Nabil Sawabini founded MENA Capital in September 2004 and today is the chairman and chief executive officer of the private equity and property company. Before founding MENA Capital, Sawabini was with JP Morgan, where he spent 25 years in high-ranking positions in the United States, Europe and the Middle East. Executive recently sat down with Sawabini to get an insider’s view of the private equity and real estate markets in Lebanon and the region.
E We are still in the midst of an economic downturn and the effects on the regional private equity markets have been significant, leaving funds and investors in a wait-and-see mode. What has your strategy been since October 2008 when we started to see the market nosedive?
The focus we have had in the last few years has been primarily on real estate for a very simple reason: We felt that there is more potential and better reward for the risk we were taking in real estate than in private equity. That is primarily because on the private equity side the valuations were simply too high in every sense. Whether you took valuations based on market multiples, on earnings multiples, on discounted cash; everything didn’t make much sense. So we basically held back on investing. After the crisis began to subside in the spring of this year, we decided that we are going to start getting more involved in private equity and merchant banking, [with] a fine line between the two. Merchant banking is a creation of new businesses that are more or less tried and tested elsewhere but not necessarily in the market where [you invest], or if they have been started, they have done so in a format that has not really been well studied. We are focusing now on three areas in private equity: principally consumables as well as food and beverage and services that basically relate to both.
E So basically you are moving more toward a defensive sector approach as opposed to things like real estate?
We are still in real estate and we are quite big in real estate. [But] we are going to be diverting more and more of our resources over time towards merchant banking.
E This is more of a long-term strategy than a short-term one, no?
Exactly. But the form you do it in and the focus you have on the products is what will make it less defensive and not your pure defensive plays.
E What angle are you playing to bring on a faster return on investment?
It’s basically the way you package, deliver, create and complement the different food and beverage businesses that will help you over time grow the business through economics of scale and efficiency — not just in Lebanon, but regionally and internationally.
E Considering what has happened in the private equity industry since October 2008, we kept hearing about interesting valuations at the end of 2009’s first quarter, and at the end of quarter two some people were even talking about the bottom being reached. Are you looking into those valuations now more than you were before?
To base any investment on just a pure valuation today is not interesting. We are still not interested. If it is in the overall context of a new business or a new direction for the business that we are buying into, then that is really the growth orientation [model] that we are looking into.
E Are you saying venture capital and mezzanine sectors are now the focus, such as your Kababji restaurant venture in the US?
That’s a venture but it’s a tried and tested concept. There are already 14 or 15 similar outlets in Washington, DC which are very successful. It’s not really venture capital where you create a whole new product and service — not quite. We wouldn’t invest in new technologies. We are not interested. Anything we don’t understand we will not do.
E So basically a conservative approach even in light of the valuations we discussed?
Absolutely.
E But why wouldn’t you take advantage of those valuations before they go up?
I didn’t say we are not interested. We are interested but only if it is coupled with a growth model that makes sense to us. It can’t just be the price.
E How have you adjusted your financing now that the large buyout model fell through after the financial crisis?
We never relied on bank debt in our business. We do not believe in leveraging as being the cutting-edge of a transaction. We believe that leverage should always be used prudently, on a margin, as is needed, but never to build our model based on leverage.
E Is this model being replicated across the industry?
Because leveraging has been affected and banks are very reticent to lend for private equity deals, I think that although banks will at some point start to lend for such deals, they are going to be a lot more conservative and a lot more cautious as to what they lend and who they lend to. Which translates into less deals being done, more prudent deals being done, more reasonable valuations and in transactions that really make sense rather than just flipping.
E During the boom phase private equity companies acquired a lot of dry powder, investors were willing to invest and when the financial crisis hit this changed. Today the firms still have this dry powder and now they are under pressure by their limited partners to increase their investment activity. Nonetheless, we haven’t seen a real surge in the market. Do you expect to see it soon?
I don’t think we are going to start seeing that before 2010 when people truly begin to believe that the bottom has been reached. As long as people think we are still in a sliding mode, even potentially a [downward] slide again, they are not going to be very eager.
E What about your capital commitments? How long can you keep the investors at bay while still asking them to deliver on their commitments?
We do have private equity investor commitments and we basically told them: ‘Look, we haven’t done it and these are the reasons we haven’t done it. We are going to do it now at much better valuations and in businesses that make a lot more sense. Just count your blessings that we didn’t do it, because you would have lost your shirts.’
E But this can’t go on forever; something has to give.
We feel very strongly that if we can’t do it in the next year we might as well just…
E Give the money back?
We never took the money. We never drew down the money, we only drew down what we needed.
E But the industry as a whole has a lot of commitments and they don’t have cash in hand. They are under pressure to make investments. When is this going to end and when will we start to see some action?
The next year is very critical. It’s hard to predict. I smile because six months ago I was sitting with someone who was one of the largest players in hedge funds, and he was claiming that the hedge fund business was dead. Now they are going back into it. Never say never.
E How about your investor profile? High-net-worth individuals are important in the Gulf, even more so in Lebanon. Here you don’t have the sovereign wealth funds (SWFs), who have the money. Moreover, those high-net-worth individuals along with the family businesses, have lost a lot of money, as have the SWFs. Which investors are you targeting in light of this?
We continue to target investors who are, in our opinion, professional and have the in-house capacity to determine what is good and what is bad for them, especially on the real estate side. Unless the group or the high-net-worth individual truly appreciates what it takes to do a private equity deal and how to get out of it, how much time it will take and all of that; we are not eager to bring them in as an investor. At the end of the day people have seen a lot of craziness and they stop and say: ‘Fine. We have done what we’ve done because everyone else went crazy, not just us. Now the time has come for us to be a lot more prudent.’
