Private equity’s microeconomic outlook fuses numerous ideas of industry practice to focus on the quintessential benefit of the industry: value-creation. The re-structuring of firms by private equity players to bring value to them requires a strong team focused on research and pursing only the best deals in the pipeline, while giving consideration to best-practices in revamping businesses. This due diligence is dependent on talent and is important when introducing reforms in corporate governance to acquisitions.
Acquisition acumen
According to experts across the industry, talented professionals with experience in due diligence processes and methods are a necessary addition to any team, but the specific math these due diligence experts employ — from Six Sigma Black Belts to those with a regional understanding — vary considerably. However, they maintain the same ends of making a firm more efficient.
Khaled Al-Muhairy, CEO of Evolvence Capital, thinks that “private equity firms here go to Frankfurt for a conference, and hear buzzwords like value-added. Then they say ‘we bring value-added services to the company’ and they put it in slides seven and nine of a presentation and unfortunately they don’t have a clue what one thing does and what another one means.”
Demonstrating abilities is the best way to gain the favor of regional firms and investors. Looking back at SHUAA Partners’ success in closing their first fund, with the UAE’s leading jewelry retailer Damas, Jamil Brair, senior vice president of the firm, remarked that back in 2005, when the group engaged in fundraising, “raising the money was relatively easy.”
SHUAA Partners’ success has now allowed it to brag about its ability. Briar explained that “raising the money on the back of a transaction that you’ve done is all the easier. After Damas, it was a much more compelling story to investors to show that you did a close on an investment rather than have one slide with Company A or Company B. Having done Damas, I think it took two weeks to raise the money after that.”
Richard Dallas, managing director of Private Equity for Gulf Capital, which prides itself as the first in the MENA region to use Six Sigma due diligence methods, believes “things happen during the course of your ownership and you have to react to it, so it is a very collegial relationship we have with post-acquisition. But fundamentally, I don’t know how to fix supply chains, and that is what another managing director, Magellan Makhlouf, and his group does for a living. And I don’t mean to suggest it’s only supply chains because they are very tactical in what they do.”
Dallas thinks that his firm “is unusual in the Gulf, in getting people together who are committed on a tactical basis to improving the companies. Everybody will tell you they strategically monitor the companies, but I think we are relatively unique in having dedicated internal resources that actually help the company to achieve their operational efficiencies. The other thing Magellan does is manage a series of outside resources that we bring in on a specialist basis. He is involved in the operational aspects of the company.”
Gulf Capital hires due diligence experts from other firms to work on specific deals. “For example, if we are looking in the media area, we will find as a team, somebody who is the guru, who really knows the landscape.” Although Dallas can bring global industry knowledge, his business depends on “localized knowledge to see what opportunities have been foot-printed in the West and how they are going to flow through a new system that is nascent and just building.”
Evolvence Capital’s Al-Muhairy believes that talent acquisition is going above finding skills that are commodities, to hiring people who understand the business climate of the countries in which they work. He views foreign understanding of local markets with disdain saying that, “if he speaks Arabic, it doesn’t mean that he is Arab.”
Changes in company performance since receiving equity or venture capital funds
Executive literacy and innovation
Al-Muhairy advises local players to read, because it makes little difference if someone from a Gulf-based firm attends conferences on Western practices for their MENA business operations without an understanding of regional practices.
He believes “it’s all about reading and understanding. It’s a major issue in this town, reading. You know why they like the newspaper, because it’s short. You give them a ten-page article and they’ll look at the subheadings.”
Maher Hammoud, senior vice president at SHUAA Partners, indicated how the private equity industry has changed from “attracting talents from the investment banking experience. This is understandable given that the focus of these private equity firms have been on raising the funds, screening investments, and executing transactions.”
He continued, “Recently, we started seeing a trend of PE firms attracting talent from the strategy consulting industry. This is a positive trend and a signal that some private equity firms are beginning to add in-house capabilities to manage the post-acquisition stage of their investments and playing a more active role to assist their portfolio companies in building value.”
Innovation is the key to finding new ways to operate and private equity firms pride themselves in their abilities to generate teams whose members compliment the firm’s strategy and the rest of its in-house personnel. For Gulf Capital, Dallas thinks it is “innovative in that we maintain post-acquisition operational resources. And a lot of firms don’t maintain it in house, they outsource it. We like to have people internally, who we can put into the companies as well as draw on outside resources. We are very focused on a value-creation strategy. When we buy a deal, its not ‘oh boy, that is a good punt, I think telecoms is a good go, let’s throw our boat in the river and see if the tide rises.’”
Another private equity guru, The National Investor’s senior vice president of private equity, Yahya Jalil, has organized his division into four research teams to bring in additional deal flow from in-house spotting and assessing. His team is divided by sectors, including healthcare, real-estate and contracting, industrials, chemicals, energy, consumer and retail.
He explained that “each sector has a dedicated research analyst or team covering it, looking for investment ideas for the fund in that sector on a proactive basis. This allows us to build domain knowledge in these sectors of interest over time, and allows us to make smarter decisions in the future.”
