Founded in 1992 as continental Europe’s first independent private equity placement agent, to date Triago has raised more than 130 funds and transferred more than 800 secondary positions. Today, Triago enjoys a presence on six continents operating out of their offices in New York, Paris and recently Dubai, which was inaugurated in 2007. Executive sat down with chairman and CEO Antoine Dréan and managing director Middle East Jean Aboumrad to get an insider’s view on what’s happening in the private equity market in the region and around the world.

E Are private equity (PE) firms having difficulty finding investors, given current financial conditions, and is it becoming harder to find investors for venture capital or growth capital?

Dréan — Yes, in big letters, even though it is not mission impossible. There are about 1,000 active investors in this asset class worldwide and probably two-thirds of them are on the sidelines waiting for better times, broke or with no cash for PE because they are already way above their ratios. That’s two-thirds, but there is one third that is fully ready to work. They are obviously a bit more cautious, they take more time, they look under every rock to make sure that there are no traps, but they still put money out. We have been through some ups and downs but we always find money because we look at where it is has gone. [The money] used to be in the US and Europe, then it used to be here and now it’s probably less from here and more from the US again and from Asia.

E What prospects exist for your investors, given what is happening in the region?

Aboumrad — The current trend in the region today is that you have the usual investors and usual suspects who used to commit a lot of money to this asset class, namely the sovereign wealth funds (SWFs) and the pension funds in all of the countries of the region. These guys still have funds allocated for PE and they will still commit. The other chunk of money that used to invest in this space was more family offices. Now families are much more cautious. They have put all their investment programs on hold. Some of them don’t have money anymore so they cannot invest. Others will still have liquidity but they are just more cautious. In terms of numbers, the amounts invested by the SWFs can very easily cover the amount [of money in family conglomerates] because families put less sizeable amounts than SWFs. So in the PE space there is still money but probably less than last year. Also, there is still money in the Middle East, the US and even in Asia. Now definitely buyout and large buyout, which was trendy last year and the year before, is basically finished because there is no leverage anymore. This will become buyout without leverage or even de-leveraged buyout.

So money will move more into growth capital or other capital like distress, mezzanine, and restructuring, and focus on more niche strategies and less typical buyout funds.

E You have been in the region since 1993, but did not open your Dubai office until 2007. Why did you wait so long?

Dréan — It’s difficult to know for certain when exactly in the cycle you are entering a space, but what is important is to start and this is what we did. In effect, 2007 was also a good year for the PE secondary market. In 2004 we added the secondary business. Most of what we thought we would do here when we setup shop in 2007 was on the primary side, but in fact we were almost 100 percent wrong. We are now funding a lot of sellers even in this region. People here now face some stress and some of them are very anxious. They are saying, ‘all my illiquid stuff, all the investments that are not really poor or those that I have doubts about, I am selling’. So we are seeing a lot of secondary business coming our way. In 2007 we were already thinking ‘well, this is too good to be true’ and that the party would be over at some point. Where it would come from and when, no one really knew.

E What has been your greatest challenge in the MENA market since you started operating in the region?

Aboumrad — First, covering the entire space that the region offers has been a challenge. Second, in order to invest in the PE space investors have to be mature investors. Most of the SWFs and pension funds have staff for that. Most of the families in the region, however, who have a lot of wealth and had already invested in this asset class, did not really know what was going on. In Europe, it is easier to speak with specialists in this area or with families and institutions who have their asset allocation [in place]. Here, people were much more opportunistic. There was a kind of raising awareness, which wasn’t that easy. In the past couple of years PE has become very trendy. If you called investors and ask them to invest in this space they never said ‘no’. Now there is less money and you have to dig to find it, so we are having more and more business. In a sense the situation is actually better for us.

Dréan — We are actually profiting from this mess.

E What do you see happening with PE in the Levant?

Aboumrad — We have a lot of relationships in Lebanon. In Syria we do as well, but so far the Syrians haven’t yet entered this asset class. Financial institutions are quite young there and in terms of Syrian investors, if they cover this asset class, they do it from abroad and it’s never done from Syria. In Jordan and Egypt we know mostly general partners (GPs) but the biggest amount of energy and time spent is in the GCC because the money is there.

E How will you manage things going forward in terms of which funds you adopt?

