda celebrations, the 2,000 delegates thatparticipated in the festive conference represent a renewed and revived core ofthe Gulf’s economic activity. Gone are the days when business in the region meantbetting on inflated real estate prices and skyrocketing stock markets. A muchmore sober mood of industrious entrepreneurship is setting in.

The number of people I know personally that are en-route tostarting their own businesses, despite the recessionary environment, isenormous. They come from all walks of life — from students to executives — andare setting up everywhere from Riyadh, to Jeddah, to Cairo, to Dubai, toBeirut, to Amman.

In the past 20 years working in the region, I have not seensuch a vibrant entrepreneurial environment as I do today. The benefits ofeconomic liberalization are starting to trickle in.

So what does that mean for private equity?

It means that there is a stellar increase in demand forequity funding, which is good news in principle, except that economicliberalization measures have not extended to privatizing large-scale stateenterprises. Instead they have given rise to a wave of grassrootsentrepreneurialism.

In other words, large private equity funds seeking to attract,say, a company like Gulf Air, are going to compete with each other over the fewopportunities of such scale that remain. On the other hand, smaller growthcapital funds focused on funding a company like Bateel — a successful regionalchain of date stores and cafés — will have ample opportunities from which tochoose.

Large funds are rigidly geared to do large deals; due to thehigh profile of the people they hire and the bandwidth of their fund managersit won’t be easy to switch their focus to smaller deals.

IMAD GHANDOUR is chairman of Gulf Venture Capital Assocation

 

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