Global Investment House –Private Equity in Middle East- Newfound Recognition- The majority of funds invest in more than one country and many individual investments are themselves cross-border by nature. At the fund investor level, while the bulk of capital for venture capital and private equity funds is raised locally, international investors are also participants, sometimes significantly. Similarly, a proportion of financial institutions invest in international venture capital and private equity funds. Investment vehicles vary from country to country because fund structures are linked to taxation and regulatory issues, which in turn is linked to various national regulatory regimes. Because not all private equity fund structures are recognized in all countries, additional complications arise for funds investing in several national markets, imposing a severe fiscal and regulatory burden and resulting in a need for complex and expensive structures.
Drivers for PE Growth in MENA
There are many key factors that will drive the development of the private activities in Middle-East going forward.
Ample Liquidity
According to market sources, the private liquidity in the MENA (Middle East & North Africa) is in excess of US$2.3tn - of which over US$1.5tn is in GCC countries. Other studies suggest that the number of millionaires in the MENA region with more than US$1mn to invest is growing at an annual rate of 3 percent.
Strong on macroeconomics
Economically stable and reasonably predictable macro-economic conditions are important to have a thriving business atmosphere where investment capital meets the most eligible investment opportunity. Significant initiatives including PE investments are being undertaken to bring overseas Arab wealth back to this region.
Family/ Group Owned Enterprises
Much of the private sector economic activity in the region countries is controlled by large family groups mainly because of their traditional business relationships with the ruling families of the respective countries. The contribution of PE firms in assisting the family-owned enterprises can be in different forms, namely:
a. Supporting the family group as a buyer or an alliance partner in selling-off their non-core businesses.
b. Providing suitable exit opportunities by identifying suitable regional or international partners
c. Valuing the business and putting a best price tag in various acquisition or divestment related activities thereby instilling value creation opportunities for the shareholders of such businesses.
d. Providing a framework for target identification, target screening and transaction execution in their core businesses or service areas to help in acquisitions and build a critical mass for the business groups and then joining hands together to make such acquisitions for the business groups.
Islamic Investments & Private Equity
Islamic banking and finance is no longer a mere exotic niche in the international capital markets. With almost $300 billion in diverse assets and worldwide network of Islamic Finance intermediaries, the market in Islamic finance has grown exponentially over the last few years, but the private equity market in the Middle East has remained relatively illiquid. Private equity, can, in certain circumstances, lend itself to shari'ah compliant investing, particularly in early stage investing, where investors can participate in the growth of companies as partners rather than creditors. Notwithstanding this, buy-out transactions and recapitalisations, which, in the western capital markets, will often involve some form of debt security, may still prove attractive to Islamic investors if structured properly. Shari'ah disapproves of imbalances in business relations, and it is easy to see why many Islamic investors prefer early stage venture capital, with the 'pure' equity investment clearly allowing for equal partnership in the investment structure.
This sounds like the principles that drive the private equity industry and may serve to demonstrate that the private equity fund industry can have a significant future in an Islamic context.
Increased regional trade
Currently the intra-regional trade activities between MENA economies is small as compared to the trading activity levels achieved with US, EU and other Asia-pacific economies. However, with the opening up of borders and sectoral liberalization of key economic segments in the economies, we expect a significant activity in the following sectors. These sectors offer tremendous investment opportunities for the private sector. It is a clear signal that a free market will increasingly shape the business environment of the MENA region. In a truly liberalized business climate, increasing business competition will drive PE activity by putting pressure for companies to consolidate their activities and will also compel family businesses to divest their inefficient asset bases.
Stock markets developments
The culture of raising risk capital through IPOs is steadily gathering steam and is gaining acceptance in the Middle East business culture. Developed efficient capital markets are an important precondition for a buoyant VC industry, insofar as public offering is one of the four methods of exit (the other being trade sales, private sales and share purchase). Along with the current improved liquidity scenario, we expect increase in the IPO and listing activities in the region. Therefore, as markets open up and competitive forces enter these markets, rapid changes are expected in all of these areas.