Dréan — We have to look at fund managers and their history, track record and where they are coming from. Almost every fund manager has one or two poor assets that they try to hide a little bit. Today we would not be interested in a leveraged buyout (LBO) fund because they are having a hard time managing what they already have. The most difficult part of this asset class is that the past is not a guarantee for the future. Some fund managers were superstars for 10 years and then their business disappeared. They will still be able to raise money because some investors only look in the rear view mirror and say, ‘wow, these guys were great so they must be great forever’, and that is sometimes a big mistake.

E What is happening to LBOs now that the regional economy is on a downward slope?

Aboumrad — There was a lot of financial engineering in the leveraged component of the buyout, firstly in the leverage itself and especially in the securitization of this debt. Western banks were very eager to give a lot of money. They knew how to do it and they knew how to sell it afterwards so as not to have it on their balance sheets. This is what actually pushed them to give out more money and what created the bubble we have now. In this region, we didn’t have this level of sophistication. There was more obvious lending and this is why local banks and all the syndicated loans that were given were not as sophisticated or aggressive as those in the West. Going forward there is a lot less leverage everywhere. Most of the new strategies and funds that are going to be raised now, and most of the deals that should be done in the region, will focus more on growth capital and restructuring because those strategies require less leverage, if any, than the usual buyout.

E What do you think the future holds for the secondary market in the region now that investors are so eager to liquidate their holdings?

Aboumrad — Now the secondary market is extremely important, especially investing in PE and illiquid assets. When an investor invests in the [primary] PE market, the lockup period is typically 10 or 12 years and there is no easy way to get out of this investment. Nowadays, most of the investors who invested in this asset class are looking for liquidity options because either they don’t have a choice or for strategic reasons. There is not a lot of awareness in the region about this market in particular. Most of the time, we have discussions with investors who don’t really know that the secondary market exists or how we manage it. Sellers do not usually give out this information and agents cannot because of non-disclosure agreements. The only information that you have in this market is information given by the buyers and it is in their interest to say that they are buying very cheaply. So when we speak with investors and raise the secondary option they say that they are not that distressed. We tell them that in reality the situation is not that distressed and the deals being done are not that distressed anyway. It is a discount market nowadays. Six months ago it was more of a premium market, but it’s still not as depressed as one might think.

Dréan — It’s a very inefficient market. It usually deals with one and the same asset and on the same day with only two parties. [The asset] will go for $0.20 on the dollar to $0.80 on the dollar. So if you know how to sell private equity you will get $0.60 to $0.80; if you don’t you will get very poor prices and there won’t be a chance to go back.

Developers in the Gulf have been building high-rise towers, luxury developments and artificial islands, mainly targeting high-income individuals. Yet this time, the Qatari real estate conglomerate Barwa is planning to build the world’s biggest truck park with an eye to the less fortunate construction worker. With its $750 million project the “Truck Park,” Barwa Al Baraha, a subsidiary of Barwa Real Estate, aims to secure decent housing for laborers and truck drivers who were eaten by the inflation sweeping the country. The project will include a 676,000 square meter truck parking lot able to accommodate the trucks of roughly 4,200 long distance truck drivers. The company will nominate the development for the Guinness Book of World Records as the world’s biggest truck park. The project will also include accommodation for 53,000 people, dining halls and workout facilities. Barwa has also launched its Barwa Housing Program for middle and low income tenants who are carefully selected according to criteria, such as their salaries and number of children, in order to be eligible for low cost two or three-bedroom flats.

Dubai has been the Middle East’s business hub and an attractive destination for international investors since its doors were opened to foreign entrepreneurs. Thanks to its free-market economy and developed infrastructure, the emirate witnessed a continuous inflow of investors who chose to benefit from its appealing operating conditions and promising growth.

Although the high operating costs — including office rents and wages — did not keep new businesses from opening in Dubai, they were a concern for entrepreneurs who struggled in some cases to find a suitable office with affordable rent, or talented employees expecting reasonable salaries. With the international financial crisis hitting the region, these costs have now come down, making it less expensive for new entrepreneurs to settle in the emirate.

Office space

When starting a business in Dubai, finding a suitable place for office space is essential since it greatly affects the company’s customer base and operations. In the last few years, one of the main problems that new companies faced was the shortage of office space, since demand was on a steady increase while supply failed to keep pace.

“Definitely rents were very high before [the crisis began]. They were a huge component in the cost of a business, and one of the major factors when determining where to have your office space,” explains Camilla D’Abdo, general manager of D’pr/D’event.

