Apr 22 2012
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Private equity companies set sights on Saudi Arabia
Saudi Arabia's ranking in "Doing Business" published by World Bank significantly improved from 67th in 2004 to 12th in 2012.
Keeping in mind the current economic scenario, private equity money is focusing on profitable companies with strong potential for growth. Very few private equity firms are considering green field projects.
Private equity is now looking to provide growth capital with little or no exit opportunity for the current owners. This is evidenced by the fact that around 11 percent of the total funds raised in 2006-2008 were for growth capital companied to 50 percent in 2009 to 2011.
The general sentiment of the market players is that there is surplus PE capital available for investment but limited attractive opportunities. However, the number of available opportunities seems to be increasing, Islam Al Bayaa, Partner, Corporate Finance Saudi Arabia, KMPG.
For existing portfolio companies, PE firms are spending the majority of their time on improving the operations, strategic planning and business development. However, exits are proving to be problematic as the market is still finding it difficult to accept the valuations that the PE firms acquired companies at during the peak of the market cycle.
The report noted key challenges faced by PE firms which are looking to invest in Saudi Arabia. Saudi Arabia is the biggest economy in the MENA region with a GDP of $588 billion and a population base of 28 million.
High oil prices and a sharp increase in Saudi Arabia's crude output allowed the country to expand its foreign assets to nearly $296 billion by the end of 2011. The current account surplus went up to 24.5 percent of GDP whereas total external debt went down to 18 percent of GDP (the lowest level in the last five years).
The government has been supporting the economy with expansionary budgets since 2003. The 2012 budget, which is the highest ever, focused spending on the defense, education and healthcare sectors.
Going forward, private investment growth will also be stimulated by the significant number of large projects planned including the economic cities and expanding rail network.
Establishing inroads into family businesses and making them understand the value that private equity brings is a challenge. In addition, convincing multiple family owners to sell a stake in their prized family jewel is not straight forward. In times of need, family businesses first turn to close friends and family members to meet short-term cash needs rather than approaching private equity, he said.
Family-owned businesses, with high emotional attachment, tend to be over valued resulting in either prolonged negotiations or failure to agree a price acceptable to both sides.
The price gap between a buyer and seller has widened following the financial crisis. It is taking longer for sellers to realize that the old market multiples during the pea of the market cannot be achieved in the current market conditions. However, the recent rally in the stock market, with stock prices increasing by 17 percent since the beginning of 2012, should have a positive impact on reducing the price gap.
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