Green Shoots For Private Equity Sector

The Middle East’s private equity market is slowly regaining confidence, with discussions and interest in new deals on the rise. However, according to experts the surety needed to close deals is still lacking and it may be a couple more years before the market is back to its prosperous pre-2008 days.

Fadi Arbid, CEO of Amwal AlKhaleej, a private equity firm based in Saudi Arabia, believes the regional market has seen a definite rise in interest this year, but closing deals is still an area of caution for most parties.

“There’s still a lot of uncertainty — you can see a lot of volatility on the euro, a lot of volatility on oil prices, and this is affecting the West and also eventually affecting us [Middle East] directly and indirectly,” explained Arbid.

“The geopolitical situation hasn’t been sorted out. You might think this is too much of a macro response but this is the reality — investor confidence hasn’t been restored.”

A private equity report by global management consulting firm Bain & Company supports Arbid’s opinion that the market is struggling for confidence.

“The trends at play more closely bear an uncomfortable similarity to those prevalent two years ago than to a return to boom times,” said Hugh MacArthur in the report, head of global private equity at the firm.

“There are many deal discussions taking place but less confidence that buyers and sellers will agree on value given the current macroeconomic uncertainties. Exit markets remain anaemic.”

Raj Mehta, a director in Deloitte’s transaction and restructuring services team, believes the confidence is there but only with the strongest private equity firms with local knowhow.

“Deal volumes are up on last year and there is a general air of confidence and willingness among general partners to do deals,” says Mehta, who also co-heads Deloitte’s private equity initiative across the Middle East. “Deals are there to be done and investment activity will continue to increase over the next year. With the challenges of fundraising and successfully exiting assets still around, it is very much about survival of the fittest. General partners that have funds to deploy, a local presence, and a track record will likely benefit the most.”

Should investor confidence on a greater scope than just the local, fittest funds be restored it could mean that billions of dollars worth of dry powder in the region is ready for the taking.

“Nearly $1 trillion in dry powder is still waiting to be put to work, almost $2 trillion worth of assets remain on general partners’ books and more than 75 per cent of them are currently valued at below carry hurdle rates,” said MacArthur.

Arbid acknowledged that some funds have dry power lying in abundance: “Some private equity firms had great funds before the crisis and have struggled to deploy them, so you find a lot of dry powder. Firms have been struggling to close deals and therefore returning the money.”

Despite the market’s timid confidence, the improved interest is enough to show which sectors may bounce back the strongest. Mehta explained regional investors normally focus on defensive sectors, but change is afoot.

“In the past, industry favourites have included education, healthcare, oil and gas services. But today, growth and demographic linked sectors, such as retail and food-related businesses, are topping the shopping list and are expected to attract the most attention in the next 12-18 months.”

However, as Mehta pointed out, “private equity as an alternative asset class is all about finding an opportunity where others don’t. The successful firms will be the ones that push those boundaries.