Private Equity in the Middle East and North Africa
Geographically situated at the heart of some of the world’s most important trade routes, the countries comprising the MENA region are richly diverse culturally, politically and economically. Stretching from the Maghreb in the west, and moving east through Egypt and the Levant to the Gulf, each of these markets possess distinct histories—from the ancient Mediterranean civilizations of Carthage and Phoenicia, to the sultans and wayfarers who plied the Indian Ocean spice trade. Far from a monolithic region, the origin of unity may very well be the extraordinary expansion of Islam during the 7th and 8th centuries.
Categorizations of this region have historically been quite fluid and nearly every stakeholder views the market through a unique lens. Cem Bayulgen, Managing Director at NBK Capital Partners, observes “MENA is a very broad term—and every GP has a different definition. There are a lot of different economies with different dynamics lumped into this one acronym.” Nonetheless, despite this diversity, Western observers of—and investors in—the Middle East and North Africa have come to conceive of these economies as one larger mosaic.
A Fledging Private Equity Industry
Having begun in the late 1990s, the private equity industry in the Middle East and North Africa has a shorter history than most emerging market regions. In its earliest days, the asset class received a significant amount of interest from local—primarily GCC-based— limited partners, which led to a large number of first-time funds raising a sizable amount of capital in a short amount of time. In 2007, more than US$6.2 billion was raised by funds dedicated to investing in the region (see Exhibit 1).
However, the party proved to be short-lived; with the onset of the global financial crisis, the asset class nearly disappeared as quickly as it had emerged. By 2009, fundraising had slowed to just over US$700 million, a drop of over 82% from the prior year. Amitava Ghosal, a Partner with Al Masah Capital Limited, notes, “The 2008 global financial crisis was a sobering experience for many firms. The worldwide downturn from 2009 to 2010 resulted in a shakeout of the industry; the most serious players have survived, but many of the small funds have wrapped up their operations and closed shop.”
Echoing this sentiment, Nabil Triki, Managing Director and Head of Private Equity at Swicorp, observes, “This is probably one of the only emerging market regions where the asset class developed in a geography in which there is a lot of local liquidity. If you look at Asia, Africa and Latin America, you’ll find that private equity evolved gradually beginning in the early 1990s, with small GPs raising small amounts of money mainly from development finance Surveys, the region ranked near or at the bottom vis-à-vis all emerging market regions in terms of attractiveness for GP investment, with concerns over political risk, a challenging regulatory and tax environment, and a limited number of established fund managers being the greatest deterrents to investment.
Time for a Second Look
While it has certainly been a challenging few years for the industry in the Middle East and North Africa, signs of renewed interest in the region are evident. In EMPEA’s most recent Global Limited Partners Surveys, the Middle East and North Africa has begun to slowly climb back up in the rankings—even jumping to sixth place (out of ten) in terms of overall attractiveness in 2014—and LPs are following through with commitments as MENA-focused private equity fund managers raised nearly US$1.1 billion in 2014. These funds represented 2% of all emerging markets fundraising, up from 1% in both 2013 and 2012.
What is driving this gradual shift in sentiment? One notable factor is the strength of the teams that are active in the region. While the current roster of fund managers is much shorter, many industry experts agree that they are more seasoned. After reflecting upon the shakeout that occurred following the global financial crisis, Al Masah Capital Limited’s Ghosal adds, “This was good in the sense that the firms that are now operating in the Middle East are more serious and capable entities.” This has proven to be true across the region—the players that have survived over the past several years now have an arsenal of lessons learned with which they can assist current and future portfolio companies. In particular, a greater focus on due diligence, operational expertise and the value creation process, as well as the path to exit, has ultimately resulted in a much more mature and professionalized asset class.
A strong macroeconomic story—which will be explored in greater detail in the next section of this report—is also enticing investors to take a fresh look at the region. Favorable demographics, high disposable incomes across a number of markets, significant GDP growth forecasts and an increase in economic diversification are all contributing to the region’s attractiveness. In addition, there is a growing appreciation amongst institutional investors that public market exposure alone is not sufficient to capture this opportunity. An analysis of private equity investments made in 2014 versus the public market equivalent reveals that private equity deals in the consumer space represented 41% of transactions by number in comparison to 20% of the companies represented on the listed side (see Exhibit 2). In contrast, the public bourses are dominated by financial services companies, which represented 46% of all listings as of March 2015.
Another signpost that may point investors in the direction of reconsidering the region is that its private equity participants are largely optimistic about the next phase for the asset class. As Ziad Oueslati, Managing Director and Co-founding Partner of AfricInvest, remarks, “Despite all that has happened in the region, we’ve never invested as much as we have during the last four years. And at the same time, the exit environment is improving nicely. We expect the coming years to be even better.”