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Middle East PE Analysis
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December 2010 | Print | Email to a friend

Palestine: Open For Business

PE Funds Can Make A Difference Despite A Challenging Environment, writes Rasmiya Masoud, Investment Manager at Siraj.
Historically, small and medium-sized enterprises (SMEs) have undoubtedly played a critical role in economic growth and sustainable development of both advanced and developing markets. Palestine is no exception.

At present, SMEs represent over 95% of business enterprises in Palestine and employ 84% of the private sector workforce, and account for 55% of GDP. Accordingly, Palestinian SMEs constitute a critical backbone of the local economy.

Financing needs of Palestinian SMEs are substantial. It is estimated that at least 66% of Palestinian SMEs are currently in need of financing, most of whom have insufficient collateral to qualify for loans.

The fact that there are few large companies in Palestine presents a golden opportunity for Palestinians to establish their own small businesses. The country is brimming with entrepreneurs who have viable and innovative business ideas. However, long-term political turmoil across the country has had a negative impact on the economy leading to capital depletion in the country, a lack of cash and thus insufficient equity for Palestinians to start or grow their businesses - thus, the need for private equity financing.

Palestinian Statehood and Private Sector Investment
Amidst failed peace negotiations, the Palestinian economy has shown resilience, continuing towards the establishment of an economically viable Palestinian state. According to the International Monetary Fund, the Palestinian economy grew by 9% in the West Bank and 16% in Gaza through the first half of 2010, citing the easing of Israeli restrictions, continued donor aid, and the Palestinian Authority's increased support and revamping of the financial sector as the key drivers.

The Palestine Investment Conference in Bethlehem, now in its second year, is an extension of Prime Minister Dr Salam Fayyad's ambitious plan to build a viable Palestinian state. The biennial conference promotes Palestine as an attractive investment environment with an aim to build sustainable economic development and to move away from a reliance on foreign aid. This year's conference focused on empowering Palestinian SMEs and promoting private sector investment opportunities in Palestine.

Additionally, Palestinian laws are very investor-friendly and encouraging of direct international investments. The Palestinian Investment Promotion Agency (PIPA), provides guarantees to all investors and investments operating in Palestine, granting incentives to investors, and providing the appropriate environment for encouraging investment in Palestine.

Kick-Starting the Fund Management Industry
It is important to mention that fund

management is a new phenomenon in Palestine and was virtually non-existent until recently. Coming from a strong fund management background from the US, it's what brought me to Palestine two years ago - to help kick-start the fund management industry in Palestine. It certainly comes with its frustrations and challenges, but the reward of actively witnessing the industry bloom so quickly and successfully is what keeps me.

Massar International - one of the fastest growing investment firms in Palestine - established the first and only fund management firm in Palestine, the Siraj Fund Management Company (SFMC). Along with the merits, however, comes the obligation and pressure to succeed in order to pave the road for others to follow. By launching its first PE fund, the Siraj Palestine Fund I, SFMC has not only jump-started the fund management industry in Palestine but is helping create the momentum and sustainability, which are necessary for the long-term success of structured investments in Palestine. This serves as a compliment to the already healthy and active Palestinian stock market.

Private Equity as First Asset Class
Globally, the PE industry has recently been facing tough times across most MENA markets. However, in recent years, PE in Jordan, Egypt and Palestine has become a fast-growing industry. In Palestine, specifically, it has just started and is off to a great start.

During the last year alone, three Palestinian PE Funds have emerged. Among them is a $25 million fund investing in export-oriented IT companies in Palestine. The ICT sector is thriving in Palestine, with a growth of approximately 45% in the number of ICT firms over the past three years. In 2010, the ICT sector's contribution to the country's GDP is estimated at between 5-8% with a current market size of more than $300 million.

Earlier this year, a $50 million fund was launched. The fund is part of a $700 million regional SME investment-platform. The fund does not have a sector focus, but is expected to make a majority of its investments in the technology, media and telecom sectors.

Scheduled to close in January 2011, the Siraj Palestine Fund I is the largest of the three with $80 million to invest in promising companies across a range of sectors and stages of maturity across Palestine, including the cities of Jerusalem, Ramallah, Bethlehem, Hebron, Nablus and Gaza. Although the fund will not have a sector-specific focus, it will invest in companies that promote, grow and/or develop technological advancements and development in Palestine. It's expected that the fund will predominantly invest in a diversified set of industries within the ICT, energy, agriculture, industries, services (healthcare, education, financial), and clean technology sectors, among others.

It is worth mentioning that the PE Funds in Palestine have recognized the need for a complementary technical assistance and/or developmental program that

facilitates the transfer of skills and know-how to the funds' portfolio companies in order to improve their operations and enhance their prospects for growth. Such programs have already been implemented.

At this year's SuperReturn Middle East conference in Abu Dhabi, it was the first time Palestine, through Siraj, was represented and given a platform to present the case for PE in Palestine. It is our hopes that next year, Palestine will constitute a bigger PE presence in the MENA region.

As the PE industry gains popularity in Palestine and continues to mature and grow, so do exit options and potential co-investment opportunities for these funds, providing a track record and spawning an inviting environment where foreign investors - both public and private - can confidently invest in Palestine.

A Vote of Confidence
A diverse group of high-profile investors are already on board the PE bandwagon in Palestine. These include the U.S. Overseas Private Investment Corporation (OPIC), the Soros Economic Development Fund, Qatari Diar and Massar International, in addition to at least one major U.S. pension fund, and they all point to the bright prospects that await the Palestinian economy.

Of course, no one claims that there are no risks associated with investing in Palestine. On the contrary, political risk associated with decades of military occupation and ensuing political instability has plagued the country for years. However, those who invest in Palestine are well aware of these risks but also understand the need for private sector investments. To provide assurance to its many investors, Siraj has implemented a strict set of diversified risk controls in its investment strategy. It’s expected that the other funds will do the same.

Overall, the country offers excellent opportunities for investors including, in particular, a virgin PE market with an abundant deal flow. It also confirms that Palestine is, in fact, open for business.

Though Palestine will not be immune to the global crisis, we expect that the Palestinian economy - as its real estate boom indicates - will be in a much better position to weather the storm.

We are confident that the PE industry will continue to develop and prosper in Palestine. It will also play an increasingly pivotal role in the development of the private sector by acting as a catalyst for job creation and economic growth in Palestine.

Significant Developments since November 2010

CI Capital's Karim Helal on emerging markets' private equity allure

"The whole world is talking about emerging markets and how they are the linchpin for the world's recovery," Karim Helal, group CEO of CI Capital Holding, the investment banking arm of Commercial International Bank... Read Full Story

TVM Capital MENA Brings Nobel Prize Winning IVF Facility to Middle East

Adia eyes £3.5bn E.ON assets

Abraaj Capital To Ink 5 SME Deals, Close $500M Fund In 1H 2011

Bahrain's Investcorp To Invest $500M Over Next 2 Yrs; Eyes Mena, Turkey

Abu Dhabi's Mubadala To Invest $100M In Verno Capital's Managed Funds

Shuaa to fully deploy its SR2bn fund by end-2011

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