Across the region’s private equity landscape, there are a large number of financiers, whose mixture of know-how and ability to gather capital from a solid investor base introduced new ideas of efficiency to some of the region’s most successful firms, including those whose sights are set on becoming regional champions.

When Executive had the chance to sit down with the co-heads of Investcorp’s Gulf Growth Capital (GGC) Fund, Azmat Taufique and Christophe de Mahieu, it reached the crème de la crème of the region’s private equity scene, the philosopher-financiers of the industry.

Investcorp began private equity operations in 1982 in the Gulf, and has since evolved to include a host of other assets. The firm’s latest GGC Fund is a return to its home turf, in an effort to harness the group’s synergy and experience with local partners — an essential ingredient to any regional private equity mix — in spotting deals and acting on those with the best chances for success. The particular focus of the fund is to invest in and improve greenfield projects and buyout opportunities in medium-sized firms, the newest foray of the firm. De Mahieu said the fund has “deployed more than $35 billion of the Gulf’s capital across the world.”

Alignment

With more than $13 billion in assets and an investor base of 1,400, the GGC Fund should not lack deal flow. De Mahieu said that “[Investcorp] combines its distinctive capabilities of raising funds, with its trusted investors in the Gulf and across the world, while bringing its well-established private equity capabilities built over time in the West to make private equity investments in the Gulf and by extension across the Middle East.” According to Taufique the investor base of contacts are not just investors, “but genuine partners in the region,” to whom Investcorp looks “for ideas and for deal flow.”

The relationships with the investor base of partners and profiteers from successful deals are not the only relationships the firm is mindful of. Taufique described the firm’s cooperation with management best when he explained the host of global experience Investcorp brings to the table. Especially as Investcorp is “particularly adept at understanding what the potential conflicts are and mitigating them, creating alignment and structures and working with the teams over a period of time to enhance value that would be of interest to everyone concerned. In this sense, we would like to think that we are better at handling this.”

To enhance investments and ensure that Investcorp can achieve positive results with firms, according to de Mahieu, “there is often an alignment phase with the owner and management of a company before we launch the full due diligence process.” He explained that, “during this alignment phase, we spend a lot of time with the existing owner and management to align ourselves around the vision, the strategy, and the contribution of every party, including Investcorp, to create significantly more value. When alignment is reached, we go into the due diligence. After the due diligence, if the transaction is consummated, we work together, we change the governance, support the management, inject new capital when required and bring our operational capabilities where agreed.”

Foreign capital

Taufique noted the strong regional pull in attracting foreign capital, as seen through the FDI number for Saudi Arabia and the UAE which are both “beyond the charts. And so for a country that has a great capital surplus to attract that sort of foreign investment, there must be something positive going on.”

Within the kingdom, Taufique believes that few associate Saudi Arabia with being one of the fastest reforming economies in the world, because “there are perceptions of other constraints of different kinds, but in terms of the economic structure, there seems to be a momentum for reform, which is being recognized by institutions like the World Bank, but also by private investors.”

Future strategy

Taufique opined that “there are many more possibilities for growth capital equity investing here today as opposed to investing in existing companies and tweaking the edges. And that is the focus of many private equity players now, because that is where the opportunities are, but as things progress, you will find more and more of the region evolving into what you have seen in North America.”

With these dynamics in mind, “as the industry matures, the intermediaries will start playing a more active role as they build their expertise in the region and they build their own relationships,” which, according to Taufique, will “see a bigger flow of deals coming from the intermediaries and that will make the industry more efficient. We know what we do best and that is to invest and enhance value.”

Across the developing world, telecom companies battle to provide populations with the most efficient services. Combining price, service, and convenience, mobile telecom firms and fixed-line businesses are looking for new ways to penetrate these nascent markets and consolidate their share to out-compete rivals. Telecom markets, especially in the developing world, present an interesting case study and a concrete example of how private equity can revamp businesses through their infusions of capital and of knowledge.

