The Middle Eastern Private Equity Internationalconference, held each year in the third week of March inDubai, has become the annual hotspot for the region’s PEindustry. Heads of international PE funds, like Carlyle’sDavid Rubenstein and CD&R’s Joseph Rice, descended on Dubaito explore how to expand their sprawling reach to one of thefew remaining untapped markets. In addition, rising PE starsfrom the region lectured about their experiences and theirvisions, eyeing further international expansion, and aimingto attract the attention of global PE giants.
Carlyle’s Rubenstein, in his keynote speech, predictedthat the Middle East will be the fourth pillar in the globalPE industry after US, Europe and the Far East. The region,loosely defined from India to Morocco, has more than 2billion inhabitants, $1.5 trillion GDP, and is one of themain exporters of capital. Rubenstein is practicing what hepreached by setting up a $1.8 billion fund targeting theMiddle East and Turkey.
Sarah Alexander, President of Emerging Market PrivateEquity Association (EMPEA), noticed the remarkable evolutionbetween the first conference in 2005 and the 2007 edition. In 2005, the local presenters were inquiring if it can bedone, how it can be done, and how lucrative it will be ifdone well. Today, local PE champions are speaking withconfidence about deals closed, problems overcome, exits madeand real realized returns. Between 2005 and 2007, theprivate equity industry has quadrupled in size, and controlsnow more than $15 billion in assets under management.
Where to go from here?
Rubenstein and Rice’s appearance at the conferences onlyhighlight the increasing attractiveness of the region as atarget for global PE funds. Other PE heavyweights have beenscouting the region and assessing its potential. Secondtier global PE players, like 3i, Ripplewood, Actis, CVC,HSBC and Emerging Market Partnership, have already starteddeploying funds since 2003. By tying up the region to theglobal PE network, regional investment practices will besignificantly alleviated, and PE will rise further invisibility.
In 2007, the $2 billion fund benchmark will probably besurpassed with the closing of Abraaj’s Infrastructure fund.In 2005, PE practitioners could barely identify a dozensmall-size deals. Today, the prospects have improvedsignificantly. A multi-billion privatization program, a direneed for infrastructure investment, an active need forpre-IPO institutional investors and a relentless need forequity financing to support corporate growth are presentingfunds with a continuous stream of investment opportunities. Infrastructure funds will become larger and larger in orderto finance the privatization and infrastructure programs,but the mid-cap market targeting investments in the $25-150million range will remain very active as well.
Global private equity has been under scrutiny bygovernments and media in both US and Europe. However, localPE leaders have been from the onset more proactive,advocating the benefits of PE for the region’s economicdevelopment. PE is frequently prescribed as a remedy for the“unemployment bomb” threatening the social and politicalstability in the region and the institutionalization of theprivate sector.
Access to capital was definitely not an issue that cameacross the conference speakers’ minds. Unlike other parts ofthe emerging world, the GCC is one of the largest exportersof capital. This excess liquidity will fund PE investmentsand their IPO exits.
UAE as the fourth capital of private equity
UAE is already the regional capital for private equity:three quarters of all PE funds are managed out of UAE, andthe UAE is the largest recipient of PE investments. AbuDhabi Investment Authority (ADIA) is also rumored to be theworld’s largest investor in private equity funds.
But reaching global prominence over the next few years is,to a large extent, in the hands of the leading firms. Themacro environment is expected to remain favorable in themedium term and investment opportunities will be abundant. The biggest challenges for PE firms are to identify, train,attract and retain talented and experienced professionals,and build a competitive advantage through the development ofsystems and operations at par with international standards.
Imad Ghandour is head of strategy and research at Gulf Capital