Private equity in the Middle East is emerging stronger and smarter from the financial crisis, finds a new report co-authored by INSEAD and Booz & Company.
The report, entitled “Private Equity in the Middle East: A Rising Contender in Emerging Markets,” sets out to examine the evolution of private equity in the region over recent years and the current challenges and prospects for the industry.
Private equity is a relative newcomer to the Middle East, being virtually unknown 10 years ago. However, it has grown rapidly: there are now some 150 funds with a further 10 announced; and an estimated $11 billion available for investment — cash raised principally before 2008.
Little research or literature exists on private equity in the Middle East, partly due to the industry’s relative youth, but partly also due to a lack of comprehensive information and transparency. Websites such as DubaiBeat.com, set up in 2007, are dedicated to providing news and analysis related to private equity and venture capital in the Middle East
The study is the fruit of collaboration between INSEAD, an international business school with campuses in Paris, Abu Dhabi and Singapore, and Booz & Company, a global management consultancy.
They surveyed private equity firms and general partners, as well as their investors and limited partners, soliciting views on current market sentiment, confidence and expectations.
“The results of our survey have provided unique insights into the private equity market in this region on which little formal research has previously been done,” said Deborah Schlichting, a research fellow at INSEAD.
“We produced this report because we believe we have the expertise to bring light to a crucial emerging industry that is of great interest to players in the Middle East and beyond” said Ahmed Youssef, Booz & Company.
Private equity in the Middle East is emerging strongly from the global downturn, having learned important lessons for its future development. “[S]tricter and more disciplined acquisition and due diligence processes, tighter contracts and stricter enforcement, and stronger control, management and governance” are all important, according to the report.
There is a special focus in the report on family-run businesses in the Middle East, as this is a particular characteristic of the region’s commercial landscape. Family businesses present challenges since it is often hard for investors to acquire accurate information about them.
However, family businesses themselves can be important investors and also provide attractive opportunities for private equity firms.
“Private equity is … closely tied with the transition of family businesses to corporate structures and the development of regional regulation,” said Laura Morales, director of INSEAD’s Global Private Equity Initiative, sponsor of the report.
Against the background of signs of regional macroeconomic recovery, there is optimism for the growth of private equity in the Middle East in the coming months.
“In order to take advantage of [Middle East] opportunities in 2010 and beyond, [private equity] firms must act as active owners. They have to provide more support to their portfolio companies, helping with strategic and market positioning, financial discipline, and filling the management gap,” advised Youssef.
Historically Egypt has been the source of the largest share of Middle East private equity transactions, due to the maturity, depth and strength of its economy, the report notes.
However, the study suggests that the balance may be beginning to shift, as private equity firms turn towards the Gulf states, particularly Saudi Arabia. A number of international private equity firms are expected to open offices in Riyadh in the coming months, including New York-based firm Revere Capital Advisors.
Ahmed Heikal, chairman of Citadel Capital, an Egyptian private equity firm, expects at least $20 billion in transactions in Saudi Arabia over the next five years in sectors such as mining concessions, microfinance, healthcare and education.