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.