When Jalil initially came on board TNI’s private equity team, after a significant time in Western markets, he knew the ins and outs of the private equity business, and thus “the learning curve for me was really on understanding the region, and deal-making in the region. So I surrounded myself with smart, driven people who could help me on this. My first hire was someone who, while he had not done private equity before, had broad and deep financial services experience in the region.”
Pursing this, he ensured that “each hire I made was to find someone with a skill-set complementary to mine. Today I have people that have (a) deep forensic accounting backgrounds, (b) deep operational backgrounds — they really know how to run a company, and (c) industry specialists in the region. All of these skill sets complement my own background well, and to me, that is what a good private equity team is all about — collecting the right set of specialists.”
The mixture of in-house and external firms in assessing deals in the pipeline has now become standard in MENA private equity, but Jalil wants his team “to have ownership of this part of the process,” including business establishment, due diligence, researching end-markets, and all the core competencies of a private equity firm.
TNI does hire Western firms to help with feasibility studies, but for planned investments the firm “will do the business plan and transaction structuring in-house.” Jalil also believes in “empowering management teams to make decisions,” offering backing while on the board to “a decision related to the operations of the business where we put faith in management of the company to make those decisions.”
Preferred sector of private equity investments since 1998 unskewed ($ million)
Team synergy is important to private equity deals. Dallas explained the organization of Gulf Capital whereby another managing director and his team “become active while we are doing due diligence. They are very active when we do our business diligence as part of the creation of our investment thesis of why we are interested in a company and why we are interested in a sector and, ultimately, why we like that company. He is involved along with his team in doing operational, commercial due diligence.”
Gulf Capital’s division of labor is an attempt to layer pre-acquisition deals. At the technical, tactical level Dallas’ firm examines “how to fix the supply chain, so you could push working capital out of the business or help recruit better human capital into the business.” His team coordinates at the strategic level by examining “where is this firm going? What are the macro trends? What sectors do we want to be in?”
Geographical split of private equity investments since 1998 unskewed ($ million)
Due diligence
Due diligence, the process private equity firms pursue prior to an acquisition to find if investing in a particular company is feasible, has taken hybrid roots in the MENA region. Traditional forecast-based models of the processes — including the new popularity of Six Sigma procedures developed by Motorola — are blending the region’s more Eastern style and approach to deal valuation. They also factor in a certain unquantifiable amount of synergy that a deal will create to nurture future possibilities with a regional partner.
For regional players, the due diligence procedures they learned in the financial capitals of London and New York, along with the ranks they hold — from Green Belt to Black Belt — are of less use than understanding softer due diligence standards, including “the notion of give and take,” which Jalil of TNI has acquired since establishing his base in the GCC and attuning his style to be more market-oriented.
He believes that “if you ask for perfect corporate governance in the region, or corporate governance to North American standards, you will never do a deal in the region. Rather, what I try to do is ask for the really critical things, and maybe give on some of the less critical ones, in the interest of getting a deal done. There are some fund managers in the GCC who have said to me, ‘we don’t do a deal until corporate governance is 100% tied up.’ But then you look at their deals, and there are corporate governance holes so big you could drive a sixteen-wheeler through them.”
For Jalil, “the strongest fund managers in the GCC focus on finding the balance between doing enough diligence to not make a mistake and not going overboard on Six Sigma. This is a fine balance, but one that is paramount for a fund manager to do deals successfully in the region.”
Rami Bazzi, principal at Injazat Capital, explains his firm’s due diligence procedures, consisting of both soft and hard approaches: “The first phase is done in-house, where we assess the opportunity, estimate its fair market value and negotiate the deal structure from a financial and legal perspective. Once we have the board approval, we initiate the hard due diligence process, in which we appoint external advisors to get an independent view on a number of valuation and legal matters. In summary, we do it in-house and conclude it by seeking external expertise.”
Corporate governance
What due diligence often discovers is room for improvement in a firm’s efficiency and with the top-down approach of most private companies, slack in efficiency needs improvement through the management and the board on down. Izzet Güney, managing partner at Millennium Private Equity, attested that “indeed, bringing a high degree of reputation to the table, setting up governance boards, making sure checks and balances are correctly implemented adds value.”
The experience he had with corporate governance improvements prior to his expedition to Dubai in 2006 has taught him that “those steps enable the investor base to truly expand and liquidity in a stock for example is what makes it go high. Bringing the famous other pair of eyes also helps a lot and in many instances, a new investor had the ability to identify issues which needed to be resolved but that existing shareholders overlooked.”
The traditional response to management restructuring has been viewed with suspicion by industry pundits in London and New York, but in the Gulf and in the MENA region in general, there is much improvement to be made bringing firms up to scratch with more sound principles of governance.
Robert Wages, executive director of Private Equity for the Abu Dhabi Investment Company, believes that “there is a willingness and recognition to improve the procedures in corporate governance. However, it starts with the board downward, so if you compose the board properly with people who have the best interests in the company, then you put in place the right reporting and governance procedures from the board who promotes good management practices and the management can carry out the same on down. There is not really resistance, just a lack of familiarity.”
