April 2009

President Barack Obama declared that a "new era of energy exploration in America" would be a crucial to leading the nation out of an economic crisis. Obama went on to say, "Now, the choice we face is not between saving our environment and saving our economy, the choice we face is between prosperity and decline. We can remain the world's leading importer of oil, or we can become the world's leading exporter of clean energy."

It could be argued that from a Middle East perspective this vision threatens the economic well being of the region. After all, the GCC is blessed with an abundance of hydrocarbon resources and a move towards clean energy will threaten future oil revenues.

However, an alternative view would be that the Middle East region, like any other region, must lead the shift to clean energy to ensure that it remains at the center of global energy supply and sustains economic growth and social development.

Private equity and venture capital investors have an important role to play in introducing clean technology in the Gulf and in the process transforming the economy in a way that will ensure continued relevance of the GCC in the post-hydrocarbon world.

Fortunately there is evidence that policymakers in the Gulf have already accepted the challenge. The Abu Dhabi government has conceived Masdar. Masdar is stepping up its investment in research projects and similar activities are taking place in the new industrial cities KSA.

The Emerging Markets (EMs) Private Equity Survey is conducted by the Emerging Markets Private Equity Association on an annual basis. The survey researches the investment patterns, likes and dislikes of Limited Partners, representing North America (47%), Europe (41%) and Rest of the World (12%), for investment flows into the Emerging Markets.

The data shows that LPs believe that EMs will remain attractive over the medium term with China, Brazil and India ranked in order of priority as the most attractive destinations for private equity investments. The data is supported by the latest growth rate forecasts by the IMF for these economies averaging 4.5% for 2009 as against a growth forecast of 3.3% for all EMs. LPs are expected to increase their exposure to EMs during the next couple of years based on forecast growth and strong fundamentals.

The survey highlights that low levels of debt and robust underlying growth of EMs during recent years has increased investor return expectations from EM PE portfolios as against Global PE portfolios. The survey shows one-third of LPs without EM exposure to begin investment over the next two years. However, increased return expectations from existing portfolios, coupled with medium-term growth forecasts, for EMs has affected the perceived riskiness of EMs.

EMs will continue to remain attractive over the next 12 months as the global economy comes out of the financial crisis. The Middle East is part of the EMs and is expected to emerge as a strong contender for the limited pool of LP funds that will be invested in EMs. However, with only 1 PE deal over US$10 million for Q1'09 the market looks bleak with little hope of recovery till year end '09. However a bounce back in private equity activity is expected as early as Q1 '10.
  
Source: EMPEA Survey 2009

HSBC monitors business confidence in the GCC region with its Business Confidence Index. The quarterly index polls executives and professionals from across the GCC region and is a good barometer of business attitudes. 

The latest index, out in March 2009, indicates a worsening of business confidence, albeit at a decreasing rate. The index, which had fallen from 92 in Q3’08 to 70 in Q4’08, fell marginally to 69.7 in Q1’09. The worst-hit was UAE, where the index fell to 58 while the business community in Saudi Arabia and Bahrain continued to show a moderate level of confidence, with respective indices hovering in the 80s. 

The data shows that while two-thirds of respondents see the economic downturn lasting for more than a year, a few ‘green shoots’ are also visible: 42% of those polled think their organization has performed better quarter on quarter, as opposed to only 25% who think the quarter has been worse than the previous one. 

Interestingly, a sectoral cross-section shows that executives in the financial sector (along with consumer goods) show the highest level of optimism, with 40% optimistic about meeting their annual targets. Is merely ‘irrational exuberance’ or has government intervention started to restore confidence in the financial sector?

Source: http://www.hsbc.ae/1/2/ALL_SITE_PAGES/about-hsbc/business-confidence-index

The AIM market has seen a dramatic change of fortune as the global financial crisis has unfolded since 2008.In the last year the AIM index dropped almost 70% and in the process wiping £50bn-£60bn of the total market cap of AIM listed companies. The Financial Times recently reported that there is now a growing move towards delisting which is a controversial issue.

It is understandable that the management teams and strategic shareholders of AIM companies are trying to optimize their businesses by cutting costs in difficult times and focusing management resource on value creation rather than regulatory issues.

Understandably the London Stock Exchange is these days busy highlighting that the rules and regulations of AIM are not particularly onerous and that there are negative consequences of delisting which should be kept in mind when evaluating the "going private" option.

Many business professionals in the City of London are preparing for a flurry of activity in taking AIM companies private. In all this there will be a major role for private equity to satisfy both management and institutional shareholders by offering to take out institutional shareholdings, offer new growth capital for the business and a new reward structure if management performs well. There is a real opportunity for new investors to acquire substantial shareholdings in attractive companies at reduced prices. Existing investors are eager to exit before companies delist and management refocuses on creating upside under a different framework.

AIM companies will increasingly spend more time with such private equity investors who are focused on the SME market and see the opportunity to consolidate and grow companies after acquiring them at significant discounts.

Link to Original Article: http://www.ft.com/AIM_Article

Private Equity is well positioned in these difficult times to capitalize on lower valuations and provide much needed liquidity when funding is scarce but growth still anticipated. This is according to the 2008 annual report by Gulf Venture Capital Association (GCVA) which covers private equity and venture capital in the Middle East.

Last year fundraising reached $6.4 billion having grown from $2.9 billion in 2005, or the equivalent of 30% CAGR.
The investment environment is cautious with the number of deals and total transaction size decreasing by 22% and 31% respectively. This should not come as a surprise when valuations have plummeted and investors are still trying to call the bottom of the crisis.

Private equity investments in 2008 focused on healthcare, transport and power and utilities. In 2009 the focus is shifting to defensive sectors including social infrastructure, healthcare, education, food and energy.

Exit options are limited after the meltdown of equity markets in the region, so PE fund managers will need to spend more time working with their portfolio entities to enable growth and ensure adequate access to capital. The involvement will be more operational when leverage has dried up and exit opportunities limited.

The PE industry in the Middle East will continue to mature as it passes through its first major downturn.

Source: Private Equity and Venture Capital in the Middle East – Annual Report 2008