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March 2010 Issue 38

Back to work

Last year was a quiet year for private equity in the Middle East and North Africa (MENA)

an almost silent one in fact.

There was zero activity last year we went straight from 2008 to 2010, says Chris

Ward, chief executive officer Financial Advisory Services for Deloitte Middle East.

However, Ward, like every other person in the region spoken to for this report, notes

a pick-up in activity recently; at least in the sense that Deloittes due diligence teams are

working with a number of firms on potential transactions.

Although a full recovery in confidence and activity levels has yet to take place, there are

several reasons for private equity firms in the region to be optimistic.

The first, according to local practitioners, is that existing portfolios in the MENA region

are in relatively better shape than many of their Western counterparts, which are suffering

from issues with debt structures. There is, as Omar Lodhi, head of investor coverage at

Abraaj Capital, puts it, less indigestion for MENA private equity firms to work through.

With 2009 almost a standstill for private equity in the MENAregion, the only way is up for 2010. But will LPs recover theirappetite for the asset class in time for GPs to make the mostof increased deal ow?

Wherever you look in the region andwhatever sector you look at, there is aneed for private capital.

Regional report: MENA


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March 2010 Issue 38

Dubai: Downfall of government-backed giants

While private investment firms in the Middle East have largely

managed to keep their troubles to themselves, this has not been

the case for many of the Dubai government investment entities.

The most public fallout has been from Dubai World, the giant

holding entity, which asked creditors for a standstill on $26 billion

of debt at the end of November 2009. At the time of going to press,

Dubai World-owned private equity entity Istithmar World was selling

off assets such as budget airline SpiceJet at a rate of knots in order

to improve its parents balance sheet.

While Dubai Holding, owned by Dubais ruler Sheikh Mohammed

bin Rashid Al Maktoum, has not caused the same ripples in world

markets as Dubai World, it has also embarked on a selling spree to

ease its $100 million debt burden, with Singapore-based distributor

and retailer RSH and a stake in Malaysias Bank Islam among the assets

reported by the Financial Times to be up for sale.

At Dubai Holdings private equity entity Dubai International

Capital (DIC), signs that things were not as they should be emerged

in February 2009, when the firm replaced the dealmakers at the top

of its international private equity division, Sylvain Denis and Alan

Hyslop, with portfolio managers David Smoot and Eric Kump.

Later that same month, DIC and Dubai Group, a diversified

financial services company, were aligned under Dubai Holding

Investment Group, a wholly-owned subsidiary of Dubai Holdings,

in order to cut down back-office costs.

Then in August 2009, DIC founder Sameer Al Ansari resigned

from his position of chief executive officer in order to take

the same role at SHUAA Capital, becoming executive chairman

instead. In January this year, he stepped back once more, becoming

non-executive chairman.

The remaining DIC team has been tasked with managing the

groups existing portfolio, which includes UK-based hotel chain

Travelodge and German industrial packaging manufacturer Mauser.

Local observers consider it unlikely that the group will return as

an investor in fresh deals any time soon.

Commented one Dubai-based private equity professional:

I think its fair to say that none of these [government-controlled]

investment funds are going to be in new investment mode for the

foreseeable future.

In terms of new deals, as with other emerging

markets, the regions continued growth and

the need for private capital to feed that

growth continue to provide the primary

investment thesis.As Lodhi notes: Wherever you look in

the region and whatever sector you look at,

there is a need for private capital. Its all about

growth whether through organic means, M&A,

or domestic and regional expansion.

Following on from this, with banks in the

region still hesitant to lend as they struggle with

the aftermath of the economic downturn and

what Ward terms the Dubai World effect,

private equity has an opportunity to position

itself as the obvious capital provider. When you

factor in that the IPO pipeline is still deferred in many of the regions

stock markets, the case for private equity becomes even more

compelling. Theres nowhere else to go quite frankly, says .

Because of these market conditions, Lodhi predicts private

equity firms will see targets that were not targets two years ago

become very attractive prospects for private equity.

The pipeline has increased substantially across all sectors and

activities. I do not see any shortage of investment activity over

the next two or three years and I think 2009/10/11 vintage year

opportunities are going to be very attractive in terms of the quality

of the investments and the pricing levels at which they can be

executed, he predicts.

Supporting all of this, says Lodhi, is the fact that, rather than

back away from reform agendas during the downturn, governments

in the region instead stepped them up. They

also tightened fiscal policies and pledged fresh

investment to maintain the pace of infrastructure

development even after the project finance

market tailed off.This, Lodhi argues, is because the

governments in Saudi and other countries

have realised that its through true private

sector-led investment that job creation over

the next 20 years will be achieved.

Lodhi estimates there is a need to create

between 40 and 50 million jobs throughout the

region going forward in order to sustain the

young demographics of the region. That is what

has led to reform and that is what we believe

makes it sustainable, he states.

