Abu Dhabi, 12 October 2009 - "With more than half of the assets under management in regional Private Equity (PE) companies still un-invested, a limited number of deal flows and an overly-cautious capital, post-crisis survival will be challenging to many," according to Dr Karim El Solh, Chief Executive Officer of Gulf CapitalGulf Capital, a leading GCC Private Equity firms.

"However, the sector continues to grow in the GCC despite the current difficult economic climate. In fact, the fundamentals that contributed to its growth are as valid today as they were a couple years ago," he confirms.

"Many funds that adopted strategies that were only successful in an environment of stellar growth will not be able to survive in the downturn. Hence, the crisis will shake out the industry and reduce the number of players slowly over time. For the rest, competition will be tougher than ever," Dr Karim boldly states.

Fund Raising

On the fundraising side, only two funds were successfully raised this year, the most notable one being Gulf CapitalGulf Capital's GC Equity Partners II, which raised almost AED1.84 billion (US$500 million) from some of the largest and most prestigious global investors. GC Equity Partners II is the first ever regional private equity fund to derive the majority of its investors (over 60%) from international markets including the USA, Europe and Asia, proving that the Arab region is an attractive investment destination. Fund II investors include some of the most prominent global sovereign wealth funds, pension funds, insurance companies and financial institutions. This

strong traction and level of commitment is a powerful endorsement of the Gulf CapitalGulf Capital private equity franchise and its unique focus on control growth buy-outs.

Deal Activities

He adds that deal activity in 2009 has temporarily dropped in the region. "The number of closed deals by MENA funds in the first 9 months has decreased by almost two-thirds, to 12 deals from 34 for the same period a year ago, and the total announced investments in this period dropped in value by 75% and in number by 65%."

The state of private equity elsewhere was the same. On a global level, private equity investments trickled to a halt, with deal volumes dropping 74% to $180 billion, a four-year low according to Dealogic. In the US, deals worth $62 billion were closed in the first half of 2009, compared to more than $400 billion in the similar period last year, a staggering drop of 85%. With no debt financing available, global private equity firms were not able to consummate target acquisitions as they had done so easily in the past.

Dry Powder

In the region, this means that the leading private equity houses, like Gulf CapitalGulf Capital, have enough dry powder to go after high-class opportunities, but they are all competing in the same defensive sectors and geographies. It is estimated that around US$11 to US$13 billion of assets under management by end of 2008 are still not invested. That is about 55% to 65% of the total US$21 billion raised to date.

With so much dry powder left, regional private equity firms are under considerable pressure to close transactions and deploy the considerable amounts raised; otherwise they will be forced eventually to return the capital to their limited partners in the funds.

In the West, the private equity industry has come to a virtual halt due to lack of acquisition financing, which was the key ingredient to fund transactions in the past. Typically a PE firm in the West would historically put minimal equity of 10% to 20% in an acquisition, funding the rest with corporate debt provided by eager banks chasing fees and higher interest income.

"Financial engineering rather than true value enhancement was the name of the game," explains Dr El Solh. "This business model is viable in boom times when debt is plenty and cheap but is broke and unsustainable in today's environment where debt is scarce and very expensive. This explains the virtual halt in activities in the Western private equity industry," he adds.

Global and regional liquidity crisis: The Middle East scene?

The story of regional PE scene is quite different. The impact of the liquidity crisis on PE firms in the Arab region was minimal. The reason, as Gulf CapitalGulf Capital's CEO clarifies, lies in their business model.

"Regional private equity funds never leveraged their deals in the first place and their main business model relied more on private to public multiples arbitrage and, selectively, operational improvements rather than financial engineering to deliver returns." Their challenges are different. Dr Karim El Solh explains that PE is becoming more selective in terms of sectors and control.

Regional deal sourcing: Where to invest?

In the Middle East, private equity investments flowed primarily to the region's three largest economies: Saudi Arabia, the UAE and Egypt. The three countries accounted for 67% of the total number of deals announced year to date, and this is in line with historical trends.

Investments have focused post-crisis on selected defensive sectors or long-term technology bets. Education, healthcare, utilities, telecommunication, and food, traditionally defensive sectors that remain largely unaffected in a downturn, accounted for five of the twelve deals completed to date. Not surprisingly, Oil & Gas has also attracted two of the 12 investments. Venture capital investments in technology and media has increased significantly, and accounted for three of the 12 investments. Traditionally, private equity in the region has shied away from venture capital deals.

"We have observed that many PE firms have now moved to the business strategy adopted by Gulf CapitalGulf Capital since its inception, mainly the control buyout and value creation model. The majority of transactions by value in the region, year to date, are now control buyouts. Investment strategies like pre-IPO plays seeking minority stakes are losing ground."

