Investment in MENA private equity market seen improving

EDDAH – Confidence among regional General Partners (GPs) has bounced back and outlook became more positive for the long-term prospects for PE in the MENA region, the fifth Deloitte Private Equity Confidence Survey released Tuesday showed.

Saudi Arabia is the largest economy in the region with the highest GDP growth and will continue to be the main country to see deal activity, while Egypt is the largest country in the region, and has favorable demographics, but it will take some time to resolve the political issues there.

The report forecast a lot of deals out of Egypt and Iraq, however the majority of these are infrastructure plays instead of minority stake investments etc.

“Egypt is interesting due to its location, demographics and economic growth prospects. The problem, however, is that we have to sit and wait to see what happens there. We are seeing a few deals in the pipeline and people are preparing for due diligence on assets there, ready to buy at the right time.”

It noted that Iraq is very attractive, but not before 2013 when more people start to become active there.

Private equity has an important role to play in plugging the capital structure gap that exists between founder equity and working capital in the SME sector, a sector that is pivotal to future and sustainable economic growth.

There are two main differentiators that private equity (as an asset class) brings into companies – one, a degree of institutionalization and two, less emotional money compared with other asset classes.

“The ability to add value is the most important thing for private equity managers as it encompasses all areas including leadership, strategy, networks, etc. and is the key for deal execution,” the report further said.

“Private equity houses can be more flexible in terms of deal structures than other investors. Some entrepreneurs prefer this because they can retain more control than what might be offered in a corporate deal.

“On the whole, sellers in the region are glad to have private equity groups in their pool of potential buyers as we provide a frame of reference,” the report said.

Pressure to divest on the part of GPs and the gradual opening of exit channels point to an increase in exit activity.

Many assets in private equity portfolios are mature and ready to be exited. In the next 12 months the political situation should stabilize which will provide more confidence to investors, it added.

“There is a better environment now compared with 12 months ago, when there was negativity due to the Arab Spring and some wider issues. In general, we have optimism on the fundamentals, which are quite interesting,”

The bulk of GPs expect to continue focusing on sourcing and executing new deal opportunities as well as ongoing portfolio management over the next 12 months, the report said.

“This edition of the Deloitte Private Equity Confidence Survey is perhaps the most insightful so far. The general sentiment among the MENA PE Community is one of optimism,” said Richard Clarke, managing director, Transaction & Restructuring Services, Deloitte Middle East. “While in the past, GP’s may have been hoping for increased deal activity and a bounce back in returns, today’s optimism is supported by our own experiences – there really has been and continues to be an increase in PE backed deals.

With the regional political situation starting to settle down, the investment environment is now more attractive than it has been since the beginning of the uprisings of the Arab Spring and moreover the global crisis,” he added.

This is supported by the fact that over 75 percent of respondents expect investment activity to increase in the Middle East over the next 12 months, reflecting the continued confidence in finding suitable investment opportunities and a general willingness to deploy capital for the right assets.

Exit activity is also expected to see a pickup, after a lull in the last few years, according to the Deloitte survey. “Now more than ever, GPs are focusing on leveraging off intermediaries to help them find the right route to market while also assisting them to prepare portfolio companies for exit,” said Raj Mehta, Director, Transaction & Restructuring Services, Deloitte Middle East.

“Despite the challenges with exiting, GPs still expect to focus the bulk of their time on sourcing new investment opportunities. This says two things – that deals are still there to be done, and that fund managers are very much in deployment mode,” he added.

In terms of the sectors of most interest to PE investors, the Deloitte survey found that the main focus remains on the defensive sectors, such as education, healthcare and oil and gas services. However, there is also a growing interest for growth and demographically-linked sectors, such as consumer retail and food, which are expected to attract the most attention among the PE Community in the coming year.

Regional GPs are reporting increasing signs of optimism regarding the long term prospects for the MENA PE sector, with strong domestic growth, the abundance of oil and natural gases and favorable demographics cited as just some of the many reasons for confidence returning to levels seen pre-crisis in the region.

The Saudi Gazette 2012, Sep 19 2012