Market motions

Vying for market share has created a host of privatizations by governments in the region and has led to a series of mergers and acquisitions within the telecoms, media, and technology (TMT) industries. A. Shabu Qureshi, director at EMP Global, explained that “liberalization points to more opportunities and market efficiencies in the short, medium and long run. It removes the barriers and constraints posed by public ownership. Positive developments brought about by liberalization translate into new services, new opportunities and growth prospects.”

The case for competition is stronger in the developing markets of the Middle East and North Africa (MENA) where penetration rates and convergence are low. This leaves a huge opportunity for private equity firms to assist companies with expansion and improvements to existing models of their corporate governance. Izzet Güney, managing partner at Millennium Private Equity, thinks that TMT private equity deals will target mobile operators “mostly in Africa and South Asia, where you still have countries with only two operators and a low penetration level.”

He attributes the low level of penetration to the existence of several small operators in countries which have escaped the radar of larger conglomerates and who are focused on buying mid-sized to larger operators. The larger firms might penetrate new markets once local telecom operators are “actually larger in size.”

Güney’s experience from one North Africa deal is “to buy one small operation, maybe bring in one or two management executives, maybe on the finance side, maybe on the IT side, maybe on the tech side, and grow the operations from 50,000 subscribers to 200,000 subscribers, at which point in time it becomes a critical mass interesting enough for companies such as Vodacom or MTN.”

For local players, private equity capital offers the chance for a growth-oriented business with a strong possibility for success to become a regional player. While TMT firms are not tip-toeing around owners, they are certainly not hesitant to indicate the points at which efficiency can be improved. According to Güney, “we actually know what they want to see in place before they do an acquisition. They are interested in making sure the numbers are clean, so that is an issue of corporate governance. There is also a critical mass of subscribers, which is extremely important, because dealing with small numbers is not very helpful.”

Instead of working with very small firms, he believes “it’s more effective once you have a critical mass to get discounts on scale in terms of ordering, etc. This area of investment is going to take a large chunk of the fund’s capital.”

For Millennium and other TMT fund managers, the time to act is now and as within the coming year or two the time for investment would have passed. Güney said that, “emerging markets are growing very fast and penetration levels are growing very, very fast. What’s happening now is that the penetration in most of the emerging markets in cities is already quite high.” 

Fixed-line penetration in the Arab World

Restructuring infrastructure

“The infrastructure within mobiles is also another play,” according to Güney, especially for “people who are very conscious of the bottom line and they are trying to figure out ‘how can I squeeze more money’.”

Private equity firms are quite engaged in restructuring the way telecom infrastructure is operated, from changing management and personnel, to specializing in pure telecom by selling off infrastructure to be run by separate entities with more experience and better efficiency.

“Some operators want to just sell a service, sell a phone, one can squeeze some money on the marketing side, maybe some on the acquisition cost, but maybe you should not own the tower” advises Güney, because “the tower is just a building that somebody else could actually run for you much more efficiently. You could lease the space, etc. That would make a lot more sense and that squeezes the costs, so it creates more free cash flow, which is what everybody is moving towards. So infrastructure to us is extremely important.”

Güney believes private equity is best to revamp telecom infrastructure because “they don’t personally have any affinity or love in keeping a tower, for example, in the mobile business. They only look very rationally at where it makes most sense in owning that tower and what the costs associated to it are.”

For telecom operators in love with their towers and network, the idea of de-merging infrastructure from operation is anathema, especially to someone who spent their whole life in telecoms and understanding the sector partly through the physical representations of its infrastructure. Pointing to Western Europe, he shows evidence of people taking issue with demerging their businesses, “but if you go to India, Indian operators are much smarter and they understand exactly where the cost-benefit will be. And they have decided, Reliance, Bharti, Vodafone, and Idea Cellular have all decided that owning a tower doesn’t make sense. Pooling and sharing makes more sense. Let somebody else run that specific area with a specific knowledge while you can concentrate on marketing your services.”

Through demerging and redistributing industry functions, private equity might be able to increase efficiency through investments in telecom’s down-market industries, including logistics and supply-chain management. Rami Bazzi, principal of private equity at Injazat Capital, believes “Telcoms are offering products for which they need support. They need to focus on coming up with the right product, the right service and make sure that they do it right, that they do it profitably. However, they need support on the operational and business side and it is very challenging to get all the support they need built in-house.”

