Private equity funds are beginning to make waves in the Arab world as investors seek to expand limited opportunities to invest the huge sums of capital pouring into the Gulf because of record oil prices.
Until recently private equity funds operating out of the oil-rich Gulf states tended to target firms in Europe or the US. The big state-owned funds have continued to pursue high-profile foreign acquisitions.
However, smaller private firms are now focusing their strategies closer to home, following a five-year trend, partly set off by closer scrutiny of Arab money after the September 11 attacks, in which unprecedented sums have been invested in regional markets.
Fund managers think the trend will accelerate as Gulf governments begin to pour an estimated $200bn (€156bn, £106bn) of annual surpluses into new infrastructure projects, as economic reforms deepen and as trade liberalisation encourages cross-border transactions.
“There has been a paradigm shift in the mind set of GCC [the six-member Gulf Co-operation Council] governments. This is the first time they are privatising at a time when oil prices are high,” said Shirish Saraf, the managing director of Abraaj Capital, the region’s leading private equity firm, based in Dubai.
Mr Shirish thinks the recent collapse of stock markets – driven to unsustainable highs last year partly by the region’s limited number of investment opportunities – will do little to change the dynamic.
“Neither the stock markets nor the real estate sector are barometers. The economic boom is here to stay,” he said.
According to Abraaj, there are 29 private equity firms operating in the Middle East, with a total of $5.2bn under management. But 16 new private equity funds are seeking to raise a total of $2.2bn, with the average size of funds more than doubling each year. Benchmark rates of return in the region are nearly double those in Europe and the US, at 25-30 per cent.
“We are at an influential turning point when private equity funds can begin to act as a catalyst for economic change, providing best practice, introducing corporate governance and enhancing value realisation,” said Mr Shirish.
Abraaj, which has raised a series of funds from a combination of institutional and high net worth investors, is one of the few firms that has sought majority stakes in target companies and concentrated resources in post-acquisition management. Its strategy has paid off handsomely so far, with returns on investment ranging from 35 to 84 per cent.
Many of the other funds have sought smaller stakes, sometimes in companies preparing to go public. Global Investment House, the Kuwaiti investment bank with its own private equity arm, sees growing interest in this area.
Initial public offers, when privately or state-owned companies list on the stock market, have been hugely oversubscribed. In practice that has restricted the profits of large investors seeking to buy up substantial chunks of companies or obliged them to pay a premium in fast-rising secondary markets.