The freehold areas witnessed a greater increase in rents mainly due to their attractiveness and strategic locations. Rose Marie Kilzi, leasing director for Great Properties, says “the rates are usually a bit more expensive [in the free zone] because the business owner is not required to have a local sponsor in order to operate the business. While this is a great incentive, it is a bit more expensive for business owners, especially when market prices — whether in the free zone or outside — are so expensive.” Kilzi also notes that in the last couple of years, rents doubled, while some locations “even saw hikes of about three times the original price.”

With the financial crisis in full swing, companies have begun downsizing or even closing down, while at the same time the supply of new offices continues to increase. These two effects have forced office rents to drop, making it less expensive for new businesses to settle in Dubai. Landmark Advisory, a real estate consultancy, announced that prices of commercial real estate in Dubai have fallen by almost 30 percent already and they are expected to reconcile at 35 to 40 percent below their peak during the third quarter of 2008. Additionally, the company reported that commercial rents are expected to drop by 30 to 35 percent.

The ball is currently in the tenant’s court, hence businesses are capable of finding offices in Dubai’s prime locations with affordable rents. Hala Abou Nader Kassis, owner of Agate Engineering Consultants, says “the landlords or the sales representatives who still have our application are calling us to offer the chance to rent a space that we applied for and could not rent because of the high rate. Currently we expect to move from our location to a better one, with wider space and a better price too.”

Kilzi echoes Kassis, explaining that, “we were almost never able to find office space available on Seikh Zayed Road. Only this week, we have received requests from owners to lease out about 10 [different offices] there.”

Wages

Before companies started to lay-off their staff and freeze their hiring strategies, high wages in Dubai were making it problematic for new businesses with limited capital to open. One of the reasons for the wage hike was the expensive accommodation for which employers had to compensate. Furthermore, Dr. Uwe Forgber, director of Conject Dubai, a leading provider of management software for the real estate and construction industry, says “Dubai is a busy [human resources] market with people who are ready to change jobs just for some more percent of salary. This makes choosing the right people difficult as you never know if they are money driven or really interested in what the company is doing.”

It was also easier for large companies who started their businesses or opened their branch more than five years ago, since prices of residential properties were still affordable, which induced them to buy property to accommodate employees at reasonable prices. Davinder Reo, co-founder of Duplays, a full-service sports portal, opened his business in March 2008. “We came at a time where housing was so expensive, it was unaffordable for us to buy a three bedroom apartment to accommodate three people.”

Similarly to rents, wages are also coming down since people who are in need of a job are settling for less in fear of being rejected or remaining unemployed. Employers say wages have decreased up to 25 percent, making it easier for new businesses to attract talented employees. Eric Raes, general manager of Makateb holding, notes that “it was always hard to find talented [employees] …nowadays, new businesses and established ones will find the process of hiring people easier as top talents are now willing to negotiate and settle for a lower salary range. However, these lower wages should be accompanied with a reasonable package that allows the candidate non-monetary benefits like training programs and personality/skills development sessions.”

Bureaucracy

New entrepreneurs also have to decide whether to settle in one of the free zones or outside. One of the main differences lies in the sponsorship system, which is applicable to companies setting-up outside the designated free zones. The sponsor must be a UAE national and be at least 51 percent owner of the company. Moreover, the sponsor will require a fee and/or a percentage of the profit. Additionally, outside the free zone area, an office space and a rental contract should also be arranged prior to applying for a license.

Subsequently, a license should be applied for at the Dubai Economic Department (DED) — unless indicated otherwise in exceptional cases — for which different rules are set for different types of businesses. Three types of licenses exist: commercial licenses, professional licenses and industrial licenses.

Different investors had different experiences in setting up their businesses. While some considered it easy, others struggled.

“Getting a license is a real challenge, it took us about three months,” says Reo. He used the help of the local sponsor who guided them through the procedure. Forgber says “setting up a company was more difficult than advertised by the Tecom Free Zone. But all-in-all the people were and are really helpful and friendly. We finally managed to found the company after overcoming some obstacles.”

Others found the process easy and straightforward. D’Abdo says “the time for getting a license can range, but it is not going to take a couple of months. Getting a license… has never been a difficult task and we have not faced any obstacles. It is very straightforward.”

It is much harder for investors who are managing their paperwork themselves without guidance or past experience. This explains the popularity of business advisors who help with the process. DED is currently trying to facilitate the licensing procedure by making most of its services available online, meaning investors can perform most of the process at home. “Wherever possible, we are also working with other government departments that enable investors to set up businesses with more ease. If all the paperwork is in place, it is only a matter of hours before any investor can get a business license and roll out the enterprise,” asserts Mohammed Shael, chief business registration and licensing officer at the DED.

