Emerging market private equity activity down 60%, but confidence remains high in Mena

The global study of over 200 general partners (GPs) from Mena, India, China, SE Asia, LATAM, Russia, Central and Eastern Europe, Turkey and South Africa showed that whilst the economic downturn has taken its toll on the industry, there is nevertheless long term confidence in the market.

The global slowdown is putting downward pressure on entry multiples across all regions; the majority (83%) of GPs in the Mena region expect entry multiples to decrease throughout 2009; the top three underlying drivers cited for this including falling public market valuations, the global economic downturn and less deal completion.

"However, falling entry multiples are a sign that there are better times to come - this is very much reflected in the long term confidence cited by all the emerging markets, in spite of figures detailing the downturn," said Chris Ward, Global Head of Corporate Finance and CEO of Deloitte Corporate Finance in the Middle East. When scored out of ten, Mena rated its long term confidence for PE as 8.2.

"Given the financial and regulatory turmoil surrounding the industry, it is reassuring to see that the emerging markets still view the long term potential of the industry positively. Private equity has a robust business model that is able to adapt, and although the next 12 months will prove difficult, it will survive and indeed prove a helpful tool in developing these emerging markets' economies," he added.

Over 47% of Mena GPs anticipate activity to increase, with the top three drivers cited as underlying this increase being improved access to capital, lower valuations and growth in mid-market. However, 40% are expecting a decrease, with the top three drivers cited as underlying this being economic uncertainty, valuation expectations and low liquidity.

"With regard to the growth opportunities in Mena, its geographical location is a key point: it is at the center of lots of what's going on." said Chris Ward. He added that despite downside risks to the region - such as the weaker oil price - it is important to remain optimistic. "Mena has a lot on its side. Dubai and Abu Dhabi are growing faster than places like Moscow. It is easier to do business here" he said.

The research indicated that local knowledge and relationship networks are considered vital. "Across the regions, the consensus of opinion amongst GPs is that proprietary deal flow is key. With deal flow being primarily focused on regional markets, and domestic private equity and other investors accounting for over half of all active players, the emphasis is upon possessing a deep-rooted knowledge and understanding of local markets," said Chris Ward.

Deloitte in the Middle East places great emphasis on strong local networks backed by the expertise of its global firm. To this end, moving seasoned practitioners such as Robin Butteriss and Martin Pierce to the region to support clients across other locations, in these cases in Abu Dhabi and Doha respectively, has demonstrated the firm's commitment to investing in world-class expertise to complement its strong local financial advisory team.

Robin transferred from Deloitte London corporate finance practice in 2008 to support the Middle East team and will now be located in Doha to focus on that market. He has a broad base of local and global experience having helped both corporate and financial investors with their acquisitions, divestments and restructuring activities.

As for Martin, he returned to the UAE at the beginning of this year, having previously worked with a major Dubai conglomerate in strategic planning and has over 20 years financial advisory experience.

Like Robin, Martin has an international cross border outlook, having previously worked in London and New York, as well as Dubai, and was seconded to a major international bank for two years to support its work-out team. He has both a wide diversity of transaction experience (including buy and sell side, restructuring and banking) and broad sector experience.

Key statistics:

• Global PE deals down from 1407 deals in Q3 07 to 655 in Q1 09;
• Emerging market PE deals down from 128 deals in Q307 to 51 in Q1 09;
• 73% of respondents expect exit activity to decrease in Mena, and 83% expect entry multiples to decrease in the region also;
• 60% of respondents in Mena expect a key source of deals to be proprietary.