Private equity funds in the Middle East face the threat of closure as returns stagnate and raising cash from investors remains tough.
Economic trends are buffeting private equity funds around the world. The financial crisis and other factors "are reshuffling the cards in our industry", Antoine Drean, the founder and chief executive of the global fund-raising company Triago, said in a report. Triago has offices in Dubai.
The uncertain future for private equity in the region is likely to be at the top of the agenda at the SuperReturn Middle East conference, a gathering of leading figures from regional and international buyout firms, starting today in Abu Dhabi.
Private equity is a form of investing where companies raise funds to buy stakes in or take over private companies, aiming for strong returns when they sell off by listing the companies on stock exchanges or offloading them on other companies and funds.
The industry got off to a rapid start because of easy fund-raising in the boom in global markets between 2003 and 2007, when more than 100 funds are estimated to have been established in the region.
But after the financial crisis, companies that raised billions of dollars in the good times found funding tight, leading to what insiders say will be attrition, as companies without the track record to raise new money fail to show returns.
"[The rapid growth] was out of proportion with how well the economies in the region were equipped to provide a fertile ground for private equity," a private equity executive in Dubai said.
"There is some room and some guys have done very well, but there wasn't enough room for everybody Ö if you fast-forward, there will be fewer firms, most likely with less capital but that's fit for purpose for this environment."
Richard Clarke, a managing director at Deloitte Corporate Finance in Dubai, said closures were more likely than consolidations because joining forces would do nothing to address the fundamental problem of funding shortages.
"The strong will survive," Mr Clarke said. "It might not be consolidation but there will be some reduction in the number of [private equity funds]."
But insiders say there are at least a few glimmers of hope. Raising new money looks to be a major hurdle but many funds still have unspent money collected before the crisis.
Those companies are making investments, albeit more cautiously than before, and the valuation gap - the difference between sellers' minimum asking prices and those at which private equity funds are ready to buy - is narrowing.
Deloitte's annual survey of private equity executives in the MENA region found many funds expected an upturn in activity next year.
Respondents predicted activity would be strongest in the healthcare, energy, infrastructure, education and retail sectors and that Turkey, Saudi Arabia and Egypt would soak up most investments.
About 12 per cent of those surveyed said they expected prices for stakes in companies to rise this year, while 26 per cent said they expected them to fall. Last year 58 per cent said they expected a drop.
Confidence is also growing about returns and the viability of listing companies on stock exchanges. About 41 per cent of respondents to Deloitte's survey said they expected initial public offerings to be a primary exit route for private equity companies' investments, up from 23 per cent last year.
A quarter of respondents said they expected returns to increase this year, compared with none last year.
"Not only have valuation gaps narrowed but we now have some visibility on how bad it's going to get," the private equity executive said.
"In 2009, nobody had any idea what was going on. The sad reality was we had no rudder, no compass, nothing, and no one was daring to do a thing, because who knew what you were buying into?
"We may not have bottomed out but we have a sense of how bad things can get."