LPs and fundraising

While the overall might look increasingly attractive on the

investment front, fundraising remains a stumbling block for firms,

which for the most part raise their capital exclusively from within

the region.

Abraaj, the regions private equity powerhouse, is still in the

market with its fourth fund, focused on buyouts, which was launched

with a $4 billion target. The firm, which held a first close in October

2008 on $3 billion raised entirely from existing LPs, was reported

by the media to last year to be considering reducing that target.

Fundraising is certainly very tight. The first close that we did

on Fund IV in October 2008 was very timely so, from a firepower

Ward: private equity skipped 2009



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March 2010 Issue 38

The lay of the land: How has the downturn impacted

committed capital?

The amount of capital committed to private equity in the MENA

region and the number of GPs in operation has always been hard

to pin down, but it has become almost impossible since the

economic downturn.

A statement released in February by the Ministry of Economy

of the United Arab Emirates said that 131 private equity firms were

active in the UAE at the end of 2009, with committed capital of

AED126 billion ($34 billion; 25 billion), of which AED116 billion was

paid-up capital.

But last year several in the industry put the estimate of the capital

available at $10 billion a figure that even at

less than half the size of the UAE governments

current figure was described as a capital

overhang. Since then, although deals have been

scant, fundraising has been even scarcer. So whats

the real story on dry powder?

According to Benjamin Newland, corporate

partner in the Dubai office of King & Spalding,

there is in theory a tremendous overhang of

uninvested capital in the Gulf countries based on

announced commitments to private equity funds

in the last few years.

But, he adds: A lot of new funds won these

commitments, but then had trouble finding ways

to deploy the capital. I wouldnt be surprised if

many of the funds, and their capital commitments,

just disappeared and we were left with a much

smaller private equity industry here.

He is not the only one to think so. Another MENA industry

insider predicted confidently that if one were to trace fundraising

announcements, a likely outcome would be the discovery that a large

number of the firms had been stillborn.

The issue of how many GPs remain active in the region is

complicated by the fact that much of the private equity investment

in the Middle East has traditionally been done through club-style

funding on a per deal basis. This, says Dawood Ahmedji, Bahrain-based

European Finance Leader at global consultancy firm Deloitte, has left

many private equity houses having to rethink their business model in

order to move forward.

The sell-down model in times like these becomes very difficult,

he points out. Investors are feeling relatively poor and more cautious,

making it difficult for firms to syndicate investments. Plus there are no

commitments for LPs to trade out of.

Despite all this, there have been few obvious casualties of the crisis

in the private sector as yet and neither is there likely to be in a region

where, as Ahmedji puts it, there is not always a purely economic

rationale driving business decisions.

Culturally, Ahmedji says, it is difficult to see

US or European survival of the fittest type M&A

happening in the Middle East. More likely, he says,

is a quiet closing of doors or firms continuing

to exist notionally, because the founder has

reasons other than profit for keeping the business

open, albeit in name only.

Even if any fallout has happened below

the radar, there has still been enough of a shift

in the make-up of GPs for Omar Lodhi, head of

investor coverage at Abraaj Capital, to comment

on the change.

Before the downturn, private equity in

our region was somewhat synonymous with

pre-IPO minority strategy players, he said.

Some of those players have been weeded out

leaving only the firms with more wholesome private equity strategies

intact and around.

Returning to the theme of committed capital, Lodhi dismisses

the notion of a capital overhang, saying that even if there is $25 billion

of dry powder in the region, private equity is still under-penetrated,

even as a portion of GDP.

Newland: any capital overhang is theoretical

perspective, we are alright, says Lodhi, adding that the firm would

right-size Fund IV through the course of 2010.

Ward states that the word fund is the new f-word. Many

of the investors, if they invest at all, want to invest in real estate

or businesses they can see or touch, rather than with a fundmanager, at least at the moment, he says.

This is backed up by Shailesh Dash, founder and CEO at

Al Masah Capital, who reports that many of the regions family

offices and other non-institutional private equity investors are

limiting their private equity investments to direct acquisitions at

the moment.

Many family offices feel this is a great time for them to

do acquisitions, so if they can they will buy directly, he says.

In a boom time they find it difficult to find those deals,

but today deals are present everywhere and at prices that still

remain attractive to them.

Dash says that even if these families might not have the skill set

to manage the assets they are buying long-term, they prefer to go

the direct route because of the buying delay implied in investing

into a fund and because to them direct ownership is preferable.Dash, who has just launched his maiden private equity fund

at Al Masah Capital with a $500 million target and a focus on

social infrastructure, is more optimistic about the prospects for

fundraising from the regions institutions.

If you are a team with a track record, it is not very difficult

to raise money from institutions, he says. The institutions are

full of liquidity and they are looking for good managers to invest

their money with.

