The recent launch of the Centennial Fund, one of the economic reforms introduced by Custodian of the Two Holy Mosques King Abdullah, offering financial aid worth SR150 million to young Saudi men and women who intend to open own businesses, is of great magnitude in shaping the future of venture capital industry in Saudi Arabia. The Saudi Arabian General Investment Authority (SAGIA) said the fund’s new initiative would help establish 280 projects and create more than 4,000 jobs during the next five years. Such initiatives are promising and serve as vital economic mechanisms for entrepreneurship development and the promotion of a new generation of business leaders.
The venture capital and private equity industry is a global one. Leading players are competing globally for funds and investing where return potentials are high. The benefits for economic growth that venture capital brings make it essential that policy-makers recognize impediments, like administrative regulations about establishing and doing business, to venture investments and take actions to facilitate cross-border investments and enhance the competitiveness of the business environment. This policy process should take place in a global context, learning from best practices around the world. Thus, building a dialogue between the venture capital industry players and policymakers is critical to fostering venture capital in the Middle East.
Over the past few years, the European Commission, has been working with its member states toward a more beneficial environment for venture capital. Beneficial work has been undertaken by many forums on policy coordination. The work of bodies like the OECD and the United Nations Economic Commission for Europe (UNECE), both of which have been active in developing policy cooperation in venture capital, has been instrumental in the development of the venture capital and private equity industry in Europe. Thus, important lessons can be learned as work progresses in different parts of the world, and best practices can be adopted by other international forums, as appropriate. The Gulf Venture Capital Association (GVCA), a non-profit trade and industry association for venture capital and private equity was recently formed in the Gulf to promote a risk-taking investment culture, develop skills and provide information on the venture capital and private equity industry. GVCA plans to organize conferences, industry-focused technology forums, training and workshops. In addition, GVCA plans to become a learning organization where members can share experiences and address issues of common interest. The first annual conference of the GVCA is planned to take place in Bahrain during Feb. 20-22, 2006. It will address key issues related to building a vibrant venture capital and private equity industry in the region. The conference will include special structured interactive sessions designed to address key challenges facing venture capital and private equity in the region. Such activities are important and helpful to the development of the venture capital industry in the Middle East.
Studies and research confirm the global nature of the venture capital industry. For natural reasons, large funds are at the forefront of international investments, but even smaller funds often look for opportunities to raise funds and invest all over the world. Globally, competition for venture capital investments is intensifying and investment in China has grown to $1.3 billion. Total venture capital investment in the US was $20 billion and in Europe $13.4 billion.
The GVCA indicated that private equity is one of the fasted growing sectors in the Middle East. The current size of the organized institutional private equity market is less than $1 billion, but this is expected to grow to approximately $ 2.5 billion by 2007.
Public awareness about venture capital is different in the Middle East from that in the United States, which is different from that in Europe and other parts of the world. In the United States, the entrepreneurial and equity-oriented culture makes venture capital a well-known and well-regarded financing alternative, at least in the cluster regions. In Europe the clusters tend to be smaller and the presence of venture capital more limited, holding back the possibilities of wider public recognition of the benefits of venture capital investments. In the Middle East, the venture capital industry is at its infancy, and enormous benefits would result from organizing forums aiming at improving awareness and the understanding of entrepreneurs, investors and policy makers of the private equity and venture capital industry. Such forums would provide an opportunity to review and improve the standards of the industry on many important aspects such as transparency, definitions, data, treatment of preferred shares, valuation methods and exit strategies used by venture capital industry in the Middle East.
Increased venture capital investments contribute to the goals of stimulating open and competitive capital markets, promote the competitiveness of small and medium-sized enterprises (SMEs) in the Middle East and facilitate investment flows that contribute to sustained economic growth.
In order to facilitate venture capital investment in the region, information about investment conditions, emerging opportunities, institutional players, prevailing practices and appropriate sectors must be spread. The venture capital and private equity community and the public sector can cooperate to provide information about the prevailing rules, regulations and documents on venture capital on a country-by-country basis. In order to gather and disseminate such information, coordinating work would be useful and discussion could be held among stakeholders in suitable regional forums in order to create an internet-based resource center, accessible for both policy-makers and the industry, which are interested in prevailing practices on venture capital investments. The aim would be to gradually develop this information resource to become a regional resource center for policies on venture capital in the region.
(Adnan Soufi is a professor of business administration at King Abdulaziz University, former dean its Faculty of Economics and Administration, and currently is on sabbatical at Oxford University, as Senior Associate Member at St. Antony’s College. He can be reached at: [email protected])
