Underserved private equity market

The market for investing in privately-held, profitable middle market companies in the Middle East is increasingly underserved by traditional financing sources with no credible alternative from private investors. Funding for corporations in the Middle East has traditionally relied upon founders’ proceeds and borrowings from conventional or Islamic finance institutions. Private sources of capital are essentially finite and banking rules and regulations, including lending limits, may hinder the possibility of an enterprise to rely solely on borrowed funds. Professional private equity firms are scarce and have not yet established a strong foothold in the region thus leaving promising businesses with limited choices to seek expansion capital from equity investors.

Corporate and regulatory sea change

With the erosion of ‘protectionism’ through the passage of Free Trade Agreements with the US, and the European Partnership Agreement, and with monopolies waning due to accession to WTO, future opportunities will lie in those businesses that have genuine competitive advantages through superior management skills, quality products or services, regional footprint and no specific reliance on legal or regulatory protections. Such opportunities lie in private equity investments and promise above average returns if properly structured in terms of capital injection, focused expansion strategy and aggressive marketing in anticipation of realizing full value through a well-timed exit sales at premium.

Revival of Capital Markets

A recent wave of privatizations has swept the GCC markets starting in 2002. This phenomenon has contributed to the development of better regulated and highly capitalized Arab stock markets. The GCC governments have recently liberalized key sectors from banking, to telecom and from utilities, to petrochems. These privatizations have taken the form of public offerings on the local stock exchanges. This has triggered a wave of domestic and regional investments into local enterprises and converted a significant amount of national savings into locally deployed capital. As a result, the regional capital markets have become the primary means of monetizing investments in portfolio companies via exit sales.

Liquidity pool

There is a large pool of un-invested private capital in the GCC markets in particular, and in the Middle East in general, that is seeking more and more ‘on shore’ investment opportunities as opposed to outbound flows of capital into foreign markets. One of the means of channeling this excess wealth is to direct it towards selected portfolio companies with a potential for above average growth both domestically and regionally. Such investments can and do offer –on a medium term basis- superior returns via capital gains on exit sales. The high level of liquidity in the GCC is evidenced by the current capitalization levels of the leading stock markets, the real estate boom and the sustainable upward tilt in oil prices. After a short-lived period of exuberance, the regional markets have now corrected to more rational valuation levels and the search for value investments is intensifying. Sophisticated regional investors with significant capital constantly seek opportunities to invest in portfolio companies that will undergo within 3 to 5 years a public offering, or a private placement or be sold in a trade sale.