Putting money into MENA
Insight Q3 2015

The global private equity and venture capital asset pool is huge. According to Preqin, assets under management stood at $3.8 trillion as of June 2014. At the end of 2014, dry powder amounted to a whopping $1.2 trillion – up 12% on the year, driving competition for the most attractive investment opportunities and likely to impact returns after a solid year in 2014. While the Middle East and North Africa (MENA) has long served as a source of capital to be tapped, what of the prospects for global private equity investors seeking suitable investments in the region?

We speak with Taimoor Labib of Standard Chartered Private Equity, which has invested approximately $7bn in more than 100 companies across this region, Sub-Saharan Africa and Asia. Mr Labib is a managing director and is the bank's regional head for MENA private equity and also its global head of private equity portfolio management.


How has private equity investment into MENA developed?

When I first landed as a financier in the Middle East, nearly ten years ago, there was much optimism. The MENA public markets were outperforming all other emerging markets. Investment banks and private equity shops were springing up overnight, the Dubai International Financial Centre (DIFC) had just launched, political stability was at its peak and Limited Partnerships were hungry for MENA investment exposure.

Ten years later, we face a very different investment environment. Any private equity firm with an international investment committee looking for MENA exposure will surely face headwinds trying to deploy capital today. Investing in the region has become tricky given a backdrop of negative geopolitical headlines flashing on the cover of mainstream media, shaky oil prices, potentially reduced government spending and a growing gap between countries with vision and others stuck in cycles of violence and uncertainty.

With superabundant global capital seeking out yield, will there be more interest in MENA?

Though we face greater uncertainty from a macro standpoint, I am positive about the prospects of making healthy private equity returns in our markets by ensuring we continue to partner with best-in-class management teams and families. When looking at MENA, one must keep in mind that the region is at a much younger stage of evolution than the developed markets.

MENA has an underpenetrated private equity market with cumulative capital raised over the past ten years equal to 1% of regional GDP, compared with 11% in the United States. Over the past seven or so years, there have been a number of private equity portfolio companies that have been exited at attractive returns on local and international exchanges and through trade sales to strategic buyers. We are also starting to see a growing appetite from major international, and internationally backed, private equity players seeking to capitalize on larger investment opportunities. On the other hand, the level of competition and number of private equity firms chasing deals, with teams on the ground, has decreased substantially over time. Before the global financial crisis, there was an abundance of local capital and teams were created without having true track records and relevant experience. With those teams faltering, competition lessened and as a result the diamond in the rough is easier to find today in MENA than probably any other emerging market.

Furthermore, MENA is expected to demonstrate one of the highest global GDP growth rates over the next few years – a forecast region-wide average of 4.1%. It is home to 5.5% of the world's population and 3.3% of its GDP. The region provides a compelling platform for private equity investments due to the combination of its wealth, a large and young population and the recent efforts of certain governments to implement economic reforms. Population growth across the Middle East is outpacing that of most emerging markets and is expected to rise by 17.3% between 2014 and 2024, amounting to an additional 45 million people.

Does institutional investors' interest in private equity extend to MENA?

From the conversations we have had, international institutional investors would fundamentally like greater MENA exposure given its demographics, but are concerned with managing the political risk and with the lack of transparency local companies have demonstrated historically. Institutional investors would feel more comfortable subscribing to a MENA IPO which has claimed a global investor, such as Standard Chartered Private Equity, as one of its main shareholders – and family businesses now recognize this.

What factors are helping you secure attractive investments?

The largest factor which has assisted us in getting deals completed in MENA over these last few years, and which is making the region more attractive to invest in, is the growing level of sophistication within family businesses and amongst entrepreneurs. I have noticed a marked increase since the days that private equity first started, as family businesses discover the value of having private equity investors on board.

In addition to third-party oversight, private equity allows for some of the less involved family members to monetize their illiquid holdings trapped in their family business. This not only provides liquidity to these shareholders but, post transaction, the remaining shareholders in the structure typically benefit from reduced parties within the shareholding.

A private equity investment in these businesses also serves as a well-vetted pre-IPO benchmark valuation for businesses seeking a public listing. This is particularly true for companies in MENA looking to list on an exchange located in a developed market. Structuring considerations, such as ratchets, earn-outs and drag-along clauses are now a familiar concept to these investees and they no longer view them as hostile. Investees are willing to have a discussion around management shake-ups, particularly in the finance function, one we know best, and lean on their private equity team to act as in-house M&A experts in any roll-up strategy.