More importantly, in late 2007 DED launched nine e-services on its website, “which are specifically created to boost efficiency of operation and enhance productivity,” claims Shael. These e-services are to help potential entrepreneurs find information about starting up new businesses in Dubai. The service is available in both Arabic and English.

New businesses

Despite the challenging conditions the global economy is currently facing, it seems new entrepreneurs have not shied away from Dubai and still consider it an attractive investment destination. DED announced that 3,503 licenses were issued in the fourth quarter of 2008, up by 3.3 percent compared to the same period in 2007. Furthermore, 429 new licenses were given out during the first two weeks of 2009, in addition to 50 Intilaq licenses to UAE nationals enabling them to set up home-based businesses. Eighty percent of the new licenses were trade-focused commercial licenses, while professional licenses made up just under 20 percent, leaving the rest for tourism and industry.

Anil Mampilly, business development manager at EMN Chartered, attributes the increase of licenses to the fact that many companies are relocating to Dubai, finding it less expensive than other countries. “We have branches in different countries and we are currently receiving calls in our UK and Russia offices from people saying they decided to relocate their business to the UAE, mainly because it is less expensive and also because of the tax incentives. [They are coming] not only to Dubai but also to Sharjah and Ras Al Khaimah,” explains Mampilly.

Looking forward

Although office rents and wages are not the only factors entrepreneurs consider before opening a business, they are definitely among the more important. “Being able to hire good staff for lower salaries and finding a suitable office space at lower prices make this period a good time for investment,” states Raes.

Although the international economic conditions might not be very encouraging for investment, Dubai could now represent an attractive opportunity for those who are willing to invest for the long run.

Since July 2008, stock prices of real estate companies have plunged continuously. This is especially true in the UAE where investors fled the stock market due to bad expectations, the need for liquidity to cover losses in foreign markets, or because they were simply following the crowd. Yazan Abdeen, portfolio manager equities at ING Investment Management thinks “markets are smart in their nature. They have the ability to discount future expectations and the fears of investors.” In this case, investors began to expect the burst of a real estate bubble that would result in a plunge in property prices and lower valuations for real estate companies. “Regardless of the size of the company, I think that the market was taking into consideration some trends of action will take place that will yield in the deleveraging that has happened to these companies,” says Abdeen.

At first, investors started to sell their real estate stocks irrespective of the company’s fundamentals, relying solely on the sector’s outlook and the overall macroeconomic situation. However, since concerns started to emerge about the financial status of these companies due to tighter liquidity and expectations of weaker earnings results, doubts about their fundamentals have grown. “Progressively, it would appear that people began to question the fundamentals and the overall features of some of the [real estate] companies in tighter liquidity conditions,” explains Sana Kapadia, vice president of equity research at EFG-Hermes. “What started as a more technical sell off [seems] to have become a questioning of long-term sustainability,” she adds.

Emaar’s stock price

Emaar properties’ stocks for last half year

Emaar properties, the largest property developer in the region hit its lowest share value of $0.48 on February 3 and as Executive went to print, stood at $0.75 after the Dubai government launched a $20 billion sovereign bond program to ease liquidity conditions. At the same time, other real estate companies in Dubai, like Union Properties and Deyaar, stood at $0.23 and $0.15, respectively. Even though these companies have witnessed a small increase in their stock prices, likely due to the $20 billion bond program, it is still too soon to tell if this indicates a trend toward market recovery

Since the beginning of the crisis, Emaar stocks have been the most affected in the sector as they have lost more than 80 percent of their value in 2008 and around 37 percent in the last three months. Thomas Schellen, publishing editor at Zawya Dow Jones, explains that even though Emaar’s stock price has suffered the greatest loss, that does not necessarily indicate that it has worse market fundamentals than other companies in the UAE or the region. In Schellen’s view, Dubai was the worst hit by the crisis because the relative importance of its the real estate sector in the economy is higher than in other GCC countries. Consequently, Emaar, being the biggest company on Dubai’s financial market and with a high trading activity, was affected the most. Kapadia also believes that the impact on Dubai’s stock market is more significant since “a distinction continues to be made between Dubai and Abu Dhabi, with more risk being perceived in Dubai companies in the property market… the property market crash [is] expected to be much worse in Dubai than Abu Dhabi.”

