07/21/10The private equity industry in the Middle East has grown remarkably quickly for an industry that barely existed a decade ago. Today, there are around 150 funds in the region, with a further 12 announced and six rumored to be happening. In 2008, total funds raised increased to more than $6.4 billion. However, PE as an asset class in the Middle East is relatively new and, on a global scale, still very small. In 2001, its share of emerging market PE was less than 2 percent. By 2008, however, it accounted for 10 percent.
Beyond the occasional mention in larger global PE surveys or specific case studies, little research or literature exists on PE in the region. Criticisms frequently leveled in commentary include limited information, lack of transparency and the general opacity of the industry.
There are a number of reasons for these characteristics. Much of the regional PE activity is driven by closed networks, resulting in restricted information flow, making available data in PE in the region a scarce commodity. Although sources such as the Zawya Private Equity Monitor compile data specific to the region, the information environment still relies heavily on informal sources.
The lack of reliable information is not only a source of frustration for analysts but may also be a factor in holding back the development of the region’s PE firms. Difficulties in obtaining accurate financial information on companies have been cited as a key problem faced by potential buyers in the region.
This paper seeks to provide some insight into the region’s PE sector, to identify some of its key characteristics and trends and to contribute to the understanding of PE in this region. The foundation of this report is the survey of PE firms, their general partners (GPs) and their investors (limited partners, or LPs) conducted in early 2010 by Booz & Company and INSEAD’s Global Private Equity Initiative (GPEI). This report also draws on Booz & Company’s and INSEAD’s experience working with leading PE firms in the region.
The region holds specific opportunities that are open to discovery by disciplined, experienced, and connected PE firms. The survivors of the financial crisis will most likely opt for increased specialization, greater emphasis on earlier stage investing and SMEs, improved economics for investors and more operationally focused sector-specific teams. The large number of funds competing for acquisitions may lead fund managers to re-think their investments or value creation strategies. The survey results gave mixed responses to the question of whether there were too many funds chasing few deals. This seems not to be an issue for the majority of participants partly because GPs are now more selective and more disciplined on valuations.
One key element specific to the region is the GPs relationships with family businesses, which in most cases are also clients and/or investors. Their managing owners are often sophisticated and proven entrepreneurs with privileged market access. Although the recent crisis may have affected their investment capital pockets, they still are a strong source of funds. As these family businesses enter into their third generation and re-evaluate their existing portfolios they may divest non strategic companies 90 presenting new opportunities for local well-connected PE firms. Successful PE firms will thus need to develop or enhance their collaboration with such families as a differentiation factor.
Private equity firms are now looking to the future trying to figure out what it will take to succeed and whether they have, or can develop, the attributes required. As alluded in different ways by survey respondents, success will depend on more fundamental sources of value.
As regional firms rebuild, they will need to do the basic fundamental strategies right: specialize, identify sustainable investment ideas, create value within their portfolio companies, reduce risks, and gain the trust of the best possible investment partners. These are things that will work, and remain important, in good times and bad.