Is the regional private equity (PE) industry in the midst of a “gold rush”, similar to the IPO (initial public offering) rush of 2005 and 2006?
By all accounts, the regional PE industry is at a very early stage, but already there are murmurs of overheating.
Like other asset classes, the PE industry has cashed in on this liquidity. In 2004, the nascent industry had raised a mere $326 million; but by 2006 regional fund managed had raised $9.76 billion in the year.
This exponential growth has alarmed some to argue that the PE industry needs more time to digest what it has chewed off, before gathering momentum for another spurt of growth.
“I can see a correction frankly, perhaps in the next two years,” Suresh Kumar, CEO of Emirates Financial Services (EFS), which is a limited partner in many PE deals, told Zawya.com.
“Some of it would be in the buyout space; some in retail and financial services. There is a herd mentality and a lot of rush of blood. Lots of commitments are being made fairly swiftly without thinking it through,” says Kumar.
The regional PE industry’s rise has been remarkable, spawning over 50 firms to date, from less than 10 five years ago. This has led to a parade of fund managers soliciting investors and seeking deals. The rush has also encouraged industry heavyweight Carlyle Group to set up shop in the region, and its international peers also appear to be tuning in.
Karim El Solh, CEO of Gulf Capital, thinks there is much more to come.
“Is there too much money chasing too few deals? I don’t think so, because the values are still low. We will soon have the $1 billion (intra) regional deal very soon — it has not happened yet, but it will soon,” El Solh told delegates at a recent private equity conference.
According to Zawya Private Equity Monitor, which tracks regional private equity deals and developments across MENA, the biggest regional deal to date was the $501 million, 25 percent acquisition of Egypt’s EFG Hermes’ by Abraaj’s Buyout Fund II in late 2006, (known as a private investment in public equity (PIPE) deal).
While Middle East players are still chasing the $1 billion deal dream, other regions are miles ahead. Last February saw the world’s largest leveraged buyout ever, of Texas Utility for $44.37 billion by Kohlberg Kravis Roberts and the Texas Pacific Group.
Overall, the United States PE industry raised $246 billion, while European players raised 90 billion euros in 2006. Asia was a distant third with $32 billion raised.
No wonder, the Middle East players are bullish about future prospects for the industry, despite any short-term hiccups that may come their way.
“My proposition is that (the Middle East) will be the fourth private equity center of the world five to 10 years from now,” said David Rubenstein, co-founder and managing director of Carlyle Group, at a recent event in New York. Few question the ability of MENA to emerge as an important center in the region, especially given its inclination to acquire overseas assets. Abu Dhabi Investment Authority, Kuwait Investment Authority, Investcorp, Istithmar and Dubai International Capital are already seasoned acquirers of overseas assets.
Teething Troubles
The regional industry, however, is going through its share of teething troubles.
Dubai Islamic Bank and Dubai World-sponsored Millennium Finance twice delayed closing its Energy and Telecom & Media Fund — which intended to raise $1 billion each — after failing to secure investments.
“There is liquidity, but there has to be a rationale before investors part with their money,” says Alwaleed Abdelrahman, executive Vice President at Saudi-based Amwal Alkhaleej, which has $272 million in managed assets. “Investments have to make sense and coherent.”
Many players, however, dismiss it as a one-off issue and focus on the financial discipline the industry is bringing to the regional business ecosystem.
Omar Lodhi, executive director, at Abraaj Capital thinks the privatization of national assets across the region will be the catalyst for the PE industry. “Add to this, expatriate businesses and family businesses and you have a long way to go,” he says.
While the entry avenues may be multiplying, exit points are not easily visible, especially as the regional IPO market cools off.
“Exit strategy is a problem. And not just the avenues to exit, but how to exit profitably, which also reflects on how companies are valued. The exit opportunities may be there, but they may be at the expense of extra costs,” says Kumar.
While fund managers say that it is naïve to think that a public flotation is the only form of exit, limited partners are demanding other clear and viable alternatives before they part with their cash.
That’s the question fund managers will have to answer in a few years time when they mull over exit strategies.
Q1 Figures
First quarter figures for the regional PE industry in 2007 were dominated by the $2 billion sale of The Tussauds Group by Dubai International Capital — incidentally the largest ever international deal involving a regional player.
Excluding the deal, the regional PE industry saw at least $683 million worth of deals in the quarter, compared to $914 million worth of transactions in Q1, 2006, although sizes were not disclosed for five transactions.
The number of deals fell by 40 percent in the quarter to 12 in Q1, 2007 from 20 in Q1, 2006.
Real estate pulled in the biggest PE investments with three deals worth $498 million during the quarter.
The industry closed four funds in Q1, 2007 with a total value of $207 million, compared to a single $23 million fund in the same period last year.(Yadullah Ijtehadi is managing editor at Zawya.com, Dubai.)