Big or small, PE firms in the Middle East are faring much better than most other financial institutions in the region, despite the amount of “dry powder” — i.e. capital called or committed that is yet to be deployed — in the area. Nevertheless, sitting on a mountain of cash and not spending it because you don’t like what you see is more enviable then struggling to pay off your creditors.
The phenomenon of dry powder is not just an effect of the financial crisis and the ensuing downturn, which started to take effect in the last quarter of 2008. Investments by PE firms began to make an about-face around the beginning of 2008. PE investments over the whole of 2008 saw a significant decrease in both number and size year-on-year by 22 and 31 percent respectively, the principle reason for this being that private valuations still seem to be out of touch with public market perceptions.
“At the moment, valuations are generally too high so PE firms are saying ‘give us another six to nine months for them to fall,’” says Robert Hall, head of transaction services Middle East & South Asia at KPMG.
Hisham El Khazindar, managing director and co-founder of Citadel Capital, adds that “in the grand scheme of things valuations across the board are 70 percent of what they were two years ago.”
When the region’s PE firms will start to sprinkle their powder around will, for the most part, depend on how long it will take owners’ willingness to break away from their egos and admit that they are in trouble.
“A contraction is taking place, but certainly we are not seeing the valuations that are in the public sector. We are not in a situation where we see distressed shareholders who are willing to sell at any price,” Christophe de Mahieu, co-head at Gulf Growth Capital at Investcorp, said to The National.
Yahya Jalil, senior executive officer and head of private equity at The National Investor in Dubai, remarks that, “it’s a little bit of an ego thing to admit that things have gone bad; this region is not known for being forthcoming as people like to contain their problems.”
Overcoming egos aside, many shareholders and owners don’t see the point of going into the market.
“People who have been in the market for 20 to 25 years see the blip in the market as very temporary, so they are thinking: why should they off a portion of their equity at these valuations,” says Jalil.
Ammar Al-Khudairy, managing director and CEO of Amwal Al Khaleej Investment Co., says “one private consumer goods company said to me, ‘I brought in one of the big four, they did a valuation for me and said my company was worth $100 million back in August [2008] and nothing has changed since. I sell no less if not more and, in fact, my cost of raw material has come down. So why should I sell for less than 100?’”
The stalemate that is brewing between firms and investors doesn’t seem to be going away anytime soon and it remains to be seen if the same understanding with regards to delaying capital calls will be extended to the firms for much longer.
Stressed out
The possibility of distressed or mezzanine funds is something that many in the industry are starting to look at as a result of the trauma being suffered by many regional organizations. Significantly, the Dubai Financial Services Authority (DFSA) wants the Dubai International Financial Center (DIFC) to consider establishing the Gulf’s first private equity secondary market. This could provide a respite for many PE firms looking to rid themselves of their dry powder.
“The whole issue of distressed assets in this region hasn’t been fully experienced in previous recessions. If you look at what the ‘ultimate’ distress is, which is a company becoming insolvent and unable to pay debts as they become due, then you really haven’t seen much of that yet,” says Hall. “In the recession this time around, the economy is much bigger and there are undoubtedly going to be some companies that will have significant problems. For PE firms this will provide some great opportunities.”
However, for the time being things don’t look that bad and the omnipresent attitude in the region today is not one of going after high risk and high return opportunities.
“Mezzanine capital is definitely more expensive than traditional forms of capital and it works well when valuations are improving and in upward cycle,” says Tamer Bazzari, deputy CEO of Rasmala.
Jalil says, “in the long term mezzanine is a huge unmet need in the region, but for the next year or two I think that, relatively speaking, it is not going to be interesting for investors — the risk profile between mezzanine and secured is night and day.”