Fixed-line subscriber base in the Arab World

Thumbnail of the telecom sector in KSA

To which telecom markets should private equity move?

According to Millennium’s Güney, there is a “big swath in the middle” of the African continent “where you do have some of the large operators that have a presence there, but not in all the countries. And what you’re hoping for is that area of Africa will grow over time, just like every other emerging market will grow and has grown so far.”

In addition to Africa, South Asia remains a particularly attractive market for private equity capital in telecom operations. In Pakistan and India, particularly, there are a number of fixed mobile operators, while penetration rates remain low. However, the challenges to increasing penetration rates from simple due diligence techniques are not the only consideration.

Because of the nature of the market and its lack of development, “even if you have been able to get a license, maybe there is still not enough frequency available because there are so many operators,” according to Güney. He believes, then, in the “physical restrictions in the ability to have additional players. But other countries exist in Asia where you might have only two operators or three operators and judging from your macroeconomic study of that country, you might have a growth there.”

With a geographic size that dwarfs its neighbors in the Gulf in particular, and the Middle East in general, Saudi Arabia is in the sights of private equity firms who are looking to the kingdom as a potentially excellent market.

With new plans sprouting up to develop the country’s infrastructure, particularly in the transport and communication sectors, as well as down-market industries in the supply chain of goods and services, Saudi Arabia is a slow giant ripe for the introduction of management efficiency.

A slow relaxation of regulations on private equity firms is just one of a series of measures — along with building the social infrastructure of education and healthcare — where the kingdom is thoughtfully giving a thumbs-up to private equity groups looking to enter the market. This is done through obvious contacts with regulatory and other government authorities, but also with the country’s major family firms.

Having spent over a decade in the kingdom, Richard Dallas, managing director of private equity at Gulf Capital, has noticed the difference between the Saudi market and those of its neighboring economies.

Dallas believes that both the UAE and Bahrain “have been leaders in creating regulatory and economic environments that have been inviting and welcoming to foreign investment, particularly the development of the banking and financial services sector.”

Because Saudi Arabia is the biggest market in the Gulf Cooperation Council (GCC) and its economic powerhouse, the economy is “slower, more deliberate and has a regulatory scheme that is changing on a more deliberate basis.”

But the kingdom has already made significant changes. Fadi Arbid, executive vice president for Amwal Al-Khaleej, pointed out that the Saudi government shifted from its traditional policy to spend 60-70% of GDP on defense and infrastructure to the new plan whereby more than 50% of the GDP is being spent on education and healthcare. To prepare the country for an era of declining demand for oil and the possible price drops associated with it.

Wadah Al-Taha, head of strategies at Emaar Financial Services, explained that Saudi regulators “have to set criteria, they have to be careful, then they have to make a move,” attributing the caution to the relative size of the country and the potential for grave errors from a regulatory or economic misstep.

Establishing a castle in the kingdom

Culturally, however, entry into the Saudi market is a new frontier for private equity firms. They must understand how to navigate policies by deciphering them. Firms seeking entry into the Saudi market are also best served by a synergetic partnership with families in the kingdom.

The largest families are mainly sought out for their networking potential and relationships with them are cultivated through a mixture of attracting them to a specific private equity firm as an individual investor or as the owner of a company in which a private equity firm owns a minority stake.

Deliberate, careful motions are not only the way Saudi authorities move but also how new firms proceed as they seek to gain entry into the country. By doing one successful deal with a Saudi firm, a new private equity firm might establish a relationship that generates more deal flow than previously imagined.

Shailesh Dash, senior vice president of alternative investments at Global Investment House, explained that “family-owned businesses in the MENA region are often diversified across vertical and horizontal lines of their supply chain and, accordingly, many family-owned businesses also engage in activities that are unrelated to their primary business. As ownership and control of these family-owned businesses move into future generations, the need to capitalize assets often becomes important, as some of the successors may want to pursue independent interests or liquidate their interest in the business.”

