Private equity specialist upbeat on KSA market

Private equity specialist upbeat on KSA market
Updated 01 February 2015

Private equity specialist upbeat on KSA market

Private equity specialist upbeat on KSA market

Saudi Arabia has around $700 billion in reserves, enough to continue spending at its current rate and oil prices for years to come, says Shailesh Dash, founder and CEO of Al-Masah Capital Ltd. (AMCL).
Of course, “the steep decline in the price of oil has put the Kingdom’s 2015 budget into a deficit of almost $40 billion,” Dash told Arab News in an interview.
AMCL, an alternative investment firm, was set up by Dash and his senior team from the private equity department of Global Investment House (GIH), Kuwait. Within a short time of obtaining its license, AMCL has accumulated a total AUM of more than $500 million.
When asked whether the US shale crude played a big role in bringing down oil prices, which are now hovering near six-year lows, Dash said: “The US advancements in horizontal drilling technology definitely played a large part to the current oil price slump. This technology opened up vast reserves for the US with talks of them becoming energy independent in the near future with reserves that could amount to the largest in the world.”
Saudi Arabia, which is well aware of this fact, decided not to cut production at the latest OPEC meeting and this could be seen as a signal that they are defending their market share as the low-cost producer of crude oil, he said.
Dash cautioned that the first half of the year may be challenging for regional markets; the ramifications of the collapse of oil and the steep selloff in the fourth quarter of last year are still lingering.
“Uncertainty and volatility, two dangerous combinations for any investor, are highly prevalent in the current environment,” said Dash who during his tenure with GIH created and managed in less than five years one of the largest alternative investment businesses in Asia.
He founded the private equity business at GIH and during his tenure it became the 16th largest private equity business in Asia (ranked by PEI Asia) and the second in the MENA region, with $3 billion in assets under management.
This included four private equity funds and one permanent capital vehicle, managed by a team of 45 investment professionals from 12 nationalities with deep regional market and transactional experience.
They operated a network of offices in Kuwait, Riyadh, Cairo and Istanbul for deal sourcing and execution.
Prior to that, Dash also established the research platform at GIH, and built it into one of the largest and best regarded in the region.
Dash is considered to be one of the most experienced private equity investors in the region in terms of number of transactions, with more than 58 transactions executed valued $ 1.5 billion.
Dash, a postgraduate in business management and a member of the CFA Institute, is also the largest regional investor in medium sized family businesses with more than 30 transactions, most of them sourced through his and his team’s personal relationships. 

The following are excerpts from the interview:

Q: What impact the falling oil prices will have on the Saudi economy?

A: Saudi Arabia generates 90 percent of its revenues from the oil sector and the steep decline in the price of oil has put the country’s 2015 budget into a deficit of almost $ 40 billion. The country is rich and has approximately $700 billion in reserves, enough to continue spending at its current rate and current oil prices for years to come.

Q: Oil prices are now hovering near six-year lows. Do you believe the US shale crude plays a big role in bringing down oil prices and they will recover this year?

A: Advancements in horizontal drilling technology in the US definitely played a large part in the current oil price slump.
This technology opened up vast reserves for the US with talks of them becoming energy independent in the near future with reserves that could amount to the largest in the world.
Saudi Arabia is well aware of this fact and their decision not to cut production at the latest OPEC meeting could be seen as a signal that they are defending their market share as the low-cost producer of crude oil.
The oil price this year will depend on how much supply becomes uneconomic and how many rigs go idle due to the cost of producing being higher than current prices justify.
We are already seeing signs of contracts being canceled and energy companies deciding to close down some projects.
As this continues and supply shrinks, the price of oil will eventually find a foothold to climb up from.
 
Q: The IMF estimates the MENA region to grow 3.8 percent in 2015. Is this achievable despite falling oil prices?

A: The IMF would have factored the reduced oil price into their 2015 estimates and it’s very likely that this number is achievable.
The oil producing countries in the MENA region, for the most part, are rich in foreign reserves and can weather a down period in the price of oil for some time without cutting spending significantly if at all for select countries like Saudi Arabia, Qatar and the UAE.
We believe that in the long run this could actually benefit the region as it will solidify its market share in the energy market and could possibly grow that share if prices remain low for a sustained period of time.

Q: According to the IMF, oil export losses are expected to reach $300 billion in the Middle East. What strategy the region should adopt to offset these losses?

A: What the region will lose in the interim is necessary to protect their market share today and in the future. They are ensuring that they hold onto a larger portion of the pie and defend it against higher cost competitors. It is a tradeoff, but they are essentially substituting price for quantity and are happier to produce more at lower prices than to produce less at higher rates.

Q: Do you expect the Tadawul index to recover this year after falling 2.37 percent in 2014?

A: We have seen some strength for the index since it hit its low in mid-December of about 7,200. Since then it has rebounded by more than 15 percent, albeit in a volatile manner. If oil takes another leg downward, we can be sure that the market will follow as it has since September last year. It will take time for the market to recover all of its losses as stocks typically take the elevator down and stairway up but over time the general trend in equities is upward sloping.

