The face of Middle Eastern private equity is young and vibrant, but its age does not exempt it from the challenges of the next five years as it matures through its adolescence. The enormous potential for new projects is countered by the still present, but shrinking, lack of understanding of the private equity business. As the macroeconomic winds change, private equity firms must understand how closely related they are to the forays of financiers into the developing markets of years past.
During the development of another growth prospect — that of Sub-Saharan Africa in the 1970s and 1980s — firms financed ships to deliver concrete to the plethora of countries looking to the West for an example of how they should pursue their development. Concrete was the necessary commodity for the slew of infrastructure projects planned, for transportation channels and infrastructure, including the ports in which the boats would dock, as well as other structures for industry.
When the projects turned sour, however, the ships of concrete waited at the ports until their cargo solidified. Fund managers in developing markets must realize that they are today commanders of new ships and commodities, and they should learn from the experiences of previous developing markets.
Many in the region desire the efficiency that private equity can bring, but countries are choosing different rates at which they want to import private equity as a commodity and to allow the financiers to bring their know-how to a host of regional businesses. Saudi Arabia and Kuwait are looking to attract private equity at a slower pace than their more liberal neighbors in the rest of the Gulf Cooperation Council. However, the question is not what private equity firms can do for the region, but how can they do it?
Finding the right balance
How will a private equity player tailor Western-style value creation, restructuring principles and due diligence procedures to family-owned and operated businesses with a history spanning several generations, some of which precede the modern state in the region? What can we expect to see as the next generation changes their ideas towards competition, growth, and efficiency by welcoming private equity firms to develop and turnover their businesses in new markets?
Private equity strategists must learn the geography, the climate, and the competition as they seek not only to expand their reach, but the reach of their investments. Regional firms can offer their product to the rest of the world if they receive the proper blend of Western expertise and regional know-how.
One successful deal with a regional player — whether they are an investor or investee — establishes a relationship which can be harnessed and synergized to create more deal flow and generate returns. Private equity firms understand this and pride themselves on the relationships they have been able to establish over the past few years of the industry’s infancy in the region.
As the industry matures and goes through its adolescence, private equity firms and private businesses will realize the importance of their relationship, but the conditions in which firms operate will change and a consolidation in private equity players will ensue.
A new mathematics will combine Western metrics with regional logic to create a new brand of due diligence for acquisitions, managing corporate governance and preparing investments for a host of exit options — of which the IPO is increasingly gaining speed on regional capital markets. The new logic will find businesses implementing the most efficient of procedures, colored by a local accent and a nod to the Middle Eastern market.
Much of the region continues to depend on imported knowledge to increase efficiency and thus make development schemes more effective, but it will take the efforts of everyone involved — including family-firms, private equity players, and regulators — to make sure the ships of private equity reach their ports before the cement dries.