There is a need for liquidity and a “formal capital structure in an increasingly competitive free-market economic environment, which will result in significant merger, acquisition and divestiture activity. We have capitalized on these opportunities and many times have been invited by various families to corporatize them and grow their businesses beyond their countries boundaries and helping these businesses in acquiring economies of scale.”

The help Global Investment House provides to firms comes in several varieties, including “providing liquidity to the family group as a buyer of the group’s non-core businesses or as an investor in the group’s core business, providing suitable exit opportunities by identifying regional or international partners, valuing the business and assisting in various divestment activities to create value for the shareholders of such business, and providing a framework for target identification, target screening and transaction execution to assist in making strategic acquisitions for a family group’s core business.”

KSA public equity issuance ($ million)

According to Richard Dallas, managing director of private equity at Gulf Capital, “they are very guarded and careful about making sure they do everything in an organized fashion, so that they understand the consequences of what they do as much as they can.”

The reasons for this lie not only in the special role played by Saudi authorities as the guardians of the two holiest Muslim sites and the hosts of the hajj. Although these are important factors in a majority-Muslim region such as MENA, and for the significant Muslim populations of South and Southeast Asia, the internal population dynamics are putting pressure on the Saudi state to consider the future of a people whose riches and nobility are to a large part maintained through their natural resources, or down market-related industries. Dallas said, for the authorities “job creation is very, very important. For a long time they have been very focused on providing opportunities to their younger people, so I wouldn’t say they are slower or more resistant to change. I would just say they are more deliberate in what they do. Because if they don’t, quite candidly, they would make a major misstep and I think that this deliberateness will ultimately serve them very well.”

Every major private equity firm gives due consideration to Saudi Arabia. If they do not already have businesses in the country or at least relationships through investors in their firms, regional and global private equity managers are assembling their teams to penetrate this new market. Rasmala Investment Holdings is just one private equity group that received a green light from the Saudi Capital Markets Authority to expand its service in the kingdom.

In addition to its private equity business, Rasmala will be able to operate its mergers and acquisitions and IPO advisory arms. When the group appointed Hamad Mubarak al-Huthaili as the general manager of Rasmala Saudi Arabia, the company’s CEO said that “Saudi Arabia is the largest and most important capital market.”

This appointment hints at the importance of the country’s relationship-driven business culture as al-Huthaili had previously worked for four years at the Saudi Monetary Agency, in addition to other firms in the Saudi financial sector. His experience is likely to provide Rasmala with the sort of inside deal generation necessary to sustain business with key contacts in the kingdom.

A. Shabu Qureshi, director of EMP Global, related his firm’s investment in SIPCHEM, a Saudi diversified petrochemical company. Explaining the market dynamics of the Saudi regulators, he pointed out that “what the Saudi government has done is to allow ARAMCO to controlling the upstream industry, but then to get the private sector involved in downstream investment.”

At the time of the investment, three years ago, EMP took a 23% stake in the company, which then “executed its business plan well, and was able to go for an IPO quickly. It was a very good growth story and a sort of poster child in Saudi Arabia for what the government has been able to achieve by encouraging some degree of privatization, and how some of the dynamic family groups there, in this case the al-Zamil family, have been able to take advantage of this.”

However, Qureshi admitted that “it is a bit of a challenge to penetrate the Saudi market.” He attributes success in Saudi Arabia to the fact that EMP has a “good network of people in Saudi Arabia and we know the government as well as the industrial groups. Also, the Saudi pension funds, including the PIF and the PPA have invested with us, and they have been a very big help to us.”

In addition to EMP’s investment and exit of SIPCHEM, the firm also invested in APPC, a Saudi single purpose petrochemical company manufacturing polypropylene. “It was a greenfield investment where we went in very early and just worked with the company by sitting on the board of directors. The company recently achieved an IPO and is about to begin production. Under the radar, Saudi Arabia has achieved a fair amount of macroeconomic liberalization. And then firms like EMP Global are able to help that along and take advantage of what the government has done.”

