This issue and the regional political unrest have dashed the recovery hopes of private equity firms in a foreseeable future.

According to analysts, fundraising across the whole of the Middle East and North Africa (MENA) region fell from a peak of more than $7 billion in 2008 to a mere $400 million in 2010, while investments dropped from more than $4 billion in 2007 to $750 million last year. And this year just $60 million was raised and $75 million was invested in private equity deals.

The magic of raising funds from private individual investors with a promise to double their money in two years’ time by buying a sick company, turn it around and sell it for a 200 percent profit is not working any longer.

The private equity firms were on a buying spree during 2004-2008 and their acquisitions ranged from supermarket chain to airlines, oil refineries and utility companies with a promise to double or triple the investor’s money despite having zero experience or having no clue about any of these industries, the poor investors are now paying the price and paying dearly for their ignorance.

The regional private equity industry, which earlier blamed the global financial meltdown for its drawbacks, is now claiming that regional political unrest and uncertainty were hurting their progress as they struggle to survive.

All the leading private equity firms that bought businesses and committed investments from 2005 to 2008 are desperately trying to off-load/exit from their investments under extreme pressure from the Central Banks to balance their books by early 2012.

Such problems are not limited to just one company.

Several other investment houses in Bahrain, Kuwait and UAE took steps to restructure their debt after property prices crashed in 2008 swept away their business models of raising finance for the private equity, real estate and property projects.

As most private equity deals/purchases are heavily leveraged, they need to refinance the loans that are due this year or in 2012.

Regional monetary authorities, especially Bahrain and UAE Central Banks, are insisting and encouraging more mergers between the private equity firms to consolidate their balance sheet.

Although the lucrative era of private equity business seems to be a thing of the past, it is very unlikely that emblematic deals of the private equity frenzy era will return soon, like the acquisition in February 2007 of energy company TXU Corp. by a group led by New York-based buyout firm Kohlberg Kravis Roberts & Co.

The transaction, valued at $48 billion, set a record as the largest private equity deal in history and was financed by a whopping $40 billion in bonds and bank loans.

(The remaining $8 billion came from private equity firms, including TPG Capital, and bank-owned investment concerns that took part in the consortium, such as Goldman Sachs Group’s private equity arm.)

In the wake of the continued global credit crisis and debt shortage, private equity businesses are likely to struggle to return to its former glory and the firms may have to sit idly as debt evaporates and deal activity slows to a snail’s pace.

All above-stated factors could play a role in the private equity industry.

The mother of all problems in this business is simply highly leveraged takeover deals or transactions carried out on short-term borrowing. Many of these instruments are maturing this year and early next year, and with no cash and no possible exit of their investments, the private equity companies are in panic of possible default on their debts.

This may trigger or initiate some harsh action from the central banks and the companies may be asked to recapitalize or merge with others.

This unfortunate situation could have been averted. But the greed for quick money has led this industry to where it stands today.
 
— Mohamed H. Zakaria is the CEO of Saudi Steel and senior vice president of Ahmed Salem Bugshan Group.