Buy-out groups chase elusive targets

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The Middle East has been fertile ground for fundraising by big international private equity firms but it has proven less so for acquisitions.

Several large partnerships have set up in the Middle East recently – most notably Kohlberg Kravis Roberts, the Carlyle Group and Colony Capital – but deals have been few and far between.

In 2007, KKR bought UN Ro-Ro, a Turkish shipping company, for €910m ($1.15bn), while the property oriented Colony Capital bought control of Tamoil, a Libyan refiner, for €4bn and is developing a $2bn resort in Morocco. Yet not one deal has been closed in the Gulf even after years of oil-soaked growth.

Carlyle, the only big international private equity company to have set up a dedicated Middle East and North Africa fund, has been looking at deals for more than a year but has so far only acquired a 50 per cent stake in Turkey’s TVK Shipyard for an undisclosed sum.

Some observers attribute the inaction of international private equity companies compared with local peers, which have until recently been ebullient, to a lack of integration into the regional business environment, in which relationships and proximity trump capital and a brand name.

It is a charge that Carlyle’s executives reject. The buy-out giant has local offices in Dubai, Cairo and Istanbul, and “every single one of our investment professionals is from the region and is a native speaker”, says Firas Nasir, who leads Carlyle’s Gulf operations. “The money is predominantly from the region and our offices are in the region.”

The stumbling block has been the “excessive” valuations placed on companies in recent years rather than potential deal flow, according to Walid Musallam, Carlyle’s regional head.

“However, with hindsight we can see that we were right to be cautious,” says Mr Musallam. “We have most of our capital intact, so now we can make acquisitions.”

The private equity firm declines to say how much capital its regional fund has raised but Mr Musallam says that it has looked at deals with enterprise values ranging from $200m to $1.5bn.

The fund also has access to outside help, if needed. In addition to possible co-investments alongside global Carlyle funds, the firm has a deal to present investment opportunities to Mubadala, the Abu Dhabi sovereign investment fund that owns 7.5 per cent of Carlyle.

“The goal is to be able to work together on joint projects across the globe,” says Chris Ullman, Carlyle’s Washington-based spokesman. “If we find a target we can ask them to invest alongside us or vice versa.”

The MSCI Arabian Markets index has lost almost two-thirds of its market capitalisation and many companies are casting about for cash but Carlyle does not expect to close any deals soon.

“The lion’s share of deals probably won’t get done until the dust settles and people feel more comfortable with what exactly we are dealing with here,” says Mr Nasir “We probably won’t see more than the random deal until probably the later part of the year.”

Carlyle executives say that with leverage largely absent and local business owners reluctant to give up full control of their assets, it will adapt its usual leveraged buy-out model and focus more on growth capital.

“Most of the transactions here are going to be minority or majority stakes,” says Mr Nasir. “Maybe large stakes – but they’re not going to be full buy-outs.”

Carlyle still wants a “voice at the table” and will thus take stakes of between 35 per cent and 70 per cent, Mr Nasir says.

However, the private equity firm is still looking mainly at countries in the wider Middle East and North Africa as opposed to the wealthy but relatively sparsely populated Gulf states.

“The [Gulf] economies are very dependent on oil revenue inflows and government expenditure,” says Mr Musallam. “North Africa, meanwhile is very populous, and there are some very interesting defensive sectors there, such as healthcare and food. Right now, Egypt looks interesting, as well as Turkey.”

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