Knighthood

Having an institutional backer during its start of operations aimed at the Saudi market was important for EMP, which had the backing of the Jeddah-based Islamic Development Bank, where, according to Qureshi, the firm “had some friends we could rely on for support in the region. The IDB is important for the region as a leading multilateral institution, and we also had the support of two of the Saudi government pension funds.”

In addition to the Saudi pension funds and IDB, EMP “had some prior relationships and our local executives were very familiar with the market and the industrial groups. We don’t go in and punch over our weight. That has over time allowed us to have good relationships. We tend to look at each investment by itself and to add our best professional advice, and not to favor one family group over another. We also look to bring our international relationships to the table if they can be of use to our portfolio companies.”

The bridging of Western models and what some observers affectionately call ‘Bedouin math’ is taking root in the kingdom. Qureshi thinks that “as Western banks and investment banks establish themselves in Saudi Arabia, both parties will benefit. The Western banks will get more familiar with the Saudi market, and that will benefit the Saudi partners and families who will get better access to Western financial technology. Having people on the ground with Western technical skills and knowing how the region does business is helpful for both sides.”

Abe Saad, head of private equity at Rasmala, believes that, “the kingdom is one of the largest markets in the GCC. It hasn’t been treated as it should be on the private equity side, though.

Composition of total estimated value of projects in KSA. Total value $665.42 billion

Most businesses in the region are owned and operated by families. The level of trust between members has also been offered to the extended family. 

This process is hardly the best way to objectively increase efficiency, acquire the best management and talent experts. With new sources of wealth have come new ideas and ways to operate businesses.

By entrusting their operations with a private equity firm, a family-owned enterprise will gain Western-style efficiency, but the challenge comes in interfacing with firms by understanding the concerns of the families still involved directly in business operations. There are several ways to get private equity firms on board without fearing total control by a company.

Thanks to the regulation in most Gulf countries of limiting foreign ownership of firms to 49%, owners can be sure that they will not lose their businesses. However, at the end of the day, owners must become comfortable with one of the firms, or else they will be undercut by the competition.

To balance the issues, family businesses also seek strong relationships with firms, with private equity firms trying to court the favors of family members seeking to do the same. Private equity firms make sure to include the most influential of investors in their institutional and individual backing for investments inside and outside the Middle East and North Africa (MENA) region.

According to Shailesh Dash, senior vice president of Alternative Investment at Global Investment House, family firms “know that competition is coming from regional and foreign companies and if they don’t achieve economies of scale and become big, it will be very difficult for them to have the business survive until the second and third generation. They know these are small markets and a significant amount of success was derived from the fact that these were protected economies and those protections either have gone out or are going out.”

Another industry executive, Romen Mathieu, managing director of Capital Trust Group, explained that, “The most important point of our job, which is specific to our region, and not the same in the Gulf, is that what makes it happen in the end is not the money that we bring, money is everywhere, it is the personal relationship that we manage to build with the shareholders of these companies, the board members and the top employees.”

For Mathieu, courting partners is a personal family-wide effort in itself as his “wife personally knows every wife of every shareholder, every board member, and so on. Building personal relationships are very important because when a problem comes you sit with them and deal with it. Without this personal relationship when a problem occurs you call your lawyer but here it does not work like this.”

Yahya Jalil, senior vice president of private equity at The National Investor (TNI), believed his fund “would capture some of that deal flow at a pre-IPO stage, and then TNI would take those companies public.”

He attributed his firm’s success to its brand name. “Family businesses in the region may not be open to discussing their future financing­/capital raising plans with a private equity player, but these businesses are usually interested in talking to TNI to understand how they can do an IPO. This is because of a history of credibility and a high level of trust that TNI has established for itself in the GCC, which makes entrepreneurs and owner-managers of family businesses comfortable approaching TNI on this.”

Jalil explained that his team works “closely with such businesses to identify their needs, and then, if it makes sense, we will make a private equity direct investment into the business pre-IPO. Once such an investment is made, we work closely with the family business to ready them for IPO.”