Q: The declining oil prices may impact other regional equity markets. What is your expectation for other GCC stock markets for this year?

A: The first half of the year may be challenging for regional markets; the ramifications of the collapse of oil and the steep selloff in the fourth quarter of last year are still lingering. Uncertainty and volatility, two dangerous combinations for any investor, are highly prevalent in the current environment. Since this has been a major macro event that changed the trend of the last two years, it will take time for the markets to digest the new equilibrium and find the next trend. 2015 may end up being a year of consolidation if you take into account that the last market movement (strong rally) started in 2012 after a two-year consolidation that happened after the 2008 crisis. If this is indeed the start of a new cycle, then the first half of 2015 will be volatile and possibly in the second half we may have a better indication of what could be the medium- to long-term trend lines.

Q: What effect the regional geopolitical crisis will have on the GCC economies?

A: Other than oil, the geopolitical crisis remains the other major issue regional economies have to contend with. Iran’s nuclear deal if accomplished could be a game changer not only in terms of reducing tension levels within the region but also through its residual economic impact as more Iranian oil could shift the supply-demand curve even further. However, more urgent than the Iran situation is what is happening in Iraq and Libya. Both remain highly volatile and uncomfortable situations for their GCC neighbors. Since 2008, other than the Arab Spring, which in itself was a good buying opportunity, in general GCC economies have been less spooked by the ever changing geopolitical situation as they have grown to accept that this sort of thing comes with the territory. That is why whenever markets decline, its regional investors who come in first with international investors tend to lag far behind. The fundamental picture for the GCC economies, despite the oil price drop, still remains highly favorable for long-term sustainable growth as it is based on high disposable income, strong government support, young demographics, a fast growing service industry and core focus on social infrastructure like health care and education.

Q: What scope do you see for real estate investment in the region?
 
A: Real estate investment is specific to each country and region and even then it remains a fragmented market so your investment strategy has to be very specific. Picking an industry segment and an area that has strong demographic and government support is usually the initial criteria on which to base the strategy. Even that has to be analyzed carefully.
Riyadh residential real estate, on the back of immense government support for more affordable housing, is considered a prime opportunity.
However, bureaucracy and limited supply is not allowing the trade, which should have started in 2011, to actually come to fruition.
Identifying the key triggers for future growth remains a strong foundation on which to base investment decisions. From a big picture point of view, the UAE, Qatar and Egypt would be the preferred destinations for real estate investment although the UAE and Qatar require deep research as some segments of the market are overbought while Egypt requires patience.

Q: What advise do you have for the GCC countries to utilize their sovereign wealth funds for boosting economies?

A: Sovereign funds play an important role in the GCC countries. They should be viewed more as another tool for economic diversification and wealth preservation rather than a bank deposit to be tapped whenever economic challenges arise. Yes, they do certainly play a part in terms of short-term stimulus, as can be seen from time to time in Saudi and Qatar stock markets and they can certainly minimize the impact of fiscal deficits in times of plunging oil revenue, but it has to be recognized that they reached that level of power and strength by deploying an investment strategy that looks for investment returns across a wide spectrum of asset classes across various global regions with the main aim being long-term, diversified growth. If that remains their primary objective then they will remain the safety net that they are for their local economies.

Q: Where is the world economy heading this year?

A: The world economy, in early 2015, looks like a mixed bag. The US remains the main growth driver and should be for the remainder of the year.
Europe could dip back into recession and deflation is a serious cause for concern. Emerging markets can be grouped into two groups; net energy importers will outperform net energy exporters with India looking more secure than say Russia.
Regionally, we expect modest GDP growth in the short term but once the oil price finds its floor and trading range, the new demand and supply picture will ensure oil revenue starts to pick up again.

Q: What impact the falling oil prices will have on the Saudi economy?

A: Saudi Arabia generates 90 percent of its revenues from the oil sector and the steep decline in the price of oil has put the country’s 2015 budget into a deficit of almost $40 billion. 
The country is rich and has around $700 billion in reserves, enough to continue spending at its current rate and current oil prices for years to come.

Q: Oil prices are now hovering near six-year lows. Do you believe US shale crude plays a big role in bringing down oil prices and do you think oil prices will recover this year?

A: Advancements in horizontal drilling technology in the US definitely played a large part to the current oil price slump.
This technology opened up vast reserves for the US with talks of them becoming energy independent in the near future with reserves that could amount to the largest in the world.
Saudi Arabia is well aware of this fact and their decision not to cut production at the latest OPEC meeting could be seen as a signal that they are defending their market share as the low-cost producer of crude oil.
Sovereign funds play an important role in the GCC countries.
They should be viewed more as another tool for economic diversification and wealth preservation rather than a bank deposit to be tapped whenever economic challenges arise. Yes, they do certainly play a part in terms of short-term stimulus, as can be seen from time to time in Saudi and Qatar stock markets and they can certainly minimize the impact of fiscal deficits in times of plunging oil revenue.
The first half of the year may be challenging for regional markets; the ramifications of the collapse of oil and the steep sell-off in the fourth quarter of last year are still lingering. Uncertainty and volatility, two dangerous combinations for any investor, are highly prevalent in the current environment.