Gulf buy-out groups pare ambitions

A half decade of petrodollar-fuelled growth swelled the ranks of private equity firms and funds in the Gulf – but the economic climate has forced the region’s nascent industry to pare its ambitions.

Between 2006 and 2008, 85 funds concentrating upon the Middle East and North Africa raised $18.2bn, according to Preqin, a private-equity data provider. The majority of this was in the Gulf, bankers say. But large deals were scarce even during the boom years, as a result of the reluctance of many family-owned conglomerates – who dominate the regional private sector – to relinquish control of any parts of their sprawling empires. The credit crunch has further depressed the industry.

Financiers say the larger local firms will weather the crisis – but they also point out that caution is now centre stage. “It’s not all doom and gloom – but everyone has shifted into a mode where they are taking a step back, and waiting for more visibility, which is slowly coming back,” says Mustafa Abdel-Wadood, managing director of Abraaj Capital, the largest private equity firm in the Middle East.

The outlook for the regional industry is ameliorated by the fact that regional private equity firms have generally relied on the until very recently healthy economic growth rates to enhance their returns, rather than upon leverage.

Private equity executives admit the regional economic slowdown is sure to crimp returns, particularly in already invested funds. But larger firms are starting to scour the region for cut-price deals, as some conglomerates and companies under pressure seek to raise fresh capital.