In times of crisis come times of great opportunity, or so we are told. The proverb does seem to bear some truth, however, when applied to the regional private equity (PE) market. Perhaps for too long, PE activity has been focused on a few hotspots in the Middle East and North Africa and has neglected many of untapped or fundamentally solid areas. Now there is little choice when it comes to being picky; firms need to go where the opportunities are rife and many countries in the region are taking advantage of the newfound openness towards expansionism that has taken hold of the industry.
The first country in the cross hairs seems to be Saudi Arabia. The usual criticisms of Saudi being a cumbersome and overly conservative market have turned out to be unfounded. Both Saudi Arabia’s central bank and its sovereign wealth fund (SWF) are coming out of this financial debacle much less scarred than most of their regional counterparts, but that’s not to say they have been unaffected.
“There will be an increased reliance on cash coming out of places such as Saudi… which are unlikely to be so badly affected by current market conditions,” says Robert Hall, head of transaction services Middle East & South Asia at KPMG. Others are more reserved in their analysis.
Ammar Al-Khudairy, managing director and CEO of Amwal Al Khaleej Investment Co, says “I would not point out Saudi Arabia as a bastion or a haven of still available money. It is a haven of less economic turmoil without a doubt. That does not, however, necessarily give investors more comfort than other markets vis-à-vis deployment or fresh commitment of capital.”
Flow like the Nile
Another country that looks to continue its upward trend despite the effects of the global downturn is Egypt. The land of the pharaohs has already attracted $2.8 billion in PE investments (33 percent of total MENA investments) since 2005 according to Zawya Private Equity Monitor and the Gulf Venture Capital Association. Even though this figure is largely attributed to Abraaj’s investments of $1.4 billion in the Egyptian Fertilizer’s Company (EFC) and a $501 million investment in EFG Hermes in 2006, Egypt is expected to continue to attract investment from PE firms desperate for buying opportunities.
“There is a positive outlook on the medium to long-term prospects of Egypt because of the demographics, reforms and the fact that Europe needs the southern Mediterranean basin as a manufacturing base because of environmental and cost of labor issues,” says Al Khudairy.
For the more risk-prone capitalist there is always Iraq which, despite its obvious shortcomings, cannot be written off when considering investment opportunities in the region.
“Obviously Iraq has its challenges, but PE is a local business and you need to be there early,” says Hisham El Khazindar, managing director and co-founder of Citadel Capital. In theory, the promise of post-conflict Iraq is monumental given its oil reserves, demographics and the amount of greenfields on offer for potential investors. However, other industry heavyweights would rather pay more when and if the political risks of Iraq ever do subside.
“Iraq still has significant geopolitical risks and we won’t know the full effect of these risks until the US winds down its occupation,” says a regional PE chief executive who spoke on condition of anonymity. “I would rather pay three times the amount [for a company] without a civil war than with one.”
Preservation is key
The regional PE sector is at a crossroads, or perhaps the more accurate term would be a U-turn. Gone are the days when investors lined up to throw money at PE firms. Today, what separates the wheat from the chaff will be cold hard cash.
“If you have already raised money then you will be OK, if you haven’t then you are in trouble,” says Imad Ghandour, executive director of Gulf Capital. That notion becomes even more reinforced when one considers that leveraging options have all but dried up for the immediate future.
“I do not see previous levels of leveraged investments restored in the foreseeable future, as the market will need to clear excess leverage,” says Rami Bazzi, senior executive officer at Injazat Capital. Al Khudairy adds that, “leveraging is gone for two or three years at least.”
As regional PE firms move forward, the key to surviving will be to take care of ones own and keep limited partners happy whether or not the bottom has been reached.
“The bottom may have been reached but it is important to remain disciplined and stay focused on your existing portfolio a little bit longer, to make sure it is in good form and weathering the storm before starting to get distracted by some of the great opportunities, even if it means you miss the bottom,” says El Khazindar.
The ride has been bumpy and it’s not over yet. What remains to be seen is whether regional PE firms will hold on for the ride or if they will be thrown to the wayside.
“We have had a rising tide that lifted all the boats and the industry never had to really roll up its sleeves and do the dirty work as portfolio companies,” says Yahya Jalil, senior executive officer and head of private equity at The National Investor in Dubai. “That time is now at hand.”