Can Middle East private equity deliver on its promises?

These are heady days for private equity in the Middle East. Just five years ago the total value of funds raised stood at $1bn while today that figure has grown to $18bn. At the same time there has been a proliferation of locally based private equity funds all now hungry for deals.

'There is too much money pursuing too few private equity opportunities,' Ammar Alkhudairy, chief executive officer of Saudi fund Amwal Al Khaleej, told the conference. 'We have seen families paying around three times the bids of the private equity funds at recent auctions.'

However, HSBC Private Equity Middle East's Ara Sahakian intervened to note that his firm - which has just closed its second fund at $500m - has no problem with deal flow. Other speakers agreed, suggesting that part of the skill in operating a private equity fund successfully is deal generation, and attracting investment opportunities that are not up for public auction.

Private equity investment is, after all, usually about a lot more than getting the right price for an initial equity stake. The whole idea is often to employ the expertise of the new private equity shareholder to deliver a higher final exit price for the business for all shareholders.

This might comprise such advice as opening of doors to new customers and markets, capital for finance or help in restructuring corporate governance to global standards. Private equity funds are generally the ultimate in active investors.

Track record

So you need to choose to whom you sell very carefully. The problem in the Middle East is that track records are non-existent, and even the oldest practitioner HSBC can only trace its history back to 2001, albeit the first $100m fund launched in 2003 was followed last year with a $500m fund which suggests initial investors were happy with performance.

NBK Capital's Amjad Ahmad presented a case study of his bank's investment in Yudum Foods in Turkey, a 100 per cent management buy-out from Unilever which was sold seven months later to Saudi food giant Savola. This looked like a dream deal but it is the bank's only private equity exit to date.

Would-be investors in private equity funds are also highly critical of fee structures which EIS head Deon Vernooy told the conference seemed 'structured more like a remuneration package than an investment with standard two per cent management and 20 per cent performance fees'.

The truth is that such fees are acceptable if the higher level of returns - and as high as 30-40 per cent is often promised - are achieved. But this depends on success in sourcing deals, and also critically the subsequent success of those companies within their market sectors.

Some of the funds presenting to the conference have invested in highly cyclical industries like shipping and construction at what could prove to be the top of the global cycle, and it is arguable whether the Middle East operations of these companies can counter any downturn. Caveat emptor: beware of who you are trusting with your capital!

See also:
China ripe for Middle East investment
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