Five years ago, the Middle East did not have a formal private equity industry. Wealthy families occasionally bought local firms, while a handful of institutions – many of them in Bahrain – raised money in the Gulf to invest in private equity deals in the US and Europe.
Today, it is a very different story. Dozens of private equity funds have sprung up in recent years: last year they had about $6bn under management, roughly double the figure in 2004, according to calculations by Abraaj Capital, one of the region’s leading funds. This year it could touch $8bn. Some are pure-play private equity houses, such as Abraaj, others are family funds that have been institutionalised. State-owned investment funds are also becoming increasingly active.
Huge potential
“It is the potential of the region that is making investors look at regional-based investments,” says Faisal bin Juma Belhoul, CEO of Dubai-based Ithmar Capital. The firm began life as a vehicle for managing the investments of the Belhoul family, one of Dubai’s leading trade conglomerates. But in early 2006 it closed a $270m fund, raising money from other family firms, governments and financial institutions. It has a target internal rate of return (IRR) of 25%.
Ithmar’s original investments include healthcare, education, real estate and manufacturing. The new $270m fund is targeting high growth sectors such as water desalination, telecoms and oil and gas but Mr Belhoul insists: “We are much more opportunistic rather than targeting particular sectors.”
Many state-owned private equity funds are targeting investments outside the region, as governments look to diversify away from oil and gas. Dubai International Capital (DIC), owned by the state investment arm Dubai Holding, agreed more than $3bn of investments in 2005. They included a $1bn stake in DaimlerChrysler, the $1.5bn purchase of British leisure group Madame Tussauds and the $1.2bn purchase of Doncasters, a British engineering firm.
However, the focus is switching eastwards – partly because of attractive returns in China and India, and partly because of the fallout from Dubai’s controversial bid to buy British Ports operator P&O for $6.8bn. Dubai Ports World agreed to sell US ports it acquired as part of the deal, after many Americans voiced security fears about an Arab government operating US ports. DIC’s bid to buy Doncasters has also come under scrutiny, as the firm supplies parts to the US military.
“This shift had been happening for about nine months,” says Angus Blair, a director of MENA Financial, which advises Gulf institutional investors. “Partly it’s political, but a lot of it is just financial. They are concerned about the US economy and are attracted by returns in the Middle East, India and China.”
Spending challenge
For those firms focused on the Middle East, raising funds is proving easier than spending them. With many stock markets trading at earnings multiples above 30, private equity funds are finding it challenging to convince owners to sell stakes at single-digit multiples. But Iyad Duwaji, CEO of Dubai-based investment bank Shuaa Capital, which manages a $200m private equity fund, says good opportunities are available. “This is still not a mature private equity market. These markets are not efficient, and that presents opportunities.”
For this reason, some of the world’s leading private equity firms are targeting the Middle East. 3i has a strategic partnership with Ithmar Capital, and others are understood to be looking at ways of entering the region. Mr Belhoul insists that with the right contacts, there are still lucrative deals to be struck.
He says: “A lot of people think deal flow is circulated among institutions. If that is the deal flow that private equity firms are relying on, they are going to face challenges. Private equity is an art that requires proprietary origination. It needs partners and professionals to originate deals. The relationship factor is the predominant factor.”
