How Covid-19 has changed private equity in the UAE

The coronavirus pandemic has caused investors to reassess their portfolios, but there remain opportunities ahead

A trader talks on the phone during the opening of the Dubai stock market June 26, 2016. Image for illustrative purpose

A trader talks on the phone during the opening of the Dubai stock market June 26, 2016. Image for illustrative purpose

REUTERS/Ahmed Jadallah

The global coronavirus pandemic has affected lives and livelihoods in the UAE and beyond.

Private equity funding is no exception. Across the country and the region, the new Covid-19 environment has caused once-done deals to be reopened and those that were underway to put on hold as markets remain volatile.

On the surface, there has been an uptick in total deal size for Q2 with the top five disclosed venture capital (VC) deals amounting to $244 million, as compared to as compared to $173 million in the previous quarter, according to Wamda. The real impact of the coronavirus on private equity will only be known towards the end of the year. Within the current environment, however, as capital eases back into markets and asset valuations recover, there remain significant opportunities amid sectoral challenges.

Let us first consider the challenges. In general, sector insiders report a drop-off in fund raising worldwide as private equity investors have looked to shore up their portfolios by strengthening cornerstone assets first. Secondary deals that were close to being signed in the UAE saw investors walking away in the first half of this year. Although portfolios have largely recovered since, the emotions tied into recent dips remain a strong memory. Funds may therefore be made available more slowly.

Further, with economic activity having come to a standstill during lockdown periods in various feeder markets, lowered or negative returns may have prompted regional investors to rethink their strategies. In combination with declining values, investors may now be witnessing increased PE allocations. The resulting denominator effect has left some buyers more exposed to certain sectors than they might like.

Accordingly, exit values are lower, even as sellers' price expectations remain high in line with pre-coronavirus estimations. These factors amid an uncertain geopolitical and global economic environment could see investors exercise widespread caution.

Opportunities abound

Nevertheless, the long-term outlook favours emerging markets in the Middle East and Africa, thanks largely to their strong fundamentals. A significant cross-economy development potential is supported by a demographic youth bulge - 60 per cent of the region is under the age of 30.

The current scenario could very well offer significant opportunities for investors. The pandemic has enabled a heated market to let off steam, allowing for lower and perhaps more reasonable valuations. Lower P/E ratios are one indication of how current prices may be discounted in terms of future earnings - but the lower asset values serve up tempting prospects for cash-rich investors. Exploiting these could help turbocharge investment returns. Indeed, we are already hearing the buzz about more deal flows, albeit at lower valuations and by way of co-investments as P/E buyers look to hedge their outlay.

As Warren Buffett famously said, be fearful when others are greedy, and greedy only when others are fearful. Current events may provide the perfect moment for investors who have done their homework to take advantage of market dynamics.

Saikat Kumar is the founder and CEO of SKYCAP Investment Management. Views expressed are his own and do not reflect the newspaper's policy.

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