MENA private equity Continues to show robust growth
Private equity in the MENA region in general and the GCC in particular, has continued its robust growth in 2006 and 2007 on the fund raising front, as well as fund sizes. This growth was made possible due to a lot of factors, mainly the increase in liquidity in the GCC region on the back of the recent surge in high oil prices. Other factors that contributed to the private equity rise relates to the governments’ initiatives to foster this sector through privatizations, also the efforts exerted by fund managers and investment firms to encourage private equity as means of financing.
The GCC countries have also realized the importance of involving the private sector in this restructuring, so privatization has also played a pivotal part in the process. The diversification of their economic bases has most importantly led the GCC countries on a race towards the “financial capital of the GCC”, thus, easing regulations in terms of foreign interests in the regional financial sector. This has provided the right catalysts for the GCC economies to embark on restructuring their financial sectors, hence new regulations were imposed, financial systems were upgraded to allow for new financial instruments, and a myriad of financial companies have launched their products in the region.
These recent trends in the GCC, had a positive spill-over effects on the Middle East and North Africa (MENA) regions. MENA countries have adopted “openness” to their economic and financial sectors, which gave cash rich private equity managers the incentive to seek investment opportunities within the region. To that end, private equity funds that invest in the MENA region have increased tremendously in numbers and sizes, whereby US$13bn in private equity capital are currently under management in the region and has been raised in 2005 and 2006.
As per a recent report produced by the Gulf Venture Capital Association in collaboration with KPMG, data extracted from Zawya, a leading source for financial data in the MENA, on private equity indicates that the total capital raised by private equity funds in 2006 reached US$7,075mn. This has increased by 61.6% from its level in 2005 of US$4,379mn.
Sizes of private equity funds in the MENA region have also exhibited an increase, where total fund sizes have reached the US$14bn mark, and as of June 2007 fund sizes is at US9bn. These are significant developments in the MENA private equity sector given that total fund sizes was at US$78mn in 2001, an increase of 121 folds. Two important reasons for this surge in fund sizes, the first relates to the increase in the number of private equity funds in the region, and the other relates to the increase in the sizes of the funds in the MENA region.
Throughout the period of 1994-2007, the majority of the private equity funds in the MENA region are in the “Investing” phase, where 55 funds with a total size value of US$12,717mn, 40.6% of total value, are classified as part of the group. Funds that are in the “fund raising” stage throughout the same period in the MENA region constituted 28.3% of total value of funds. Fully vested private equity funds in the MENA have a combined total of US$629mn, 2% of total fund sizes, while funds that are in the liquidation process are only 2, and they have a combined value of US$58mn. Announced private equity funds in the MENA region through 1994-2006 are concentrated in the years 2006 and 2007, and they have a combined size of US$3,842mn, which constitutes 12.3% of the total fund sizes of private equity funds in the region. Closed funds, on the other hand, constitute a mere 1.8% of the total size of private equity funds in the MENA region with a combined value of US$554mn.
The private equity industry in the MENA region does not only seek investment opportunities in the region. Private equity managers have also been tracing absolute returns worldwide, given the maturities of the US and UK markets, and the ample of opportunities in Asia, particularly China and India. It is also important to mention that the private equity in the MENA region is relatively a new phenomenon compared with the US and Europe, hence, the reluctance of family owned business to sell the interests in the companies is still widespread. It is only recently that individuals came to grip with the concept of “going public” and the advantages it has within its folds.
MENA private equity deals in the MENA region conducted by private equity managers domiciled in MENA, it is evident that the combined total of deals were focused on Egypt with 61.6% share of total deals in 2006 and 2007. The United Arab Emirates was the next country of attraction to private equity deals in 2006 and 2007 where 15.3% of total deals flows were directed to that country, followed by KSA at 10.3%, Bahrain at 4.3%, Kuwait 2.1%, Jordan 1.3%, and the rest of the MENA region drew less than 1% each in private equity deals from local fund managers.
The basic materials sector took the largest share of private equity deals in terms of value in 2006 and 2007 combined. The real estate sector attracted 16.4% private equity capital from MENA private equity managers. A lot of activity characterized the real estate sector in terms of private equity deals targeting the said sector where a total of 16 private equity deals were closed in 2006 and 2007. The financial services sector was also a favorite destination for MENA private equity managers. A total of 19 deals were done during the years 2006 and 2007 with a total value of US$1.7bn for disclosed deals.
There are a limited number of exit strategies for private equity investments, namely through Initial Public Offerings (IPO), through the sale of the private equity manager’s stakes to other asset managers or individuals, and through mergers and acquisitions. As far as the MENA private equity is concerned, it is important to realize that the aforementioned industry is still in its early stages and hence very few transactions have been “exited”. The Annual report by GVCA and KPMG on MENA private equity 2006 indicates that only 5% (US$0.3bn) of deals since 1998 have been realized on exit. It is now that we expect some private equity deals have reached the maturity stage and private equity managers will be looking at ways they can exit these investments with highest returns feasible. A very important factor that has helped the private equity managers realize impressive returns on their investments is the vibrant IPO market in the MENA region.
As mentioned above, the governments in the MENA region in general, and the GCC in particular, have taken massive efforts to regulate their financial markets and enhance the privatization efforts. This have reflected positively on the IPO market in the MENA where demand for new offerings by local and regional investors continues to outstrip supply, and all IPO’s have been oversubscribed by several folds. Going forward. It is expected that the charged IPO momentum in the GCC will proceed, albeit not with the same vigor experienced in 2005. Nevertheless, the general trend indicates a vibrant IPO market in the GCC, which consequently prepares the playground for private equity managers to exit their investments that are fast reaching their maturity stages.