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Orient‘s budding markets beckon equity industry

Orient‘s budding markets beckon equity industry

by Rend Stephan
The private equity (PE) industry in the MENA region (i.e., the Middle East and North Africa) has witnessed significant change over the past five years, evolving from infancy stage to a multi-billion dollar growth market.

In 2003, the MENA private equity market was embryonic, with only 20 firms managing less than $3 billion in capital. In the five years since then the industry has mushroomed to more than 80 firms, with more than ten-fold growth in committed or announced funds. Furthermore, the private equity industry in the MENA region now accounts for a considerable portion of total mergers and acquisition (M&A) activity.

Behind this growth are a number of MENA-based private equity firms, which can be segmented into the following categories:

• Pure-play firms, both regional — such as Abraaj Capital, Amwal Al-Khaleej, and Citadel Capital — and international — such as Carlyle Group — focus solely on private equity and are typically wholly-owned by their general partners to ensure high alignment of incentives.

• Institution-linked firms — such as EFG Hermes Private Equity, NBK Capital Equity Partners, and Shuaa Partners — typically affiliated with regional banks or large conglomerates, can leverage their institutional relationships for fundraising, sourcing deals, issuing debt, and exiting.

• State-backed firms — such as Dubai International Capital — are owned by or linked to regional governments and possess strong networks, often at the government-to-government level, that enable them to source investment opportunities, particularly in regulated sectors.

First-movers such as Abraaj Capital, Amwal Al-Khaleej, and Citadel Capital have made a large number of investments over the last three years and several successful exits to date. First movers have built substantial knowledge, networks, capabilities, and reputations that have well-positioned them to raise greater amounts of capital and have a good view as to where it can be efficiently deployed.

Challenges of MENA private equity

While overall trends bode well for an industry clearly poised for growth, the MENA PE market remains underdeveloped in comparison to other developed and developing markets.

First, compared with other economies, the MENA region’s private equity market is small relative to its gross domestic product (GDP), with the size of the industry in MENA at less than 0.5% of GDP versus 2-3% for developed economies. This indicates significant untapped potential should the necessary investment enablers evolve to facilitate greater PE activity.

Second, PE market growth has been largely driven by a few mega-deals, with limited growth in the number of transactions over the last three years and an increase in deal size, with media transaction size increasing from around $10 million in 2005 to $30-50 million by 2007. The slow growth of transactions could indicate potential pent-up demand or simply difficulty in deal sourcing.

Third, deal sourcing remains highly proprietary, built on closed social and business networks beyond the few privatization or secondary buyout transactions. Many MENA private equity firms who are backed by high-net-worth individuals as their limited partners often source the bulk of their opportunities through their LPs, giving them a competitive advantage over their peer firms.

Finally, and reflecting the industry’s early stage of development, most PE firms have largely focused on “low-hanging fruit” deals — arbitrage, pre-initial public offerings (IPOs), and capital-restructuring plays — as opposed to more complex value creation plays, such as Greenfield investments, roll-ups, and turnarounds. While simple plays have generated returns in excess of 50% to date, this is typical of any young market dominated by first-movers who quickly exploit market inefficiencies.

Future outlook for MENA private equity

In order to capture market opportunities, MENA private equity firms will have to capitalize on three major industry trends expected to dominate this sector over the next five years:

First — Continued market growth: Significant investment opportunities in a number of sectors in the MENA region will create many opportunities for MENA private equity firms. This is particularly true in high-growth, capital-constrained markets where private equity can fill funding gaps that exist in the market. In addition, many geographic markets continue to remain “virgin territory” for the private equity industry and are now undergoing significant structural transformations, including trade liberalization, privatization, and capital markets modernization.

Second — Separation of leaders from laggards: The second trend we anticipate is that there will be more differentiation between top quality firms and other “me too” firms. Given the capital excesses and pressures to invest/exit, there may also be some level of consolidation over the coming years. Some less performing firms may end up positioning themselves as co-investors on deals led by top-tier firms, while others will try to compensate through alternative investment classes.

Third — Increased prevalence of more complex value creation plays: In line with the previous trend, top performing PE firms are likely to increase their use of more complex value creation plays, relative to simple plays that depend most on market inefficiencies. This trend is inline with developed markets where leverage and exit multiples play less of a role than operational enhancement in creating value.


Clearly, the MENA private equity industry has made considerable progress over the past five years. However, much territory remains uncharted with significant potential. As firms consume the remaining “low hanging fruit” there will be an increased focus on more complex (and lucrative) value creation plays, such as roll-ups and Greenfield investments, which require greater expertise.

It will, however, continue to be quite competitive and each PE firm will need to carefully think about where and how to play to add value. Each PE firm will need to have its own unique strategy in order to become more differentiated as the MENA PE industry matures.


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Rend Stephan


Ahmed Youssef


Albert Khoury


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