What does 2024 herald for MENA M&A and private credit?

Global M&A was on track to fall 20 per cent in 2023 compared with 2022, to a total value of about $3tn, according to advisory firm Bain & Co, reported the Wall Street Journal in December 2023. Deal making was down especially for venture capital and private-equity firms, which saw an estimated 39 per cent and 35 per cent declines, respectively, according to Bain.

Despite global dealmaking challenges in 2023, the flow of funds into the MENA region and the outflow of innovation displayed remarkable resilience, notes Lumina Capital Advisers in its latest report that looked at UK-Middle East cross-border deals in the past year.

Lumina Capital Advisers, a specialist mid-market corporate finance adviser based in Dubai, highlights in its report four factors that will ensure the Middle East will continue to be a global bright spot for transactions.

1.Record-breaking FDI surge in the UAE, Saudi Arabia

Foreign Direct Investment (FDI) in the UAE and Saudi Arabia reached unprecedented heights in 2022, marking the first time that the kingdom’s FDI surpassed that of the UAE. Saudi Arabia experienced an astounding 71 per cent increase in FDI in 2022, underlining its emergence as a regional investment powerhouse.

In 2024, key MENA projects are poised to drive FDI and UK-to-Middle East investments. Notable among these projects are mega and giga mixed development ventures like NEOM, and Palm Jebel Ali and Tower at Creek Harbour in the UAE. Infrastructure projects, including the King Salman International Airport and the Dubai Metro Blue Line, promise significant economic contributions and enhanced connectivity.

Additionally, renewable energy continues to be emphasised through projects like the Mohammed bin Rashid Al Maktoum Solar Park in Dubai, which is the world’s largest solar park on a single site, and Shuaibah 2 Solar Facility in Saudi Arabia, which will power hundreds of thousands of homes. These projects will collectively shape a promising landscape for investment in the MENA region in the coming year.

2. MENA transactions: A shift from early-stage VC to growth/corporate strategic M&A and JV deals in 2023

The MENA transaction landscape saw significant changes in 2023. Early-stage VC deals declined while M&A and JV transactions in the $30m to $200m range remained consistent. Regional M&A and PE deals decreased by 15 per cent, lower than the global M&A drop of 27 per cent.

The year also saw significant transactions led by sovereign wealth funds.

“As 2023 progressed, we noticed that private sector-led deals gained momentum, accompanied by a resurgence in private equity activity, focusing on exits and capital raising. These developments reflect the dynamic and evolving nature of the MENA transaction market,” said George Traub, managing partner at Lumina Capital Advisers.

3. UK public limited companies capitalise on record growth in MENA

Public limited companies in the UK had a great year in 2022 in the MENA region with significant revenue growth, in sectors aligned with the region’s energy transition initiatives. The MENA region’s growing stature for FTSE-listed companies reflected by the revenue contribution of those companies with Middle East revenues climbed to 20.9 per cent of global sales (up from 20.1 per cent the year before).

Among the FTSE 250, 21 of the top 27 companies with MENA revenues reported an upward trend, with sectors like Transport, Technology, and Industrials experiencing rapid growth.

These achievements coincide with the MENA region’s ambitious energy transition, fostering substantial inward investment and business opportunities in a rapidly evolving energy landscape.

Andrew Nichol, partner at Lumina Capital Advisers, remarked, “The impressive growth in sectors beyond oil and gas, particularly in industrials, healthcare and transport and technology, is a testament to the dynamic and innovative environment fostered by the region’s commitment to sustainable energy projects.”

“As the region continues to invest in renewable energy and green technologies, we foresee a continued upward trajectory for UK businesses, making the MENA an increasingly vital hub for global economic and environmental leadership,” added Nichol.

4. The rise of private equity and private credit as dominant funding sources

In 2024, the financial landscape is likely to see a significant shift, with Private Equity (PE) and Private Credit (PC) emerging as the primary asset classes for companies seeking essential growth capital compared to 2023.

This trend is driven by the increasing quality and volume of PE and PC deals, resulting from regional funds being raised from a variety of sources, including domestic, international, and sovereign wealth funds. As a result, PE and PC are set to overtake venture capital as the leading source of growth capital funding.

Factors contributing to this shift are:

• Firstly, the decreasing interest rates are leading to a lower cost of deal funding, making these options more attractive.
• Secondly, there is a growing recognition of sophisticated investors’ value, including growth, access, support, and bolt-ons, leading to more reasonable deal valuations.
• Thirdly, there is an increase in the flow of transactions, especially in the $30m to $200m range, which aligns well with the sweet spot for most regional firms.
• Lastly, in the realm of PC, it is increasingly acknowledged as a relatively ‘cheaper’ alternative to equity. This is coupled with the fact that the majority of corporations are facing almost a total lockout in seeking acquisition finance from banks, further cementing the role of PC as a crucial financing source in this evolving market.

Traub commenting on the rise of PE and PC, “From Lumina’s perspective, we can see that all the new, well-funded participants in the PE and PC markets predicate an increase in sophisticated, institutionalised investing in 2024.”

Predictions for 2024

1. Resilient dealmaking with increased size and sophistication in 2024 will be the over-arching trend this year

The dealmaking sector is poised for resilience, with a notable uptrend in deal size and sophistication. This is driven by increased international involvement in cross-border transactions and a shift from traditional venture capital dynamics. As a result, the region has now progressed from discussing to leading renewable energy initiatives and is now attracting larger deals from global firms.

Key growth sectors include energy transition, healthcare, travel and tourism, gaming, engineering, project management, and digital transformation, indicating a more diverse and complex dealmaking landscape.

2. Funding will return (at last) – PE and Credit, encompassing both direct investments and secondaries, are expected to be the fastest-growing asset classes in the region. This growth is expected to be attributed to an increase in funding from various sources, including domestic, international, and sovereign wealth funds.

Therefore, a rise in the volume of PE and PC deals is expected. Lumina predicts a shift towards more institutional investments, moving away from the ad-hoc or individual direct investment approach that characterised the VC boom. This transition will leverage sophisticated funds’ deep experience, vast networks, and expertise.

Nichol underscored his belief in a strong performance in M&A. He said, “Looking ahead, 2024 stands as a landmark year for economic recovery and dynamic dealmaking.”

“Having emerged as a global highlight in recent years, our region is set to capture global boardrooms with the quality, sophistication, and scale of our deals. With the myriad of opportunities at our doorstep, we are confidently positioned for a solid performance this year, and we are looking forward to what awaits us,” Nichol concluded.

3. FDI will grow across non-oil sectors, driven by SEZs and ongoing regulatory reform

As a cornerstone in regional governments’ plans, FDI will continue to flow across energy transition initiatives. Special economic zones (SEZs) and regulatory reform in Saudi Arabia will balance risk-return profiles.

4. Green hydrogen projects in Saudi Arabia, the UAE and Oman will be implemented as a result of focused national strategies

Complex hard and soft infrastructure project development will require regional and global firms to collaborate and innovate to deliver on ambitious plans.

5. Regional champions will rise

The regional champions trend will continue to gain momentum across key sectors such as construction, healthcare and infrastructure services, in conjunction with transactions centred around international interest in JVs and partnering to deliver skills and technologies for complex mega projects in AI, Digital Transformation and advanced manufacturing.