Likewise, he says institutions like the regions wealthy sovereign

wealth funds and pension funds are more likely to stick to the



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March 2010 Issue 38

Not a great year for data

As the charts below show, private equity activity in the MENA

in 2009 was either extremely thin on the ground, or GPs were

less than candid about what they were doing. Heres what Ali Arab,

private equity analyst at Dubai-based research house Zawya,

the source for the data here, has to say about it:

In general the private equity industry in 2009 was less

transparent than previous years; the industry witnessed low

investment activity in the past year for two major reasons. First,

the valuation gap existing between vendors and buyers, where

vendors still valuate their companies at high premium while buyers

see it as overvalued. Second, the inability of LPs to meet their

commitments in some cases. The bright side of 2009 for MENA was

the reemergence of venture capital. The industry witnessed four

deals closing. This type of investment started gaining more appeal,

since investments in smaller companies required smaller funds, and

this made more sense with the crisis conditions faced by investors.

commitments they have already made.

If your LPs are institutions, such as pension funds or

sovereign funds, your money has not departed. If you go after them

with a transaction and you want to draw down, they are full of cash

and theyll be able to fund you. But if your LPs are family offices

anywhere in the Gulf countries, I am sure if you go to them today

they will come back to you saying Dont ask for the money.

There must be many in the region who hope the regions

institutions recover their appetite for private equity funds in time

for managers to maximise deal potential.l

Sector Buy Sell GrandTotal

Agriculture 1 1

Construction 1 1

Consumer Goods 2 2

Education 2 2

Health Care 2 2

Industrial Manufacturing 2 2

Information Technology 2 2

Media 1 1

Oil and Gas 2 1 3

Power and Utilities 2 2

Real Estate 1 1 2

Telecommunications 2 2

Transport 1 1

Grand Total 19 4 23

Geographical Focus Buyout Infrastructure GrandTotal

GCC 1 1

MENA 1 1 2

North Africa 2 2

World wide 1 1

Grand Total 4 2 6

Status Buyout Infrastructure GrandTotal

Announced 2 2

Fund Raising 2 1 3

Rumored 1 1

Grand Total 4 2 6

2009 transactions by sector

Funds in market by geography and focus/ type

Funds in market by type and status

Buy Sell GrandTotal

Total 19 4 23

Total transactions in 2009

Source: Zawya

2009 private equity transactions by country

Country Buy Sell GrandTotal

Bahrain 1 1

Egypt 1 1

France 1 1

India 1 1

Kuwait 2 2

Lebanon 1 1

Oman 1 1

Saudi Arabia 3 3

Turkey 3 1 4

UAE 6 1 7

United States 1 1

Grand Total 19 4 23



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March 2010 Issue 38Country report: Saudi Arabia

Private equity money

vs. petro dollarsMENA private equity needs Saudi,but does Saudi need private equity?

Like Japan in Asia,

Saudi stands out in the

Middle East as a highly

alluring market for private

equity on paper. With

GDP in 2009 at roughly

$361 billion and around

27 million inhabitants,

it has both the GCC

regions biggest economy

and largest population.

It also has a government supportive of private

investment and enterprise and prepared to invest

some of its enormous quantities of oil money

into those parts of the economy that need it

the most.

However, like Japan, although for entirely

different reasons, Saudi has earned itself the

moniker of being a tough nut to crack in the

private equity world.

One problem is the sheer wealth of

the country private equity money is often

times superfluous.

The families in Saudi are themselves so rich

that they really dont need the capital effectively

what they need is the expertise of the private

equity players, says Shailesh Dash, founder and

CEO at Al Masah Capital.

He adds that even then there is a question

mark over whether families really want the

advice of a private equity firm on a business

they themselves have run successfully for that last

couple of decades. It depends where they want

to go, he says. Whether theyre happy with what

they have or want to go into the global market.

According to Dawood Ahmedji, Bahrain-

based European Finance Leader at global

consultancy firm Deloitte, private equity in

Saudi is simply a different ball game.

Its more about joint ventures with existing

conglomerates as opposed to funding

divestments or existing operations, he says.

Family conglomerates would like to see

private equity bring something new to the table,

rather than ask them to participate in current

business activities.

Besides this, and despite the governments

encouraging stance on private investment, there

many who say that Saudi is a simply a very

difficult place to do business.

They always say Saudi is very business

friendly, but having operated there for some time

I would say that it is quite cumbersome in terms

of bureaucracy, said one MENA-focused GP.

Issues include the length of time taken to get

things done or approved, lack of on-the-ground

talent for both private equity firms and portfolio

companies and restrictive employment laws

which mandate the inclusion of a certain number

of Saudi nationals on the staff.

Improvements are needed in the legal

framework too, points out the GP.

There is very little legal protection for

minority shareholders in private companies,

which is the case in many other emerging

markets as well, he said. But if the family owners

are not going to sell you the majority and you

cannot get protection as a minority investor then

it obviously becomes very difficult for a private

equity player to invest there.

It looks like Saudi may remain an uncracked

nut for some time yet.l

Dash: Families need private equity expertise rather than capital

Private equity in Saudiis a different ball game.

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