GCC social stability dependent on 50 million new jobs

Speaking in Dubai at the opening of the Private Equity Forum, Ali Erfan, senior advisor to Ithmar Capital, one of the leading private equity firms in the region and headline sponsor of the forum, identified demographics as a "huge challenge" that private equity must confront in the Gulf Co-operation Council (GCC) countries.

"Depending on which report you read, there are 20, 30 perhaps 50 million jobs that need to be created in the Middle East over the next 20 or 30 years," said Erfan, chairman of the forum that is taking place at the Murooj Rotana Hotel until Thursday (26 June 2008) "That is a huge challenge," he added.

"If these jobs are not created, who knows what will happen? It forms the basis of the future social stability of the region."

Private equity encompasses investing in companies whose shares are not traded on stock exchanges and runs from small venture capital investments in start-up companies to multi-billion dollar buyouts of well known public companies.

There are estimated to have been $13 billion worth of private equity deals in the region in the past decade.

Private equity is playing an increasingly important role in reshaping and diversifying the economies of the Middle East but Erfan identified several potential global storms that would impact the region.

They included: record oil and food prices; inflation; financial systems in peril; and a global slowdown.

"Unequivocally, there is a global slowdown which will affect regions to lesser and greater degrees," he added. "Inflation and the rising cost of living is another factor. It is no longer true to say that the GCC is a low cost economy - it is quite an expensive economy."

Of the estimated $13bn private equity deals in the region in the past decade, only between 5% and 10% had been exited - with the main options being trade sales, according to G. Bala Subramanyan, Chief Investment Officer of M'Sharie, the corporate venture capital arm of Dubai Investments - a diamond sponsor of the forum.

In a presentation on regional trends and challenges, Subramanyan said private equity had been responsible for 45% of all investment in the United Arab Emirates in the past decade and 35% in Saudi Arabia.

In addition, the average private equity fund sized had increased to around $300 to $500m with average deal sizes increasing to an average of $25m.

"Private equity has seen phenomenal growth in the region, particularly in the past two years," Subramanyan added. He identified the quality and quantity of private equity deal flows as a challenge but forecast improvements in coming years with growing regional awareness. Stability and economic development, investor friendly regimes and liquidity were the three main strengths of the region, he said.

The growing impact of the private equity industry on the economic diversification of the Middle East was the subject of a special study released at the forum.

The study - Catalysing Diversification: Private Equity in the GCC, has been produced by Ithmar Capital in association with Dow Jones.

Ithmar Capital currently has $500m worth of assets under management through two existing funds.

Diamond sponsor is M'Sharie, the private equity arm of Dubai Investments, which has 17 subsidiaries under its umbrella.