"First-generation" investment strategies focused on acquiring numerous minority pre-IPO stakes are losing appeal with investors, for two principal reasons: 1) with the continued weakness in regional stock markets and the long lock-up periods on founders post-IPO, the pre-IPO investment 'bet' and the desired post-IPO share price 'pop' are no longer a viable and reliable option to deliver returns; and 2) investors today want private equity firms to be in clear control of their portfolio companies and to drive significant value enhancement and profit growth irrespective of market conditions."

The predominant majority of regional private equity firms were historically focused on acquiring minority stakes and betting on private to public multiples arbitrage to deliver returns. "Similar to the failing financial engineering strategy of Western private equity firms, this investment strategy is no longer viable and will lead to the exit or disappearance of a number of regional private equity firms. The inevitable consolidation of the highly fragmented regional private equity industry has already begun and sadly, the bulk of the 125+ industry players will not be able to raise additional funds and will be confined to the annals of history as "one-fund" wonders," Dr Karim EL Solh predicts. "Only a select few will be able to progress to the next stage and raise additional funds."

He adds: "Regional and global private equity investors are clearly interested in only one "next-generation" investment strategy: control buy-outs focused on operational improvements and true value enhancements."

Gulf CapitalGulf Capital's 'value creation' business model has been successfully implemented through post-acquisition programs to help achieve the defined targets at the outset. As a result, the Firm's investments have not only continued to prosper, but have also delivered substantial growth. This comes despite the tough economic environment over the past 12 months. Portfolio companies in Fund II achieved a compound annual growth rate (CAGR) of nearly 40% over the past two years.

The Gulf CapitalGulf Capital Business Model: Control Growth Buy-Outs

Gulf CapitalGulf Capital's unique investment style rests on three important pillars:

1. Acquiring controlling stakes in regional market-leading companies with strong management;

2. Building value through strong operational focus and profitability enhancement; and

3. Working on a number of potential exits including trade and financial sales to reduce reliance on the volatile and unpredictable regional public markets.

Gulf CapitalGulf Capital's 'value creation' business model has been successfully implemented repeatedly in a number of control acquisitions. The Post-Acquisition program typically focuses on six major initiatives:

1. Ensure that the right high-quality management team is in place from day one and align interests with them through proper results-driven compensation plans;

2. Install proper corporate governance standards and institutionalize the business;

3. Focus on the aggressive growth and expansion of the core business;

4. Drive cost reductions and margin improvements initiatives and focus on cash flow generation enhancements;

5. Use the borrowing power of the company not to leverage and finance its acquisition at entry but to finance its expansion and growth post-acquisition (a clear differentiator from Western private equity firms); and

6. Continuously position and prepare the company for the eventual exit.

As a result of Gulf CapitalGulf Capital's intense focus on cost restructurings, operational improvements and growth, the majority of the Firm's investments have delivered stellar profit growth in the last few years. This comes despite the toughest economic environment seen in generations. As an example, Gulf CapitalGulf Capital's portfolio companies in the latest fund have experienced a compound annual profit growth rate of nearly 40% over the past two years, a clear value enhancement and increase in potential returns to fund investors. These results could not have been achieved without Gulf CapitalGulf Capital's strong control of its portfolio companies and its ability to drive growth. It is this ability to deliver results irrespective of market conditions that appeals to investors and will set the tone for future investment strategies in the Middle East.

-Ends-

About Gulf Capital
Gulf CapitalGulf Capital is a leading alternative asset management firm focused primarily on investing in the GCC region. Incorporated in Abu Dhabi in 2006 as a Private Joint Stock Company, Gulf CapitalGulf Capital was established with a capital base of AED 1.84 billion (USD 330 million) from 300 of the most prestigious institutional and private investors in the Gulf. Over the last three years, Gulf CapitalGulf Capital has rapidly emerged as a leader in the field of private equity investing in the Middle East. Gulf CapitalGulf Capital recently expanded its alternative asset management platform by entering into the real estate development arena in joint-venture with the Related Companies, the most prominent US real estate developer. Gulf CapitalGulf Capital is today one of the largest alternative asset managers in the GCC. For more information about Gulf CapitalGulf Capital please visit www.gulfcapital.com.

Issued by Borouj Consulting on behalf of Gulf CapitalGulf Capital. For more information, please contact: Randa Mazzawi at Tel: +9714 3403005, e-mail: randa@boroujconsulting.com or Riham Osama at Tel: +971 50 5529872, e-mail: riham@boroujconsulting.com.

© Press Release 2009

 

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