Jalil’s process includes instituting corporate governance, legal and structural changes to prepare them for a public joint stock company structure like an IPO, adding depth to the business’ management as well as formulating succession plans for board members, and finally “getting the house in order to ready the business for an IPO.”

Had TNI ignored the relationship-driven way of doing businesses with family firms, the company’s deal flow would sink; but luckily this is not the case for the most successful players who give careful consideration when speaking with family-run firms.

Richard Dallas, managing director of private equity at Gulf Capital, explained the benefits of asymmetrical information and the relationship-driven structure of businesses. He says “people are still modestly uncomfortable with the idea of publishing their results of trade secrets to a variety of people who come and look at them and then the highest bidder wins. I think for some time relationship-based sourcing is going to be an important part of business here, which is very different from, certainly, the United States.”

Yet relationship-based sourcing is looked at positively and is considered a way to tap into proprietary deal flow, which has maintained a strong presence as businesses have moved on in Europe from several generations involved with a firm to the current business environment and the high mobility of upper management personnel within industries.

The trust Dallas’ firm obtains comes from families believing that “we can come in and take strategic investments in businesses, we don’t insist on owning 100%. We like to have the ability to influence the direction of the company, but we will take a strategic minority interest if it’s structured correctly. We bring the ability to help them get ready for an IPO. We could go ahead and regularize their accounting. We can go and upgrade their human resources and get the corporate governance that will be more suitable for a public company. We can affect and put them through that pre-IPO scrub of two to three years of good improvement and the view is that helps them get to the IPO market and enhances their value once they get there. That is one of the things we like to think we bring to the party, the ability to help family companies like that.”

Leaning towards private equity

However, the paradigm gaining popularity is that firms are leaning towards private equity as the means by which they can expand and solidify positions. According to Dallas, “a lot of family companies, by reason of succession or liquidity, whatever motivation there is, they are interested in being available to be public if they choose to be. And bringing an institutional investor like Gulf Capital that operates rigorously in terms of its investment processes, is an aid to doing that. I think that is why a lot of family companies are interested in addressing some of their issues with institutional investors. It’s more than going out and getting three guys with money, its getting smart money that helps you.”

For Dallas, the backdrop for accepting private equity money “varies quite dramatically. Some are very sophisticated, others are more traditional. What we’ve seen in the Gulf family groups own maybe over 100 companies which are all growing and they need capital for expansion and managerial talent.”

In order to keep up with portfolio growth, firms are, according to Dallas, “seeing how they can redeploy their assets and their efforts and maybe sell off some of their non-core companies. They have come to realize they can’t do everything all at once and have to pick and choose where to concentrate their efforts.”

A. Shabu Qureshi, director of EMP Global, explained that the growth in opportunities for acquired firms come from attempts “to work with companies here that are relatively small on a global scale and help them become global companies. We do that with capital, but also by providing an international outlook and relationships with different parts of the world, particularly Asia. Can EMP use its relationships to help take family businesses from this region over to Asia? Here, in the MENA region, it is interesting to an outsider that family groups are involved in such a myriad number of businesses in a pretty small geographic region.”

“To overcome the issue” of ownership attachment, notes Qureshi’s colleague Junaid Jafar, general partner of EMP, “it is important for companies to know what the financial investor is bringing to the table, apart from money — be it good corporate governance, financial engineering, access to new markets, or perhaps a combination of the above.”

Abe Saad, partner at Rasmala, believes his company has the “strength in the sectors that we want to focus on. We know the key players and most of the business done in the region is relationship-based. Typically, let’s say we own a construction business, we know all the key players in the industry in the UAE, in Saudi Arabia, and we have a relationship with them.”

Just talk it out

To increase the quality of their acquisitions of family firms Khaled al-Muhairy, CEO of Evolvence Capital, advocated good communication and local business acumen, paying particular attention to the culture of family businesses. He noticed that “Communication is at its highest level before a limited partner commitment and once you commit, it drops down to zero and I have seen that with 85-90% of the funds here. It’s just that ‘we will be so nice to you until we get your money, then we are done.’”

