JEDDAH, 15 January 2007 — With stock markets in the Gulf Cooperation Council (GCC) region languishing, the alternate asset class such as private equity has gained prominence among the investors. Lower investment returns from publicly traded stocks in the region, along with low interest rates, have pushed big investors to look for other options and private equity is trying to bridge the gap.
One of the major reasons of this asset class gaining acceptance is that post-World Trade Organization (WTO), the economies need to be opened up and international players will be entering the arena, with greater financial flexibility, according a report issued by the Kuwait-based Global Investment House (Global). Although the private equity especially the buyout funds are a recent phenomenon to hit the financial markets in the region, it presents a strong case for portfolio diversification and asset allocation. The MENA region is likely to see the same trend. Currently, there are more than many buyout funds in the region at various stages from announced to collecting funds to being fully invested. The region has ample liquidity which is attracting big foreign players such as Carlyle and local financial institutions such as Global Investment House, Dubai International Capital (DIC) and Abraaj Capital to tap the market for their buyout offerings.
According to Gulf Venture Capital Association (GVCA), close to $10 billion have been raised in private equity (PE) funds in 2006, up from $5.7 billion raised in 2005. The rapid growth of the private equity industry reflects the potential of this method of finance in the region, in part due to the imperfect match between traditional equity/debt instruments and financing needs of MENA entrepreneurs.
Globally, the buyout funds have been a rage among the investors as multibillion-dollar buyout funds are busy purchasing private companies and taking public companies private. A buyout fund collects money from the investors with a view to employing the money to buy a stake in companies that it deems to be attractive for investment.
Internationally private equity buyout firms announced more than $700 billion in planned purchases in 2006, almost three times as much as in 2005. Nine of the top ten largest buyouts in history have been completed in the past 18 months by private equity houses led by Blackstone Group’s $20 billion offer to purchase Equity Office Properties Trust. The top quartile buyout funds have generated net annual returns in excess of 40 percent in the past 20 years. In the 12 months through June 2006, investments in private equity firms returned 22.5 percent as compared to. 6.6 percent registered in S&P 500, according to Thomson Financials. India and China seem to be the hot spots, garnering the limelight in terms of private equity activity. Private Equity houses invested a record $7.5 billion across 299 deals in India during 2006 including mega buyouts such as KKR-Flextronics Software buyout, according to a study by Venture Intelligence.
GVCA report reveals that real estate sector emerged as the most attractive sector among PE firms, accounting for $2.8 billion investment followed by the transport and financial services $750 million and the travel and tourism $650 million.
The Global report also said the GCC stock markets witnessed some year-end buying activity before the start of earnings season as all the GCC indices, barring Saudi Arabia, ended in black in December. However, the GCC markets showed abysmal performance in 2006 as all the markets, with the exception of Oman, witnessed yearly losses. The region’s biggest market, Saudi Arabia, reported the steepest yearly decline of 52.53 percent.
With liquidity in the markets improving substantially in the past few years, the capital markets are also witnessing increased depths, in terms of the number of new listings, as well as a growth in overall market capitalization, the Global report said. The number of securities listed on GCC stock exchanges were 633 at the end of 2006 with the market capitalization in excess of $700 billion. The volume of shares traded improved as the regulators in many bourses allowed stock split to entice retail investors. Cumulative value of shares traded on GCC bourses amounted to $1.61 trillion as compared to $1.37 trillion reported in the previous year.
GCC bourses saw 10.46 billion shares being traded in December as compared to 11.22 billion shares being traded in November 2006. Also, the value of shares traded on the GCC exchanges went down as it amounted to $57.6 billion in December as compared to $72.2 billion in November.
GCC stock market breadth was skewed toward the advancers as 235 stocks reported monthly gains as compared to only 207 decliners. However, Saudi market continued to be battered by investors as it saw only 13 stocks reporting monthly gains in December.
The Saudi stock market continued its downward trend this year also. The Tadawul All-Share Index (TASI) is down by 9.48 percent so far this year. The index dropped 30.61 percent yesterday to close at 7,180.89 after falling 4.6 percent on Saturday.
