Sunday, Oct 17, 2010

By Nour Malas

Of ZAWYA DOW JONES

ABU DHABI (Zawya Dow Jones)--Some of the world's largest sovereign wealth funds and well-to-do families in the oil-rich Gulf states have emerged as fundraising competitors to private equity firms in the Middle East, but they could also help expand the market by replacing dried-up bank capital, industry executives said Sunday.

"I would say some of the sovereign wealth funds do compete with private equity in the region," Stephen Murphy, managing director of institutional fundraising at Cairo-based Citadel Capital, told the Super Return Middle East LP summit in Abu Dhabi.

"About 60% of capital in the region comes from the region, and that's mainly the family offices," Murphy said.

Of the top five investments in the region over the past few years, excluding sovereign wealth fund interest in real estate, Mubadala Development Co.--an Abu Dhabi government investment firm chaired by the emirate's crown prince--sealed three deals, Murphy said in a presentation.

Between 2003 and 2007, Mubadala invested in Emirates Aluminium Co., CELF Investment Advisors Limited--both in the United Arab Emirates--and the Hadjret Ennous Independent Power Co. in Algeria, according to the presentation.

"Do I think it's a threat? It's an ecosystem," Murphy later said in an interview. "Direct investing is definitely a Gulf phenomenon," he said, with its long history of savvy trading and industrial families.

Co-investing, or helping direct family or sovereign money into less familiar markets, are emerging trends, Murphy said. "They put money with PE firms for markets they don't know that well."

Market participants differ widely on the exact amount of cash that has been raised so far this year by private equity.

Citadel's Murphy, citing data from the Emerging Markets Private Equity Association, said private equity firms raised about $790 million across the Middle East in the first half of 2010.

Meanwhile the Gulf Venture Capital Association, or GVCA, said in a July report that PE firms in the Middle East and North Africa raised $1.25 billion in funds in just the first quarter of this year, more than in the whole of 2009.

Murphy said Sunday there was about $7 billion to $8 billion in "dry powder" in the region, or committed capital that hasn't yet been invested--compared to a widely-referenced figure of $10 billion or more.

FUNDING SOURCE

Family offices as direct investors are also key sources of financing, replacing acquisition financing from banks that still aren't lending for deals, other executives said.

"I don't think they're competitors at all--I think they're actually helping supplement bank debt," Catherine Weir, the London-based head of the global family office group at Citi Private Bank, told Zawya Dow Jones.

"I think it's going to help the market expand," she added. Citi expects family office investments to increase globally.

"There's a very interesting trend developing for co-investment," Weir said.

Though the Middle East's young consumer populations and massive infrastructure spending programs are ripe for private equity, the investing "universe" is small and regional laws hold back international players from deploying their capital in the region.

"You need a bigger sample size to get comfortable with the market place...and that's a reason it gets largely overlooked," Citadel's Murphy said.

The region remains "a very conservative market" for acquisition financing, he added. "The banks in the region are full of cash, they're making large margins on the cash, and they don't feel like taking huge risks on it," Boyle said.

"Not many fund managers see the MENA region as a destination for capital," said Mark O'Hare, managing director at Preqin, a research firm focused on alternative assets. "They see it as a source of capital."

U.S.-based Northwestern Mutual Capital, the private asset investment arm of The Northwestern Mutual Life Insurance Co. that manages over $29 billion in assets, doesn't currently have the resources or expertise to invest in the Middle East given plentiful opportunities in the U.S. or Europe closer to its base, its director of private equity funds Mark Boyle told the summit.

"We probably see the region as more a source of capital than a place to deploy capital," Boyle said. "If we were to invest in this region, my recommendation would be to crawl before we run and to use an advisor."

-By Nour Malas, Dow Jones Newswires, +97150 2890223; nour.malas@dowjones.com

Copyright (c) 2010 Dow Jones & Co.

(END) Dow Jones Newswires

17-10-10 1129GMT