ABRAAJ launches ME private equity report

Titled "Private Equity: A catalyst for economic growth in the Middle East region", the report takes a look at the various macro economic indicators in the region, whilst analysing the opportunities for the private equity industry. It addresses a number of issues that range from rapid population growth and job creation to capital markets and reverse capital flows into the region since the events of the September 11.

Speaking at the event, CEO and Vice Chairman of Abraaj Capital, Arif Naqvi, pointed to private equity as one of the fastest growing sectors in the Middle East region, including the GCC and Levant, stating that: "the industry has grown at a compounded annual growth rate of approximately 41 % over the last five years."

"The private equity industry in the region has evolved rapidly over the last 3-5 years as the size of organized, institutional private equity market has today risen to less than US$ 1 billion. This is expected to grow to approximately US$ 2.6 billion by 2007 at a projected a growth rate of 25 per cent (CAGR)," Naqvi added.

There are a number of significant private equity players, with sizable funds (by regional standards) that are actively making investments in the region as of now. Aside from Abraaj Captial, these include HSBC, Injazat, Menavest, the Jordan Fund and a number of others. In addition, there are major family groups and investment companies that are also targeting the private equity market in the region—but usually in a less structured and focused manner.

The report estimated that institutional private equity in the region has grown from approximately US$200 million in 1998 to in excess of US$700-800 million in 2002.

On opportunities for the industry, it said that these are present in many areas across the regional economies, including: family groups beginning to focus and rationalize their operations; governments undertaking privatization initiatives or seeking capital partners in infrastructure, energy and water projects; multinational corporations seeking to directly establish real value-adding operations or partnerships in the region.

It said that among many sectors, including the government that derive benefits from private equity, family groups in the region is one segment that is expected to find most of their solutions in their association with the private equity industry. Such groups could partner with private equity funds to benefit from their value creation discipline.

But more importantly, private equity firms can provide solutions to those family groups, which are looking to acquire other companies to expand or even help them divest non-core or distressed businesses with minimum risk to their reputation, according to the report.

"We believe that private equity industry can act as a catalyst in the development and growth of business and industries in the region and act as a focal point to attract investment. However, regional governments will have to accelerate the pace of economic liberalization and create an enabling investment climate by addressing, amongst other issues: ownership, agency and labour laws," said Naqvi.

The report talked about the reverse flow of Arab capital to the region and estimated that post 9/11 somewhere in the range of US$10-15 billion has been already repatriated. It also described the reverse flows as "the tip of the iceberg" representing only 1.1.5 percent of the estimated Arab wealth held overseas.

"There are also indications that significant capital has been committed, though not yet funded, to long-term real estate development projects in Kuwait and the UAE in particular. The figures may be in the range of US$50 to US$70 billion" the report said.

It also talked about the small market capitalization of the regional capital markets and said that these have low correlation with other markets.

The market capitalization of the GCC stock markets in mid-2003 was only 12 per cent of the market capitalization of the London Stock Exchange and two per cent of the New York Stock Exchange.

"The Saudi Stock Exchange is the largest in the region and constitutes 56 per cent of the total market capitalization of the GCC as of July 2003. However, over 60 per cent of the Saudi stock market capitalization is from five out of the 70 companies listed on the Exchange. The situation is worse in the smaller markets, such as Qatar, with over 70 per cent concentration in the top five stocks," it said.

The report also raised the issue of the dearth of highly skilled human capital in the GCC and talked about the region's growing population. It said that at an annual growth rate of 2.5 per cent, the region's population (GCC & Levant) will almost double from 41 million to 73 million by 2025 with Saudi Arabia accounting for 60 per cent of this. To effectively manage the rising unemployment levels as a result of the growing population, approximately seven to nine million new jobs would have to be created in the region by 2020, according to the report.

Abraaj Capital is a Support Sponsor for the World Economic Forum in Jordan for the second consecutive year. The forum provides a valuable platform for thought leadership and, as such, Abraaj Capital is committed to improving the state of the world by supporting particular regional events and acting as a thought leader pioneering private equity in the region as a vehicle of change towards economic prosperity.