x Abu Dhabi, UAEWednesday 17 January 2018

Private equity alive and kicking in the Gulf

With credit tightening and investment banks disappearing, the buzzword these days is de-leveraging.

There are some who say the global financial crisis is the death knell for private equity. Private equity has long been associated with using lots of other people's money: from clients, yes, but even more borrowed from lenders - what investors call leverage. With credit tightening and investment banks disappearing, though, the buzzword these days is de-leveraging. And so the barbarians now seem to be at private equity's gate.

But not here in the Gulf. Oil revenues are still pouring in, economies are still booming and private equity still stands to play a crucial role in channelling wealth into businesses that can help meet growing demand from the region's middle class and create the jobs needed by its growing population. "You have governments who increasingly recognise the importance of the role of the private sector. And increasingly, at different paces, they're opening up their economies," says Mustafa Abdel-Wadood, the managing director at Abraaj Capital. "We are seen as a sort of a catalyst to that kind of activity."

At just 38, Mr Abdel-Wadood's career has tracked the transformation. After earning his MBA at Georgetown University, he spent eight years at an Egyptian family-run company, Orascom Group, helping it launch Orascom Telecom in 1998. He started his own investment bank in 2000, sold it three years later and moved on to become the chief executive of the Egyptian investment bank EFG-Hermes's operations in Dubai before joining Abraaj in 2006.

Abraaj now stands at the forefront of what Mr Abdel-Wadood says is a seachange in the way the region's oil wealth is being distributed. In the past, he says, "people saw this as a region that provided liquidity to the outside world". These days, more of that money is staying within the region or being invested across North Africa, South Asia and the rest of the Middle East. Private equity is facilitating that redistribution. The Gulf Venture Capital Association estimates that there were US$25 billion (Dh91.8bn) in private equity funds invested in the Gulf last year, up from roughly $21bn in 2006.

Abraaj accounts for $5bn of that. Last year it invested roughly $800 million across the region as profits grew four-fold. It returned more than $1bn to its shareholders in countries, including Bahrain, Jordan, Kuwait, Qatar, Saudi Arabia, the UAE and the US. Abraaj is planning to raise another $4bn by the end of this year. The firm's investments reflect what Mr Abdel-Wadood sees as the prime beneficiaries of the region's growth: a Saudi Arabian pharmaceutical distributor, an Egyptian medical lab, a Turkish hospital operator. It owns a stake in the Gulf's biggest private school operator and is the third-largest shareholder in the budget carrier Air Arabia. Last month, Pakistan revealed that Abraaj was buying into the company that provides power to its biggest city, Karachi. Abraaj is also reportedly looking into buying Pakistani farmland.

Mr Abdel-Wadood will not discuss deals still in the works, although he admits that Abraaj considers agribusiness a hot area for investment: last year it paid $1.41bn for the Egyptian Fertilizers Company, the region's biggest-ever private equity deal. "You look at what's happening in terms of agriculture and food prices, you look at the need to improve yields, you look at what [is] a natural beneficiary of that, fertiliser," he says. "Is this region competitive? Absolutely, because the main feedstock is gas, which is relatively cheap and abundant in this part of the world."

Abraaj's investments depend on two conditions Mr Abdel-Wadood says are likely to survive the latest turmoil. The first is oil revenues. "Even if oil prices were to drop dramatically, the surpluses are tremendous," he says. "That liquidity is pretty much here to stay for our lifetimes." The second is stability. While the Middle East is likely to remain a political hot spot, Mr Abdel-Wadood says, politics has taken a back seat to business. What separates this oil boom from the previous one is globalisation. Satellite television and cheaper travel have opened the eyes of the region's citizens to the world. "You can no longer isolate yourself and your stakeholders are becoming more demanding," he says. As a result, governments in the region are opening up their economies to trade and investment, and creating opportunities. "It's ultimately going to be about growing their economies and providing jobs."

With more open markets has come more foreign investment, and with it foreign financial expertise that is helping to educate investors, making them more sophisticated and demanding about corporate governance and transparency. For the region's companies, this represents a challenge and an opportunity. Companies historically resisted taking on new shareholders for fear of losing control. But many now realise that ceding some control is a crucial way to raise money for expansion and import the expertise needed to compete. "Initially it's who you know," Mr Abdel-Wadood says. "But in the long run, it's about what you know."

Mr Abdel-Wadood can rattle off examples of companies that have made the shift, many of them with investment from Abraaj: his alma mater, Orascom, as well as the Dubai-based logistics company Aramex. He also cites Zain, the Kuwaiti cellular operator that has since expanded to become one of the biggest operators in the Middle East and sub-Saharan Africa. The key to private equity's survival in this region, he says, is that it doesn't share its western counterpart's reliance on leverage. Abraaj uses leverage, Mr Abdel-Wadood says, but much, much less. While western firms often borrow double, triple or even more of the cash they invest, Abraaj's deal to buy Egyptian Fertilizers borrowed only 60 per cent of the purchase price, he says.

With the region growing so fast, Abraaj can earn big returns by concentrating on expanding profits, rather than piling on debt. "If you're only adding value through leverage and the debt markets shut down, you're effectively toast," Mr Abdel-Wadood says. If anything, his concern is that businesses in this part of the world may have had it too good and may not be prepared for the coming global downturn. "It's easy to get things right in good times. It's a lot more challenging to navigate in bad times."