Sunday, May 31, 2015

Dubai: The Middle East private equity industry, which went through a period of shake out post-financial crisis is back on its feet and the market has matured in the last five years in terms of deal structures, volumes and values, according to industry practitioners.

“We have seen more maturity in private equity in recent years with sellers better understanding the value these transactions can bring beyond just capital raising. They also view it as a preferable option to IPOs [initial public offerings]. Family-owned businesses, in particular, are looking for ways to grow and expand regionally or internationally and they too are becoming more sophisticated in how they structure and govern their businesses in order to attract private equity investors,” said Alexander Gross, Director at Merrill DataSite, at a debate organised by Institute of Chartered Accountants in England and Wales’ (ICAEW’s) Corporate Finance Faculty in the UAE.

Overall, the panellists agreed that there is more maturity on the sellers’ side and they recognise the value of private equity, more than they did five years ago. Previously, a lot of education was required and this, in turn, led to delays in transactions. While international private equity firms are interested in investing in Middle Eastern businesses, compliance and regulatory aspects remain their biggest concerns. Industry representatives are also concerned about the valuation gap that exists across the regional markets. Live voting by industry executives at the Middle Eastern M & A and Private Equity Forum organised by Mergermarket, an intelligence and news service for mergers and acquisitions, showed 60 per cent of audience members responded saying there is still a huge valuation gap that exists here.

On the subject of financing for deals, respondents indicated that most financing came from local banks, with international institutions playing a comparatively small role. Delegates at the conference said sectors such as retail and health care were areas that have the highest investor interest from private equity investors.

“The increased interest in the Middle East from international private equity players is a hugely positive development in a market reacting to lower oil prices and regional instability. The first quarter dip in M & A transactions is reflective of short-term uncertainty, however overall market sentiment is focused on regional demographics and so remains positive in respect of social infrastructure deals, including retail and hospitality, particularly in the UAE, Saudi Arabia and Egypt,” said Will Seivewright, Partner, Baker & McKenzie.

The industry players agree that the rewards in the Middle Eat private equity industry are high thanks to the availability of wealth, a young and ambitious demographic, business opportunities and infrastructure. They also agree that the risks are equally high due to the unpredictable geopolitical situation. Many say deal-making in the region for foreign players is tough in the context of lack of data, cultural and language challenges.

Investors agree that governance is vital for businesses as it helps to improve performance, strengthens reputation and credibility, and best prepares them to raise capital through the different routes, whether private equity or IPOs.

“Appetite for private equity in the region remains healthy, but there is still room of improvement in certain areas such as audited financial reporting and transparency. Once businesses improve their quality of accounting, financial reporting and corporate governance procedures, they will become even more attractive to overseas private equity firms,” said Michael Armstrong, ICAEW Regional Director for the Middle East, Africa and South Asia.

Ernst & Young’s (EY’s) latest Capital Confidence Barometer for 2015, which gauges CFO confidence in Middle East and North Africa (Mena), found that 56 per cent of Mena respondents expected their company’s deal pipeline to increase in the next 12 months, compared with 44 per cent globally, and that 53 per cent of Mena business are planning relatively larger deals in the coming year, compared to just 31 per cent globally. With 68 per cent of CFOs believing that the number of Mena acquisition opportunities is improving, EY’s findings for the region were mostly optimistic.

“Our Mena Capital Confidence Barometer reveals an interesting picture, with broader confidence among Mena executives over the global outlook for deal-making, but an undercurrent of concern that the challenging regional geopolitical climate may impact conditions for a sustained pickup in investment and M & A. The key question is whether the general level of caution captured by the Barometer will shift as anticipated deal flow rises. Oil price stability, continued government spending and a calming of regional tensions would do much to bring M & A expectations back into equilibrium with the substantial growth opportunities on offer,” said Phil Gandier, Mena Transaction Advisory Services Leader, EY.

By Babu Das Augustine Banking Editor

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