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Abu Dhabi, UAEMonday 17 December 2018

Private equity market in Mena more challenging, but investment opportunities has grown too

Mena demographics provide an attractive landscape for private equity investments, with growing wealth, a large and young population, and the recent economic reforms of certain governments.

Private equity investment in the Middle East has become more challenging, but there are reasons to remain optimistic

When I first landed as a financier in the Middle East, nearly ten years ago, there was much optimism about investment in the region. The Middle East and North Africa public markets were outperforming, and investment banks and private equity companies were springing up overnight. The Dubai International Financial Centre had just launched, political stability was at its peak and private equity players were hungry for Mena investment exposure, as opposed to simply tapping the region as a source of capital.

Ten years later, we face a very different investment environment. Private equity has become tricky, given a backdrop of negative geopolitical headlines, shaky oil prices, reduced government spending and a growing gap between countries with vision and others stuck in cycles of violence and uncertainty.

However, I remain optimistic. The region is expected to be one of the world’s fastest-growing in the next few years, expanding GDP at an annual average of 4.1 per cent.

Mena demographics provide an attractive landscape for private equity investments, with growing wealth, a large and young population, and the recent economic reforms of certain governments.

The Mena region is also at a much earlier stage of evolution than developed markets. Private equity capital raised here over the past 10 years equals just 1 per cent of GDP compared to 11 per cent in the United States, so there is a big upside potential.

There also signs that Mena markets are becoming more mature. In the past few years, a number of private equity-owned companies have been sold at attractive returns on local and international stock exchanges, or through trade sales to strategic buyers. Also, there is a renewed appetite from major international – and internationally backed – private equity companies.

Another important factor making Mena more attractive to invest in is the degree of sophistication in family businesses and among entrepreneurs. I have noticed a marked difference since the days that private equity first started, as Mena family businesses have discovered the value of having private equity investors on board.

Attractive investments can be found, but what about returns?

The prospect of exiting private equity investments through initial public offerings has become more feasible, following a resurgence in the regional IPO market. Mena authorities are taking steps to boost regional and global investor confidence and attract liquidity to the markets, including streamlining IPO rules to encourage businesses to list.

Saudi Arabia, the region’s largest economy with a stock market worth more than US$600 billion (larger than Russia’s and triple that of Turkey), recently announced the opening of its stock market to foreigner investors, which will make it even larger. And the UAE has lowered the percentage of stock that companies must float in an IPO from 55 to 30 per cent, lifting the IPO market.

It is up to us as investors to bring out the best in Mena businesses and show the world how great they can be despite the risks. After all, the US was in a civil war 150 years ago, and Europe was coming out of major world wars 70 years ago. The challenges of the Mena region today will soon be history.

The tremendous growth we are set for in private equity investment in Mena over the next few years can and should act as a force for good, creating value in companies, which will in turn help to reduce unemployment and improve living standards.

Taimoor Labib is the regional head of Mena private equity and the head of global private equity portfolio management at Standard Chartered Bank.

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