Sunday 14 October 2012 saw the return of SuperReturn Middle East billed as the strongest ever line-up of regional investors and international fund managers. The event certainly witnessed an increase in attendees and the prevailing mood was one of cautious optimism, a significant improvement on the 2011 gathering.
The conference confirmed market perceptions that the key MENA markets for investment opportunities are Egypt, Saudi Arabia and Turkey.
Despite the Arab Spring and the political turmoil, fund managers remain buoyant about Egypt, which is attracting interest from both local and global fund managers alike, and the development finance institutions. One prominent example is Citadel Capital's announcement that on the eve of the presidential elections they had closed a USD 3.7 billion package to construct a greenfield petroleum refining project in Egypt. The availability of deal pipeline was echoed by Capital Trust Group, which stated that since the start of the revolution they had made two acquisitions in Egypt and were about to complete a third.
All very positive news for the Egyptian private equity industry, which had previously lost out heavily following the Tahrir Square uprising. The mood of the Egyptian private equity industry was summed up by Stephen Murphy of Citadel Capital who stated that they "were encouraged by the recent Egyptian government ministerial level messages concerning partnership with, and the importance of, the private sector to the government's plans to revive the economy and reach its growth target of 7% GDP growth rate".
Flocking to the Kingdom
In the GCC, Saudi Arabia continues to dominate the investment landscape and fund managers continue to flock to the kingdom both for raising capital and for investment opportunities. The kingdom isn't the easiest place to do business and fund managers relayed some of the challenges which continue to dominate, such as: dealings with the regulator, enforcing contracts, finding the right local talent to comply with Saudisation targets, the perception by some family businesses of the private equity industry being a cash wallet service provider as opposed to a partner, and the perennial problem of owners not wanting to give up control.
In overcoming some of these challenges, experienced private equity managers stressed the importance of focusing on partnerships with local investors and managers, building trust and demonstrating the real value add of private equity.
Wael Khattab of Alkhabeer Capital stated that the path to success lay in private equity firms becoming creative on deal structures and post-acquisition planning. Others, including Carlyle's Firas Nasir, cited positive recent experiences of dealings with the CMA and SAGIA, with regulatory approvals for some recent transactions being granted within four to eight days.
With the continued liquidity of the Tadawul, and the revamping of the courts system with the opening up of arbitration centers, Saudi Arabia will continue to see an inflow of private equity capital whether it be in the form of funds deploying capital or local investors engaging in direct investments.
Fairly Nascent Interest in Turkey
Turkey's private equity industry, akin to the MENA private equity industry, is fairly nascent and prior to the Arab Spring, the number of fund managers targeting Turkey for deal flows was primarily limited to local Turkish fund managers and a few limited international players. Egypt's revolutionary fallout resulted in Turkey's windfall and un-deployed MENA dry powder quickly navigated to Turkey.
Fund managers remain optimistic about Turkey's attraction as an investment destination, evidenced by the fact that Turkey currently has 40 to 50 private equity players comprising local fund managers, regional fund managers and international fund managers. Whilst the market has become saturated with fund managers, it continues to remain a market that has not been deeply penetrated. Also, whilst deals have been done, fund managers continue to complain of pricing issues.
The consumer sector in Turkey has seen the most private equity activity which has resulted in some businesses having overinflated valuations with unrealistic multiples, often including a high control premium. As one fund manager commented: "Turkey has lots of right deals but a lot of wrong prices; but deals are being done."
As with the GCC, relationships and understanding the local markets and cultural considerations are fundamental to successfully navigating the Turkish market and the local fund managers are well placed to seize on the opportunities. In the words of Memet Yazici of TRPE Capital following the recent PEI private equity forum in Istanbul, these gatherings highlight "the continuing demand for participation in Turkish private equity funds with a differentiated strategy".
MENA and international fund managers, without a deep local presence, are at a natural disadvantage and some fund managers have proceeded with co-investing in deals with local fund managers or placing their trust in local advisory companies and investment banks to source the right deals. The attraction of Turkey will continue.
What is clear from the conference is that there is strong continuing interest in the three jurisdictions with new fund managers and private equity players coming to the fore. Their failure or success may well depend on how well they are able to differentiate their investment strategy, product offering, or deal structuring from their peers and how adept they are at adapting to the changing face of the MENA private equity landscape.
To be continued in the November edition of Zawya Private Equity Insight. Bilkis Ismail will discuss the changing face of the MENA private equity landscape.Bilkis Ismail is employed as counsel by SJ Berwin (MENA) LLP and is part of the international funds team. She advises on the structuring and formation of private funds including Shariah-compliant funds and co-investment schemes.
Related article: Looking West: Globalizing Arab startups
The article was part of Zawya's Private Equity Monthly Insight, October 2012 issue.
Zawya 2012