How easy is it to monetize the deals that you find?

In the region, the resurgence of the IPO market and the performance of the public markets have made the prospects of exiting private equity investments through IPOs more feasible. Economic and regulatory initiatives are being implemented by relevant authorities in efforts to boost regional and global investor confidence and attract liquidity to the markets. MENA regional authorities have been streamlining IPO rules to encourage businesses to list as a way of becoming more transparent.

In 2014, MENA IPOs amounted to $14.4bn of issuances compared to $9bn and $7.9bn in 2013 and 2012 respectively. Furthermore, these statistics do not include the number of MENA-based companies which have chosen to list outside the region, nor do they take into account the number of companies which have been sold over the past few years, which has also increased substantially. We are finding that strategic players, both regional and international, are becoming increasingly acquisitive and take comfort in acquiring a previously private equity owned asset.

The United Arab Emirates recently lowered the percentage that companies must float in an IPO from 55% to 30%, fostering a healthier IPO market. IPO issuances totalled some $50bn over the six-year period from 2009 to today, and though this is roughly half of the amount of issuances which occurred in the preceding six years, it is still a healthy market which provides liquidity needed to give investors comfort. The trend has pointed to increasing IPO activity year-on-year since 2009.

Saudi Arabia, the region's largest economy, has a $600bn+ stock market – larger than the Russian stock market and triple Turkey's market capitalization. With it now opened up to qualified foreign financial institutions, it is sure to grow ever larger.

What is being done to help private equity in the region mature?

It is up to us, as investors who institutionalize companies for a living, to bring out the best in MENA businesses and show the world how great we can be in spite of the risk. After all, the US was in a civil war 150 years ago, Europe was coming out of major world wars 70 years ago, and the challenges of our region today will be news of the past soon enough.

The tremendous growth to come in MENA private equity can and should act as a force for good in creating value in the companies we invest in, which will ultimately improve our societies and more broadly decrease unemployment and improve living standards. Those who invest in great partners today will be the winners of tomorrow and as we live in these markets we owe it to the next generation to make a difference.





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The global private equity and venture capital asset pool is huge. According to Preqin, assets under management stood at $3.8 trillion as of June 2014. At the end of 2014, dry powder amounted to a whopping $1.2 trillion – up 12% on the year, driving competition for the most attractive investment opportunities and likely to impact returns after a solid year in 2014. While the Middle East and North Africa (MENA) has long served as a source of capital to be tapped, what of the prospects for global private equity investors seeking suitable investments in the region?

We speak with Taimoor Labib of Standard Chartered Private Equity, which has invested approximately $7bn in more than 100 companies across this region, Sub-Saharan Africa and Asia. Mr Labib is a managing director and is the bank's regional head for MENA private equity and also its global head of private equity portfolio management.


How has private equity investment into MENA developed?

When I first landed as a financier in the Middle East, nearly ten years ago, there was much optimism. The MENA public markets were outperforming all other emerging markets. Investment banks and private equity shops were springing up overnight, the Dubai International Financial Centre (DIFC) had just launched, political stability was at its peak and Limited Partnerships were hungry for MENA investment exposure.

Ten years later, we face a very different investment environment. Any private equity firm with an international investment committee looking for MENA exposure will surely face headwinds trying to deploy capital today. Investing in the region has become tricky given a backdrop of negative geopolitical headlines flashing on the cover of mainstream media, shaky oil prices, potentially reduced government spending and a growing gap between countries with vision and others stuck in cycles of violence and uncertainty.

With superabundant global capital seeking out yield, will there be more interest in MENA?

Though we face greater uncertainty from a macro standpoint, I am positive about the prospects of making healthy private equity returns in our markets by ensuring we continue to partner with best-in-class management teams and families. When looking at MENA, one must keep in mind that the region is at a much younger stage of evolution than the developed markets.

MENA has an underpenetrated private equity market with cumulative capital raised over the past ten years equal to 1% of regional GDP, compared with 11% in the United States. Over the past seven or so years, there have been a number of private equity portfolio companies that have been exited at attractive returns on local and international exchanges and through trade sales to strategic buyers. We are also starting to see a growing appetite from major international, and internationally backed, private equity players seeking to capitalize on larger investment opportunities. On the other hand, the level of competition and number of private equity firms chasing deals, with teams on the ground, has decreased substantially over time. Before the global financial crisis, there was an abundance of local capital and teams were created without having true track records and relevant experience. With those teams faltering, competition lessened and as a result the diamond in the rough is easier to find today in MENA than probably any other emerging market.

