The Middle East and North Africa (MENA) region continues to favor private equity as a leading alternative asset class, but changes in 2008 have led many to believe that 2009 will bring new industry dynamics, with a host of investment and regulatory movements sure to make private equity firms more competitive.
Time to invest
Although regional liquidity levels rose in 2008, commensurate with the price of oil, capital has not gone to new funds. In 2007, regional private equity houses raised a total of 22 new funds totaling assets under management of a little over $5 billion. During the first half of 2008, however, funds focused on MENA investments rose only $1.14 billion, which is a slight drop on first half 2007 figures of $1.81 billion and consistent with similarly small drops in other developing markets, such as Central and Eastern Europe and Latin America. The slowing growth in fundraising in 2008 is indicative of the many funds that have raised money but have yet to invest. Few firms have exercised capital calls for new investments, but in 2009 fund managers will have to start making deals to move their funds into the investment stage. Following a more fervent investing climate, different fund managers will prove themselves at a time when a market consolidation will begin and only the best private equity firms will remain standing.
Infrastructure and energy remain the best placed industries in which to invest. The large deal sizes for companies with grand-scale projects in the works for both sectors allow private equity firms to do some tinkering with company fundamentals, but with ever larger-scaled projects, a few deals could prove extremely lucrative. Relationships in executing these higher-level transactions will be important and local fund managers will be best placed to work with the appropriate officials in government and the private sector to invest successfully. Additional infrastructure investments in what the industry terms ‘social infrastructure’ will also allow funds to deploy capital to strategically important companies involved in the fields of education and health, which in the largest regional economies has achieved astounding growth, particularly in Saudi Arabia and other countries of the GCC and, to a lesser extent, in Egypt.
However, in order to source and invest in lucrative deals, private equity firms must still countenance a number of related issues pertaining to the lack of available data, on-the-ground and competent advisors, entangling legal and regulatory frameworks, and finding appropriate management talent. The majority of these problems will remain unsolved in 2008 and there is no panacea in finding the right technical competence to operation teams, although improvements in many countries’ regulatory climates should allow funds to execute more deals in 2009 under less constraining frameworks than fund managers dealt with in the past.
Restructuring for 2009
An ameliorating regulatory environment should prompt fund managers to look for standard exit opportunities via public offerings. One constraint on sourcing deals might be the inability to find strategic partners to whom fund managers could sell their investments down the road. Although capital markets are not performing at exceptional levels, new stock exchanges in North Africa and other frontier markets in MENA should prompt fund managers to line up deals that could be exited upon them. Syria, in particular, will remain a country to watch as many funds, including those raised by SHUAA Partners, have included the country in their fund foci. The country’s Law No. 7, passed in 2000, afforded financial firms special tax treatment, which existing holding companies operating private equity-like business lines have used to their advantage. In 2009, the country plans on taking another significant step forward with the (long-overdue) opening of the Damascus Stock Exchange, with a building and trading platform already purchased.
New improvements should give the necessary boost to the region’s broader investment climate, in which private equity stands to benefit. However, challenges to the industry will not be erased in 2009 from better external climates. Observers have pointed out the excess amount of private equity funds in the region, and particularly in the Gulf, which are doing deals in tandem partnerships or focusing on a myriad of hot industries, like infrastructure and telecoms. Some acknowledge that up-to- date, regional private equity firms have looked for the most lucrative deals and, in a relatively immature investment climate, have been able to capitalize on easy opportunities denoted as ‘low-hanging fruit’. As these types of deals dry up, firms will face a more challenging investment environment and will need to work on their own internal mechanics in order to survive through 2009.
