July 2010

'Private equity fundraising in H1'2010 is already equal to fundraising in FY2009. This would suggest that private equity activity is expected to gradually increase after two turbulent years for the regional industry' said Mr. Nasser Saidi from Hawkamah during the launch of the GVCA Annual Report 2009.

The launch event was suitably understated with most presentations focusing on the medium term consequences of the financial crisis and the future direction of the industry. The report includes a survey of the 25 leading GPs in the region and the results show c.72% of respondents expecting the economic situation to improve.

The report highlights the following reasons for fewer transactions in 2009 as compared to previous years:

· Non-availability of acquisition finance

· Valuation expectations of sellers continued to be at the pre-crisis level

· Fund managers focusing management resources on deep dive evaluation of portfolio entities

If you would like a copy of the report or wish to discuss its contents please contact us at info@hbgholdings.com

Access to capital is unlikely to be a problem for private equity firms in the Middle East as the region is flush with liquidity and regional GDP is set to grow 3.5% in 2010 according to a report by Insead.

The report suggests that even if investment activity were to return to the levels of 2005-07 it would still take more than five years to invest available capital. It’s estimated that Middle Eastern private equity firms are sitting on about $11 billion of capital raised before the economic downturn usually referred to as 'dry powder' within the industry.

The survey of industry participants shows that regional PE firms are gearing up to provide more operational support to their portfolio companies, helping with operational activities such as executive recruitment and partnership development.

The dominant trend will continue to be investment strategies focusing across the wider MENA region with a few countries such as Egypt and UAE being most active. Over the last investment cycle Egypt accounted for over 40 per cent of private equity deals in the Arab world followed by UAE at 27 per cent.

There is an expectation that deal activity in Saudi Arabia will feature more prominently as family-run businesses and the SME sector begin to understand the potential benefits of private equity through corporate governance, value add through operational involvement and providing exit routes through capital markets and trade sales.

New opportunities will also emerge as the corporate sector consolidates business portfolios and divests non-strategic assets. Private equity firms will look to pick up assets across a range of sectors focusing on non-cyclical defensive assets.

The market for leveraged buy-outs has dried up forcing private equity firms to focus on growth capital and equity driven transactions according to an article by Robin Wigglesworth in the Financial Times. Wigglesworth believes the scarcity of credit is putting pressure not only on returns but also on the buyout model which is unsustainable and will lead to the disappearance of a substantial number of private equity funds.

On a more positive note, the article highlights that PE does have a positive impact on the performance of portfolio companies and the economy as a whole. PE firms believe their results are driven by a combination of financial and operational re-engineering as well as results-driven incentive schemes.

However, institutional investors have become more selective about their investments and are demanding more transparency, especially in cases where PE investments have not generated exceptional, risk-adjusted returns.

The article puts a spotlight once again on the relationship between GP’s and LP’s. It suggests that a change in the structure of the industry is needed to return to the growth pattern of the early half of the decade. Three key points were highlighted:

1) Managers should move from 'return profiling' to 'investor profiling' as different investors have different preferences.

2) Managers should focus more on operational and strategic improvements.

3) Managers should put more of their personal capital at stake.

The fate of the industry will be visible for all to see over the next decade. Much has been written about the role of private equity in the current financial turmoil and it is time for the industry to step forward and respond proactively to future challenges.

Source: Financial Times

'Unless the world's top oil producer tackles inefficiencies in its energy system, the Kingdom's stockpile of crude for export is in danger of falling by as much as 3m barrels per day by 2028' said Khaled al-Falih, Head of Saudi Aramco.

Mr. Falih's comments are significant given that Gulf States (excluding Qatar) face a shortage of gas at a time when domestic demand for energy is soaring and governments are seeking to diversify their economies. In Saudi alone, domestic demand is expected to rise from 3.4m b/d of oil equivalent in 2009 to approximately 8.3m b/d in 2028 – this translates into an increase of almost 250 per cent.

There is a glimmer of hope as Mr. Falih suggested demand could be halved by efficiency improvements provided hard decisions are taken. Such steps would include tackling subsidies that cost billions of dollars each year and foster a culture of waste.

Governments across the region continue to invest heavily to expand crude production capacity. But if solutions are not found, increased capacity will be consumed domestically rather than increase export potential. The irony is that the Middle East sits on 40 per cent of the World's proven gas reserves, a relatively clean source of energy but largely ignored by successive governments.

Oil officials in Saudi Arabia have privately raised concerns about efforts to lure energy-intensive industries such as steel factories and aluminum smelters to the Kingdom. They fear that foreign companies will benefit from cheap power and export a basic material with little advantage for the state. Mr. Falih said growth in energy requirements was not matched by a rise in gross domestic product; something he said was "receiving government's urgent attention".

How quickly will governments across the region mobilize to leverage gas resources? Only last month ConocoPhillips withdrew from a joint venture to develop Abu Dhabi's Shah sour gas field. It seems the road to increasing domestic energy supply will be long and bumpy.

Source: Financial Times

Middle Eastern investors are likely to put far more money to work in emerging markets than in Europe, Japan or North America over the next three to five years, according to a recent article in the Financial Times.

A survey of more than 200 Gulf investors, ranging from sovereign wealth funds to advisers in retail banks, found 82 per cent planned to hold emerging market investments, while just 30 per cent wanted exposure to North America, 14 per cent to Europe and 8 per cent to Japan.

The survey found more than a third of institutional investors had a time horizon of 12 months or less and 12 per cent looked beyond five years, making the region “more short term” than most parts of the world. Saudi and Bahraini investors were found to be the most conservative, with a strong preference for local equities and a dislike of hedge funds, while those in Kuwait and the UAE favored global equities.

There is clearly growing demand for emerging market equities. This will likely impact global asset allocation as major investors seek to diversify from the West to the East.

Source: Financial Times