Is this the future of private equity in the Middle East?

Dubai Government holding company Dubai World and the government-controlled Dubai Islamic Bank established Millennium Private Equity earlier this year, and this week its first two equity funds were rolled out: Energy, and Telecoms, Media & Technology.

The declared aim is to raise $5 billion of which $500 million has already been secured from seed investors, including $100 million from the two Dubai entities. Then MPE will structure private equity deals and act as an equity investor by buying controlling or minority stakes, investing in buyouts or privatizations and acquiring equity related instruments.

To take the $1 billion TMT fund: Here MPE has recruited a top TMT team from the highly successful European Bank of Reconstruction and Development. The team aims to replicate its private equity work in Eastern Europe in the Middle East, Africa and Asia region.

Opportunity knocks

In Eastern Europe the opportunities were provided by privatization programs and the human capital was highly educated and disciplined. All that was missing was finance and corporate governance. Will this prove to be the same in the MEAA region?

Well, there is not wholesale privatization, for a start, so many of the best opportunities will stay in state hands; and where opportunities exist, such as the liberalization of telecoms, there are already plenty of private companies. The competence and availability of human capital is also less certain.

In addition, regional standards of corporate governance present a major hurdle to private equity investment. Can due diligence be successfully completed on companies with family ownership structures, especially for large scale investments? It will be challenging.

Informal ownership structures are not good enough for private equity due diligence, neither are ones where the state remains the real controller of a deal. The irony that the MPE itself is really state controlled should surely not be lost on investors in a private equity fund.

Strong investment team

However, the MPE has certainly invested heavily in its own human capital, and both the funds launched this week have world-class management supported by advisory panels of the highest global standards with impeccable international credentials.

But the jury is still out. In Eastern Europe private equity could locate the opportunities and provide the capital. In the Middle East there is an abundance of capital but a shortage of opportunities for genuine private equity investments, which is why such investments have usually been small up to date.

Perhaps MPE can locate such opportunities in the wider region of the Middle East, Africa and Asia. But it may prove much easier to raise its $5 billion capital than to find suitable investments to deliver the planned 20 per cent average annual return.