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7/28/2019 Private Equity in the Middle East
1/13
Private Equity in the Middle East
Jaideep Dhanoa
Nawaz Isaji
Frederico Teixeira
Nico Vivaldi
Christian Weniger
Abu Dhabi Action Learning Module
MBA Programme
7/28/2019 Private Equity in the Middle East
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Team composition
Frederico Teixeira
Worked for McKinsey & Company across banking, energy, telecom, public affairs and public sector, with extensiveexperience in Africa. Performed corporate finance analysis for banking units in asset management, insurance,trade finance and wholesale banking.
Nicola Vivaldi
Worked in investment banking in London advising companies on capital structure and financing strategies in
event driven situations. During INSEAD he has been involved in principal investing with a private capital fund inLondon. Nicola is a CFA and Chartered Accountant.
Jaideep Dhanoa
Jaideep is a TMT specialist with substantial commercial management and VC experience in bringing to marketand scaling consumer web products. He has led the market-entry and monetization strategies forIndian Cricketsglobal internet & mobile rights, and ESPNs online business in APAC.
Christian Weniger
Christian previously work in the Private Equity industry. He led the European Secondary investment activity ofAuda Private Equity, a family-office backed PE investment firm with $4.6 billion AUM. He specialized in IslamicFinance through his masters degree.
Nawaz Isaji
Nawaz started his career as a lawyer in Sydney, advising on foreign investments, and then moved into strategyconsulting with PricewaterhouseCoopers. He has worked across a number of sectors including energy, oil andgas, telecoms, financial services and FMCG.
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The PE industry is composed of three maingroups of players
Source: MENA PE Association, Booz & Company.
Regional
pure players
Global PE
firms
PE firms with
government
links
Middle East-based firms withinvestments focused on the region (e.g.
Abraaj Capital, Gulf Capital, Amwal alKhaleej, Citadel Capital)
Firms headquartered elsewhere, butinvesting in the region, like CarlyleGroup and Colony Capital
PE Firms linked to other entities suchas governments or banks
Also includes SWF previously investingin PE funds as LPs that are becoming
increasingly active in direct investments
Strong local roots, business networkand market knowledge
Strong global brands, raising fundsrelatively easily
Fewer local connections whencompared to regional players
Largest group of different players Small share of private equity for
each player (not very important forthe industry as a whole)
Types of firms Key strengths / characteristics
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GCC PE industry started in early 2000s,followed by a 2008 credit bubble
Birth of PE Small to mid-sized PE funds, very few
players in the market (2000s)
USD 120mn raised by Abraaj Capital and HSBC
Establishment of USD 1bn infrastructure fund sponsored byIslamic Development Bank and a group of sovereign wealthentities
Significant number of start-up firms start coming into theregion to exploit IT opportunities
Explosive growth International large size Funds start locating
into the region (2004-2007)
First notable success registered when Aramex got listed on theDubai Financial Market
Significant number of new first time funds and asset managementcompanies emerge
Institutional investors also backed PE funds, and international PEfund managers relocate in the region
The PE Asset Bubble (2008)
Too many players start to chase too fewdeals
- with asset overpricing
- flooding liquidity
- short term-flips of assets
- weak corporate governance
The 2008 crash and the future perspectives
The shakeout closed many firms anddepressed the market, but AUM were kept ata constant level
Slowly beginning of new venture capital andprivate equity firms to support SME growth(2010-present)
2000 2002 2004 2006 2008 2010 2012 2014
Source: MENA PE Association, Qatar Financial Centre.
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66
14
4
6
11
1718
10
2
5
2
The 2008 bubble provoked a major declinein fundraising and investment
Source: Booz & Company, Zawya Private Equity Monitor.
20032002 2006200520040
2009 201020082007
5
10
15
20
Funds(#)
Funds raising money (#)
Funds investing (#)
Total amount raised (USD bn)
0
1
2
3
4
5
6
Amount raised(USD bn)
2001 share of emerging market PE was less than 2%
By 2008, PE as an asset class remained small, but showed significant growth, accountingfor 10% of emerging PE, with a total of 150 funds
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but total AUM remained stable, despite a
decline in the number of transactions
Source: Zawya Private Equity Monitor, Markaz Report, Booz & Company.
Key characteristics
Trusted networks,relationships andconnections as akey driver for doingbusiness in the ME
Active role playedby LPs in dealsourcing, with theindustry relyingheavily on theirnetwork
Number of
transactions
Transaction value
(USD mn)
90
2,100
117
7,500
110
3,250
77
850
70
850
72
220
20112008
19.9
2007
13.4
2006
23.2
2010
22.4
2009
21.0
7.8
Evolution of total AUM invested in the region
(USD bn)
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The majority of private equity activity inMENA focuses on minority stakes incompanies
Private equity typically used for
companies looking to either raise
growth capital and/or cash out somevalue for shareholders
Typical 25% IRR threshold and 2.0x exitmultiple are set as the minimum to enter adeal with growth capital companies
Family businesses are particularly
sensitive about giving up majority
control; exceptions occur for subsidiarieswhich are underperforming
Put options generally required by PE
houses to guarantee a liquidity event
Difficult IPO environment outside SaudiArabia (strict regulation)
Minority stakes are hard to sell to non-
financial buyers
PE companies set customary minority
protection rights to hedge the fact they
own a minority stake in the companies
Drag / Tag-along rights
Board seats proportional to percentageowned
List of reserved matters
Characterized mainly by minority stakesand conservative multiplesMinority stakes negotiated mainly to
growth / venture capital investments
and contracts usually including specific
guarantees to protect exit failures
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Investments have been focused on a limitednumber of countries and key sectors
Source: MENA PE Association, Booz & Company.