PE & Pre-IPO Funds
The primary markets in the region evoked special investors’ attention as the private businesses and the governments of the region tapped the primary market to unlock the value of their investments. This also improved the performance of the secondary markets in terms of depth of the markets and an increase in the trading activity. Out of all GCC markets, the UAE bourses witnessed the most oversubscriptions, led by Aabar Petroleum which was oversubscribed by a massive 800 times. Aldar Properties was also oversubscribed by 448 times and generated US$103bn in terms of funds committed. Among others, Arab International Logistics was oversubscribed by 80 times and Finance House witnessed a 75x oversubscription. This high level of oversubscriptions explains the elevated initial opening price and the subsequent performance of many of the newly listed stocks. According to the reports, the public share sale of Emirates Integrated Telecommunications Company (EITC), the Emirates’ second telecoms operator, was oversubscribed by 167 times.
In order to smoothen the functioning of the capital markets, the GCC region is witnessing a change in the regulatory framework with the supervisory institutions introducing new capital market laws to improve the investment climate in their respective countries e.g. Central Bank of UAE has decided to effect a 10 per cent rise in loan ceilings extended by banks against mortgages of corporate shares to 80 per cent of the market capitalization. However, in a major move, the UAE authorities are contemplating to fix a ceiling on the maximum allotment in IPO subscriptions. With the new rule that limits the maximum allotment expected to come into force, small and medium investors stand to gain.
Also, the IPO is required to be offered to the investor at par and a minimum of 55% of paid in capital should be offered at the IPO in the UAE. There are reports that this is also being done away with in order to encourage promoters to retain the controlling interest even while going public. The regulators have also directed the newly established firms that have completed their IPOs to refund surplus within two weeks which will help the markets in getting back the liquidity. Besides the Saudi and Oman capital market regulators have tried to evoke interest of retail investor by introducing share split to make markets more liquid.
For those investors who are concerned that they might not get a substantial chunk in the IPOs and have to buy stocks at higher levels (post-listing), one route can be for investing in the company prior to its offering. There are various private equity funds in the region that provide investors with investment opportunities into Pre-IPO and private equity deals in which there is a reasonable probability of exit via a recognized stock exchange. The information about closed companies is also not available easily to the investors so they can invest in the pre-IPO or private equity funds who can conduct professional research, valuation and evaluation of management, due diligence on the companies, determining purchase/selling price and take decision on the timing of sale of their investments. Investing in the fund offers a wider selection on companies and markets with the investment experts undertaking all the analysis of the companies to be invested in.
Opportunities abound...
There are opportunities in the MENA region as well as other emerging market which these funds can utilize and generate good returns. In the MENA region, the IPO and pre-IPO market in Turkey looks promising in 2006 on the back of increasing investor interest by international investors especially in privatization projects. Accelerating privatization and pre-IPO initiatives in Iran, Egypt & Pakistan market are expected to boost economic activity. The fact that Jordan's IPO market consisted entirely of green-field companies did not deter investors from rushing to subscribe to the shares on offer as evident by the respectable oversubscription figures. Beside, the much talked about economies of India and China still offers attractive opportunities in private equity. In our own backyard the growing GCC region seems to be a hot destination for pre-IPO activity as the oversubscriptions in IPOs are reaching record levels.
Opportunity areas include utilities/ infrastructure with many privatization efforts being initiated in GCC (e.g. projects for power generation, gas distribution, water purification etc) to increase private sector participation. Real Estate sector looks promising with relaxation in ownership allowed by many countries. Health Care sector in MENA is likely to witnessed increased private participation in hospitals, pharmacy chains and specialty care projects. With a number of family businesses thinking of going public and the governments in the region keen on divesting the stake in the capital market, the pre-IPO and PE funds provide an attractive option to the family business and government to divest strategic stakes and unlock the value of their investments. For the investors, investments in Pre-IPO opportunities have resulted in significant gains in recent past and will continue to be rewarding.