Emaar’s financial situation

On February 12, Emaar released the long awaited 2008 fourth quarter report announcing a 54 percent decrease in net profit, mainly blamed on the $480 million write-down in its US subsidiary John Laing Homes, which weighed down the company’s net profit. Emaar recorded a net operating profit of $1.519 billion in 2008, 15 percent lower than its net profit of $1.79 billion in 2007. It also announced that its revenue dropped by 10 percent, from $4.865 billion in 2007 to $4.360 billion in 2008. A week after the report was released, Emaar announced that it will not be paying a dividend in 2008.

Additionally, it seems that liquidity problems at Emaar are starting to emerge since the company revealed in January its plan to secure financing by raising up to $4 billion through Eurobonds and Islamic sukuk. It has announced the establishment of a $2 billion Euro Medium Term Note (EMTN) program and a simultaneous sharia-compliant $2 billion sukuk program, already listed on the London Stock Exchange. These programs are issued “as a part of the company’s global growth strategy,” said Emaar in a statement.

U.A.E. Property prices have fallen 40 percent and are expected to drop 20 percent more in 2009

Emaar’s possible downgrading

In mid-December 2008, Standard and Poor’s (S&P) rating service revised its outlook for the company from stable to negative, while keeping its ‘A-’ long-term corporate credit ratings. “A prolonged downturn could negatively impact our view of Emaar’s business risk, and it could also lead to deterioration of Emaar’s currently healthy financial position,” said S&P’s credit analyst Alf Stenqivist in a recent press release. Even though Emaar’s rating is still high, the fact that S&P’s outlook was downgraded is not a positive sign for the company. Moreover, Moody’s Investor Service said at the beginning of February that it is reviewing six leading Dubai companies, including Emaar, for rating downgrades due to Dubai’s macroeconomic outlook. Moody’s anticipates that the downgrade would be lowered by not more than two notches, still leaving these companies with investment grade ratings. Schellen explains, “the outlook forecast might influence negotiations between the debt issuer and the bond buyers. The bond buyers might demand a higher yield because the outlook is negative, but unless the actual rating changes, it is unlikely that there is going to be any change in the direct interest situation.”

Abdeen explains that the share prices of a company do not affect its operations from a financial perspective. “The movement of the share price is neither loss nor gain for the company. The price does not affect its performance,” but there is very much a link between the company’s performance and its share price. Therefore, any bad news for Emaar or the market in general might affect the company’s share performance.

Property prices

The fact that property prices are still on a downward trend — especially in Dubai — and that projects are being shelved, is not improving the confidence of investors who would rather stay out until the market starts to show some signs of recovery. Analysts at the UAE investment bank Shuaa Capital said in mid-January that property prices have fallen 40 percent so far and are expected to lose an additional 20 percent by the end of 2009. Collier International’s analysts were more optimistic since their fourth quarter House Price Index (HPI) revealed a drop of only eight percent in Dubai between October and December of last year. “If you come to the market here and see what is happening, [Collier’s numbers] are underestimated. I know that some major places in Dubai, like the Burj Dubai area, have gone back to the price of the third quarter of 2007. It seems they have dropped around 45 percent,” says Abdeen.

Forging into the future

Abdeen believes that any company should now have four key factors in mind to withstand the difficulties in 2009. These four elements are “visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand, and if you have them, you will be immune,” he adds.

Kapadia believes “this is the time for companies to have strong corporate governance and corporate communication.” Everyone knows these are difficult times and companies are struggling to deal with changing market dynamics. Therefore, “if a company communicates and discusses how it is dealing with the current market challenges, it would help people believe that management is focused on dealing with the new dynamics,” she explains.

 With the current chaos in the UAE real estate market, it seems that Emaar and others have a lot to do to revive investor’s confidence in their company, as well as the market in general. People are starting to suspect that Emaar is currently facing much more trouble than expected and they would rather stay out of the stock, even if it is priced at half a dollar. “I think there is high risk-averseness and a general desire not to spend on any kind of investment right now. Even if the stock may look cheap on P/E [price to earning ratio] basis, the earning is in question, given limited visibility regarding how the current cycle will play out,” explains Kapadia. “It has become challenging for companies to maintain the sustainability of their earnings.”

It certainly seems people are not expecting any improvements in the short run, however, with the fast changing market conditions and the complexity of the market mechanism, experts agree that the stock markets are very volatile and only a wait-and-see strategy should be adopted at this time. “Right now it would be pretty stupid for an analyst to claim that he or she knows what is going to happen in 2009 and what the scenario is most likely to look like,” concludes Schellen.

“Visibility, profitability, proof of cash flow generation and lack of high leverage — you need these four pillars to stand”