Yahya Jalil’s idea of private equity expertise sums up the nature of the business in which these firms operate. He recounted how someone once told an investor that he made a “lucky” private equity investment, to which the investor retorted: “I find that the harder I study the industry and the company I am investing in, the luckier my investments become.” The same hope is shared by Jalil and his colleagues in private equity teams across the Middle East, North Africa, and globally.
How agnostic and opportunistic are funds?
While some firms claim to be industry and geographically agnostic within the MENA region and pride themselves on the fact, the majority of private equity firms have broad foci on certain sectors. For instance, many firms can categorize themselves as telecoms, media, and technology (TMT) fund managers, infrastructure groups, or down-market activities in the supply chain of one of those two main industries.
Down-market industries provide the cement and bricks to construct not only the glamorous high-rise skylines in the United Arab Emirates, but also the pavement and gravel for roads leading to a burgeoning social infrastructure MENA governments are creating to provide healthcare and educational services for a young, blooming population.
Wages commented on the size of the industry and noted that consolidation is far off in the future, but firms are already beginning to seek out specialization and to build scale in industries for the road ahead. The challenge firms will face when liquidity flows in less abundant amounts is that they will have to start chasing deals with more fervor.
Rami Bazzi, of Injazat Capital, believes “there is a large interest from investors to invest in specific, rather than opportunistic, funds. Industry focused funds tend to have a more defined strategy. They are able to add value to their portfolio companies by building on their industry expertise and market knowledge. Having the right network in one specific industry rather than randomly targeting opportunities in various sectors offers advantages. Overall, the industry will go through consolidation as it grows and matures and as investors become more sophisticated in picking the right fund manager. They will be more focused on track record.”
Bazzi foresees that “as the industry moves from fund raising to the deployment and investment stages, investment managers need to prove their ability to successfully close the cycle, profitably exiting investments. I believe the current industry dynamics will support the emergence of a new set of funds not particularly focused on an industry or a structure such as secondary funds. I expect new players to move in.”
Yahya Jalil, who currently oversees operations of TNI’s Growth Capital Fund I, which has a geographical focus in the MENA plus South Asia (MENASA) region and a strategic focus of late stage businesses and buyouts, is comfortable with the agnostic nature of his fund’s investments, although “a third mechanism for us to do private equity is under development. It would be through a series of industry-specific funds. It’s really taking our sector and industry research-based approach to private equity to the next level.”
For this new venture, the first movement is “likely to be an industrial fund or industrial investment company to take advantage of downstream opportunities in basic materials, chemicals, the oil & gas supply chain, metals, and alternative and traditional energy. The timing on this initiative is in the second half of 2008.”
As private equity becomes more competitive and increasingly based on what you know and how you can add value rather than who you know and the family relationships you have maintained, industry watchers are likely to see more firms heading toward a sector focus and building a competitive business.
Bazzi explained his firm’s new Injazat Technology Fund II will have a targeted size of $100 million in equity and the option of up to an additional $100 million in leverage focused on TMT in MENA. Also, it “will have partial exposure to countries outside MENA on a 75%-to-25% ratio, mainly for strategic purposes whenever the investment compliments our portfolio of companies and would allow us to transfer new technologies to the region.”
According to him, “investments outside MENA will be conducted on an opportunistic basis,” if there is an “appealing investment opportunity that will help transfer technological innovation to the region and some synergy with portfolio companies.” The fund is considering Europe, the US, and Asia as potential markets for investment opportunity. The move to export regional liquidity abroad, especially into developing markets in Africa and Asia, is a move others are following as well. Bazzi believes “investors are increasingly interested in North Africa, specifically in Egypt, Morocco, and Tunisia, as well as Libya,” although “in terms of markets, the GCC presents the highest potential.”
EMP is certainly following this trend and has not restricted itself to any set group of countries, although it has a base in Bahrain. In fact, the relationships they are cultivating are used in development projects in markets lagging behind the Gulf. Junaid Jafar, general partner of EMP, explained that his firm “did not target institutional investors outside of the region” for the group’s Energy Fund but “we intend to do this once we have achieved the first closing of the fund.” Jafar also discussed the geographic mandate of the group’s IDB Infrastructure Fund, which received a green light to work within the 57 member-states of the Organization of Islamic Countries that has a wide reach across North Africa, the Middle East, and far into Asia.
Shailesh Dash, senior vice president of alternative investments at Global Investment House believes MENA is “8-10 years behind in terms of private equity, compared to other emerging markets like India and China. I think this is still a very good market if you have the relations, because the growth rate that will come in the future will determine a lot and the region is just starting to grow and valuations are still in single digits. There will be a significant number of opportunities over the next 7-10 years.”
Izzet Güney, of Millennium Private Equity, thinks that consumerism will indicate the hot sectors in the coming years on which private equity firms can capitalize. According to him, “consumerism is what drives value creation and in the MENA region today, you have millions of kids and young adults all striving to buy stuff, to watch stuff, etc. … This makes communication key. Not only to speak to each other but also advertise, identify and personalize your shopping experiences. This requires a strong economy, not single-industry dependence.”
Real estate private equity funds total value in MENA ($ million)
