Middle Eastern sovereign wealth funds are using merger and acquisitions (M&A) to scale into new verticals and build local champions, Bain & Company said in its fifth annual Global Mergers & Acquisitions report.

The move will also strengthen partnerships, invest in the future and bolster the region, the report added.

Regional M&A activity rose nearly 39% in 2022, largely fueled by government-owned sovereign wealth funds. Combined, sovereign wealth funds and corporations represented 84% of deals, with private equity investors doing relatively few deals.

“With a strong economy buoyed by high oil prices, the Middle East is well positioned to rely on M&A to further advance the region’s long-term push to expand beyond hydrocarbons as well as globalise its companies,” the report noted.

“These are good times for the local economy, with expected regional GDP growth of 6.5% (7.6% in Saudi Arabia), the highest it’s been in more than a decade. The Middle East’s sovereign wealth funds are growing, too, and with a new government mandate, they have become a treasure chest for much of the M&A activity.”

The report cited Saudi Arabia’s Public Investment Fund (PIF) investing $1.3 billion in four Egyptian companies in August 2022, including Abu Qir Fertilizers and Alexandria Container and Cargo Handling.

On the other hand, private equity activity is limited in the region and has dropped by 36% in the first 10 months of 2022. However, there are some signs of reviving interest from firms preparing for IPOs, which are booming.

Corporations are buying companies or forming partnerships to consolidate local markets in strategic sectors, such as the deal between Saudi British Bank and HSBC Saudi Arabia or the Etihad-Air Arabia joint venture.

Meanwhile, regional companies are expanding internationally through cross-border M&A or overseas investments, Bain & Company said, citing Abu Dhabi’s FAB merged its Egyptian operations with Bank Audi Egypt, creating one of Egypt’s largest banks, as an example.

“In the years ahead, we expect more international companies will explore the cross-border possibilities of partnering with sovereign wealth funds and local authorities to create new sectors through joint ventures,” Bain & Company added.

(Editing by Seban Scaria seban.scaria@lseg.com)