While Middle East sovereign investment funds have been famously scouring the world for trophy assets over the past year, private equity within the region has also been growing impressively, with leveraged deal sizes increasing and wider level M&A gathering momentum. Philip Moore reports.
There are two sides to the private equity story in the Gulf. The one that has commanded the most attention in the global media has seen increasingly voracious GCC-based funds mostly directly or indirectly state-owned buying blue-chip assets ranging from stakes in global investments banks, airports in New Zealand to tourist attractions in London.
Granted, approaches by GCC investors to companies outside the region have not all been successful, with the abandonment of the recent Qatari bid for supermarket chain J Sainsbury of the UK demonstrating that regional buyers may not be entirely price-insensitive.
Nevertheless, bankers expect GCC acquirers to remain focused on opportunities outside the region as part of their long term objective of building a diversified portfolio of assets.
The other side of the Middle Eastern private equity story is the increasingly vibrant industry that is taking shape within the region.
As a recent research report published by the Kuwait-based Global Investment House advises, private equity in the MENA region in general, and the GCC in particular, has continued its robust growth in 2006 and 2007 on the fundraising front, as well as fund sizes. Specifically, this adds that the total capital raised by private equity funds in the MENA region reached just over $7bn in 2006, a 61.6% increase over 2006s total of $4.4bn.
Much of that money will be invested outside the MENA region, but houses targeting opportunities closer to home will be hoping to follow in the footsteps of the Dubai-based Abraaj Capital, which was the lead investor alongside Dubai Capital Group, Saudi-based Rashed Al Rashed and a number of other regional firms in this years showcase deal for private equity in the Middle East.
This was the $1.925bn purchase of Egyptian Fertilizers Company (EFC), which was significant not just because it was the largest private equity deal ever completed in the region. The EFC deal was one of the regions first pure leveraged buy-outs that wasnt 50% debt and 50% equity financed, which is the usual balance here, says one Dubai-based private equity investor. Of the $1.925bn, $500m was debt at the opco level and there was also a significant amount of debt at the holding company level, as well as a Sharia-compliant debt tranche.
Deals of that kind may be the exception rather than the rule. A key challenge for private equity players will be to identify the right acquisition targets in the region, says Jacco Keijzer, head of debt origination at ABN Amro in Dubai. Although there may be plenty of opportunities in Turkey, Egypt and the Indian subcontinent, the GCC will be more difficult.
The UAE, he says, tends to be populated either by government-related companies that are way beyond the wallet of would-be private equity buyers, or at the opposite end of the extreme by companies that would generally be regarded as too small.
Saudi Arabia, meanwhile, has thousands of medium-sized companies that would feature on private equity investors radar screens, but until recently few of those would been culturally amenable to the concept of private equity.
That may be changing, especially among conglomerate-style enterprises that have built up sprawling portfolios of businesses over the last few decades. Many of the family-owned companies in the GCC are now run by US-educated MBAs who are looking at their portfolios and recognising that they are too widely spread to stack up efficiently, says Keijzer. They are increasingly receptive to selling parts of their business, which may open up more opportunities for private equity in the region.
M&A gathers pace
Investors agree that at a wider level merger and acquisition activity is starting to gather momentum in the Middle East. We are starting to see a number of large players taking strategic stakes in small and medium sized companies for example, commercial banks buying holdings in smaller investment banks on a regional basis to increase their footprint and offer bundled services, says Aamir Khan, head of private equity at Unicorn Investment Bank in Bahrain.
Whether or not the emergence of more acquisition opportunities in the GCC will bring with it the bells and whistles that have come to characterise the leveraged finance market in Europe is open to question.
When I joined the private equity industry almost four years ago, the market for acquisition finance in the GCC was practically non-existent, says one local investor. Banks had a poor understanding of the concept of lending on a leveraged basis. They were uneasy about non-recourse, cashflow-based lending and wanted the whole range of guarantees that they had been used to for decades.
That, he says, has now started to change, driven by two influences. First, houses like Abraaj have been tireless in organising a host of conferences and symposiums aimed at educating the local banking market about leveraged finance.
Second, the focus that a number of foreign banks have put on the potential of leverage has had a knock-on effect on regional banks. We are certainly moving in the right direction, says the investor. But we have a long way to go before we get to some of the more complex leveraged structures. Most people involved in private equity in the GCC wouldnt be able to tell you what second liens, PIKs and toggles are.
Nor have many yet had first hand experience of the high yield bond market. We havent seen any high yield issuance here, says Brendan Goffinet, executive director of global capital markets at Morgan Stanley in Dubai. Non-investment grade companies looking for finance will either go to the local bank market where their name recognition is strong, or fund themselves in the sukukmarket which is generally unrated.