Furthermore, MENA is expected to demonstrate one of the highest global GDP growth rates over the next few years – a forecast region-wide average of 4.1%. It is home to 5.5% of the world's population and 3.3% of its GDP. The region provides a compelling platform for private equity investments due to the combination of its wealth, a large and young population and the recent efforts of certain governments to implement economic reforms. Population growth across the Middle East is outpacing that of most emerging markets and is expected to rise by 17.3% between 2014 and 2024, amounting to an additional 45 million people.

Does institutional investors' interest in private equity extend to MENA?

From the conversations we have had, international institutional investors would fundamentally like greater MENA exposure given its demographics, but are concerned with managing the political risk and with the lack of transparency local companies have demonstrated historically. Institutional investors would feel more comfortable subscribing to a MENA IPO which has claimed a global investor, such as Standard Chartered Private Equity, as one of its main shareholders – and family businesses now recognize this.

What factors are helping you secure attractive investments?

The largest factor which has assisted us in getting deals completed in MENA over these last few years, and which is making the region more attractive to invest in, is the growing level of sophistication within family businesses and amongst entrepreneurs. I have noticed a marked increase since the days that private equity first started, as family businesses discover the value of having private equity investors on board.

In addition to third-party oversight, private equity allows for some of the less involved family members to monetize their illiquid holdings trapped in their family business. This not only provides liquidity to these shareholders but, post transaction, the remaining shareholders in the structure typically benefit from reduced parties within the shareholding.

A private equity investment in these businesses also serves as a well-vetted pre-IPO benchmark valuation for businesses seeking a public listing. This is particularly true for companies in MENA looking to list on an exchange located in a developed market. Structuring considerations, such as ratchets, earn-outs and drag-along clauses are now a familiar concept to these investees and they no longer view them as hostile. Investees are willing to have a discussion around management shake-ups, particularly in the finance function, one we know best, and lean on their private equity team to act as in-house M&A experts in any roll-up strategy.

How easy is it to monetize the deals that you find?

In the region, the resurgence of the IPO market and the performance of the public markets have made the prospects of exiting private equity investments through IPOs more feasible. Economic and regulatory initiatives are being implemented by relevant authorities in efforts to boost regional and global investor confidence and attract liquidity to the markets. MENA regional authorities have been streamlining IPO rules to encourage businesses to list as a way of becoming more transparent.

In 2014, MENA IPOs amounted to $14.4bn of issuances compared to $9bn and $7.9bn in 2013 and 2012 respectively. Furthermore, these statistics do not include the number of MENA-based companies which have chosen to list outside the region, nor do they take into account the number of companies which have been sold over the past few years, which has also increased substantially. We are finding that strategic players, both regional and international, are becoming increasingly acquisitive and take comfort in acquiring a previously private equity owned asset.

The United Arab Emirates recently lowered the percentage that companies must float in an IPO from 55% to 30%, fostering a healthier IPO market. IPO issuances totalled some $50bn over the six-year period from 2009 to today, and though this is roughly half of the amount of issuances which occurred in the preceding six years, it is still a healthy market which provides liquidity needed to give investors comfort. The trend has pointed to increasing IPO activity year-on-year since 2009.

Saudi Arabia, the region's largest economy, has a $600bn+ stock market – larger than the Russian stock market and triple Turkey's market capitalization. With it now opened up to qualified foreign financial institutions, it is sure to grow ever larger.

What is being done to help private equity in the region mature?

It is up to us, as investors who institutionalize companies for a living, to bring out the best in MENA businesses and show the world how great we can be in spite of the risk. After all, the US was in a civil war 150 years ago, Europe was coming out of major world wars 70 years ago, and the challenges of our region today will be news of the past soon enough.

The tremendous growth to come in MENA private equity can and should act as a force for good in creating value in the companies we invest in, which will ultimately improve our societies and more broadly decrease unemployment and improve living standards. Those who invest in great partners today will be the winners of tomorrow and as we live in these markets we owe it to the next generation to make a difference.




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