It is telling that the most exciting event in private equity this year was the Celebration of Entrepreneurship event in Dubai — also known as Wamda, the equivalent of the West’s eureka. It brought a much needed freshness and vigor to a private equity industry that is in search of excitement and vision.
The private equity industry landscape has changed dramatically in the past two years as the mood has swung from celebration to humility. Fundraising and deal-making activity shrunk in 2009 by as much as 85 percent and did not recover, as many, including yours truly, had prophesied.
The number of funds that are active and investing has also shrunk to less than a dozen in the Gulf Cooperation Council from a peak of more than 50, with many fund managers unwillingly switching from being deal makers to caretakers. Some funds have already closed down shop while others are facing up to the fact that, after their current ventures wrap up, there aren’t any to follow.
Over the past four years, successful managers raced to raise bigger and bigger funds (as big as $4 billion) and few managers remained focused on the smaller opportunities, which constitute the mainstream of the corporate landscape in the Arab world. Constrained by their current mandate, the remaining mammoth funds are now facing a new challenge: access to quality deal flow. These large funds are starving for new investment opportunities that can deliver the promised returns and are facing the grim scenarios of either returning some of the cash raised to investors or investing in sub-par deals.
Going back to Wamda celebrations, the 2,000 delegates that participated in the festive conference represent a renewed and revived core of the Gulf’s economic activity. Gone are the days when business in the region meant betting on inflated real estate prices and skyrocketing stock markets. A much more sober mood of industrious entrepreneurship is setting in.
The number of people I know personally that are en-route to starting their own businesses, despite the recessionary environment, is enormous. They come from all walks of life — from students to executives — and are setting up everywhere from Riyadh, to Jeddah, to Cairo, to Dubai, to Beirut, to Amman.
In the past 20 years working in the region, I have not seen such a vibrant entrepreneurial environment as I do today. The benefits of economic liberalization are starting to trickle in.
So what does that mean for private equity?
It means that there is a stellar increase in demand for equity funding, which is good news in principle, except that economic liberalization measures have not extended to privatizing large-scale state enterprises. Instead they have given rise to a wave of grassroots entrepreneurialism.
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 few opportunities of such scale that remain. On the other hand, smaller growth capital funds focused on funding a company like Bateel — a successful regional chain of date stores and cafés — will have ample opportunities from which to choose.
Large funds are rigidly geared to do large deals; due to the high profile of the people they hire and the bandwidth of their fund managers it won’t be easy to switch their focus to smaller deals.
IMAD GHANDOUR is chairman of Gulf Venture Capital Association