Initial majority of opportunities and transactions occurred
in Egypt, with recent shift to a broader region
Saudi Arabia attracting a lot of interest because of its largeand young population, growing economy and a committedgovernment
UAEcontinues to be a popular destination for fund
managers, and it is expected to further evolve given itseconomic and demographic prospects
Key players are recently investing in healthcare, real
estate, and food and agriculture
Healthcare (biotech and pharmaceuticals) is expected toyield the most attractive opportunities
Construction: ME economies have a pressing need todevelop/upgrade infrastructures
Food & Agriculture: the GCC regions are almost entirelyfood import dependent, which pushes investment upwards
6%
7%
8%
8%
17%
Financialservices
Others
Transport
Healthcare
Food andagriculture
Manufacturing
11% Energy
11%
Constructionand real estate
13%
Tech, mediaand telecom
19%
Geographic focus concentrated in Morocco, Egypt, UAE and Saudi Arabia
Sector focus on healthcare, real estate and food and agriculture
Investment volume since 2006
Investment volume since 2006
5%
7%
29%
UAE
Morocco
14%
Egypt14%
Bahrain
0%
Tunisia
3%
Turkey
4%
Jordan
10%
5%Lebanon
Saudi Arabia
Outside MENA
5%
Other MENA
Kuwait
4%
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but are expected to diversify in the
coming years
Source: MENA PE Association, Booz & Company.
As MENA countries make concerted efforts to
diversify their economies and build regulatory
institutions, they are likely to attract further
investment
Further cash inflows into Saudi Arabia:
continuous interest given the size of itspopulation (and economy) and the commitmentlevels of its government
Jordan, Kuwait, Turkey and similar: althoughnon-typical investment locations, these regionsare likely to follow, as their legal and regulatoryinfrastructure has already developed to a
sustainable basis
UAE: likely to see a big rise in terms of FDIinflows, as they follow on the 2030 plan for theregion
The INSEAD-Booz & Company report indicates
that investment is likely to follow demographic
and social developments in the GCC
Infrastructure: traditionally been provided by thegovernment. However outside of the GCC, PEis increasingly being used as a fundingmechanism for infrastructure projects
Energy: increasingly being seen a potentialinvestment avenue as oil-rich countries aim todiversify their energy mix. Both Masdars Clean
Tech Fund (Abu Dhabi) and Catalyst (Jordan)have started the movement to investing in cleantechnology technologies in the region
Geographic focus diversification Sector focus diversification
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Exits are yet limited, but regional GPs areoptimistic about long-term prospects
Source: Zawya Private Equity Monitor, AMIC.
Minimal leverage on deal execution, preference for growth capital, often buying-in rather thanbuying-out, more operationally involved in the investments to ensure operational improvement given
family-offices based customers Number of exits recorded in the region still small, in part due to recent crises and relative young age
of the industry and limited data on private placements
Lack of maturity and depth for IPO exits and limited trade buyers restrict the potential exit strategies
In the majority of GCC states, foreign ownership restrictions apply to limit the percentage holdingthat a non-local can have in the investee company - barrier for overseas PEs
1
2
3
4
Characteristics of deal structures and exit strategies
7
3230
20
30
2325
30
2006
35
Exits / divestments
(#)
20
15
105
020112010200920082007
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GPs believe the market returns will keep
moderate but recover quickly
Source: Booz & Company, 2010 GVCA Private Equity & Venture CapitalReport.
Moderate
Pre-crisis
level
Industry
returns
Imminent
rebound
3-5 years
Reboundperiod
Total
Total
48%
10%
58%
21% 21%42%
69%
31%
100%
PE firms are beingpushed to specializeinto differentindustries in order toprovide more support
and expertise
GDP growth likelynot to be a problem,as oil prices remain ata sustainable highvalue
Positive cashpositioning leave PEfirms with current USD11 bn of dry powder
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Long term prospects for Private Equity inthe GCC look promising
There will be a tremendous need for private equity as a more common tool to
unlock value in the coming years
Family businesses are becoming more institutionalized and seek world-class
corporate governance policies, instilled in their culture (noticeable shift over thepast ten years in welcoming third parties to their board)
Second and third generation family businesses face transitional challenges Checks and balances by non-involved family members on those involved
Certain shareholders need to monetize holdings
International banks in the region becoming more conservative with their lendingactivities (no more name lending and banks taking credit outlook into account)
Companies beginning to see value-add of financial buyers
Reference valuation pre-IPO; taking the lead of an IPO committee Assisting in financial strategies including optimal debt/equity rations, acquisition
analysis and margins analysis
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Case Study:The successful exit of Aramex
Established in 1982 and headquartered in Amman, Jordan, Aramex is a
global transportation and logistics services company providing a variety of express,logistics, freight forwarding and domestic distribution services. In 1997, it was listedon the NASDAQ and was the first international company in the region to do so.
In 2002, the company was acquired in a leveraged management buyout by AramexCEO and co-Founder Fadi Ghandour and Abraaj Capital for a total consideration ofUSD65 mn.
Abraaj Capital is now the largest private equity player in the Middle East, with morethan USD6.2 bn AUM.
Acquisition structure: Leveraged buyout structure financed by USD25 mn in equity,USD30 mn in a 5-year syndicated senior loan notes led by Export and FinanceBank, Jordan, and USD10 mn in mezzanine debt.
Exit: The company was listed again on the Dubai Financial Market in June 2005through an IPO for USD190 mn. This record breaking issue was oversubscribed byabout 80 times. Abraaj achieved a 3x return, and Aramex now has a market valueapproaching USD1 bn.
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