Al-Muhairy explained that “It is not a matter of returns for investors because he can make the same amount of money somewhere else. I think there are so many elements that make private equity successful. The proof has always been communication. A lot of firms do not communicate properly. You know some of these firms are based in London and will do deals from there. If you believe this age is about communication and voice data, then you will believe it is a must that you are on the ground directly.”

Communicate and trust work together in cementing relationships between families and private equity groups. Mathieu believes “reputation is very important. That is why I don’t think that you will get a single penny from someone that you don’t know. Even if I had a great track record in the internal rate of return (IRR) and I promise you that I will make 20%, you will not give me a penny. We have to build a relationship and trust and by having that trust relationship then you might think that you will try with $1 million or $2 million.”

Since most companies that are ripe for private equity investment are family-oriented companies, Ziad Maalouf, senior vice president of MENA Capital, believes when “you are a family-orientated company your horizon is limited and this is why they see a lot of value added in having a professional private equity fund. So basically, they look for an institutional investor to come and invest in their company to help them institutionalize and streamline their operations in order to expand regionally, and this is what we do.”

Maalouf thinks private equity firms “not only provide capital, but also contribute to the strategic and financial management of the company. We also provide valuable expertise, knowledge, and contacts in the region, leading to operational enhancement and value creation.”

He explained that the role of private equity teams is to help a “successful entrepreneur who has been doing extremely well but does not have the managerial or financial skills to manage his company. So we give him the support that he needs and help him institutionalize the company, but we typically do not get involved in the day-to-day affairs of his business, however, we do actively supervise management through board representation and participation on the relevant committees and allow the entrepreneur to do what he does best, which is generate business.”

Will families accept the new guys?

According to Robert Wages, executive director of the Abu Dhabi Investment Company, acceptance of private equity firms by family firms “varies quite dramatically. Some are very sophisticated, others are more traditional. We have seen in the Gulf family groups, maybe over 100 companies, which are all growing and they need capital for expansion and managerial talent. With all this growth occurring, they are having trouble keeping up with the growth in their portfolio.”

By teaming with a private equity partner, Wages noted, “they are seeing how they can redeploy their assets, their efforts and maybe sell off some of their non-core companies. They have come to realize they can’t do everything all at once and have to pick and choose where to concentrate their efforts. They might consider selling a majority in growth companies, which removes them from the day-to-day management and having the capital is a way for them to participate in the future growth of the business. Therefore, we find that to be a very receptive conversation with family groups in the UAE and in the Gulf.”

Shailesh Dash, of Global Investment House, believes that family firms are responsible for the lack of significant amount of investment in Saudi Arabia, Qatar, and Kuwait, where they are the biggest markets of the Gulf area, but have seen little in the way of investment for infrastructure, oil, and refinery of the region’s natural resources.

Dash said that 85% of all businesses owned in these markets are family-owned, which also own private businesses, making any attempt to work with them “an art in itself.”

Dash believes that “if three years back you came to Kuwait and met any of the CEOs or CFOs of the local banks, when central banks started giving out licenses to Citibank or other foreign banks like BNP Paribas — they would have told you this is only one branch license, we have the local relationship and their business would in no way be impacted. All these local banks are owned by the merchant trading families and have been a source of pride among the various family holdings.”

The current situation, of increased liberalization and more licenses for private companies could not have been predicted. Dash believes the new landscape means “the thought process of these families has changed so much, from being a business that before they would have never thought of selling to a position in which families are now willing to sell. That means, people have really graduated today to think in terms of investment and income. They can derive from it and what is core to their activity and what is not.”

Just as private equity firms seek industry specialization in the long run, family firms are realizing the effects of competition and how businesses must morph from the traditional line of acquiring and gaining stakes in several industries.

For firms involved in trade, banking, and real estate, they “have realized that they are either good in a business or not, therefore before they loose market share and loose value in their non core activities, it is the right time for them to sell a part of their business that they don’t think is going to be good for their business. Alternatively, they have been trying to focus on growing their businesses which they think they have an advantage or which are core to them,” Dash believes.