Private equity has failed to flourish in the Middle East and North Africa in recent years. A range of issues are to blame, including the lack of a financial eco-system that could help deals to be executed, the small size of markets in the region and the immaturity of many businesses. But the future looks brighter, with a range of events on the horizon that could provide a boost to the industry, such as the potential upgrading of Qatar and the UAE to emerging market status, and heavy investment in industries that could provide future opportunities. MENA Fund Review spoke to Stephen Mezias, professor of entrepreneurship, Insead and Firas Nasir, co-head of Carlyle MENA about the future of private equity in the region
RECENT YEARS have been a tough for private equity in the MENA region. Opportunities have been few and investors have been hard to come by.
But that situation looks set to change with a range of positive factors that could increase opportunities for managers in the medium term. And there is little doubt that in the long term private equity deals will become more abundant.
At present the region is a mixture of markets mature or large enough to produce deals and those that are not. There is a plethora of private equity opportunities in Turkey, according to Stephen Mezias, professor of entrepreneurship, Insead.
“I think what sets Turkey apart from the rest of the region is the capability of Turkish domestic firms, and I don’t mean private equity firms. I mean Turkish firms acting as economic agents, manufacturing, providing services; they’ve been engaging in lots of acquisitions of one another, this has produced lots of service firms with capabilities on the ground in terms of management, IT systems, accounting and created the legal framework for acquisitions. Having these in place makes private equity that much easier.”
These services, born out of market maturity, mean private equity investors already have, on the ground, a range of service providers that understand how to make an acquisition happen in terms of integrating IT systems, managing organizational changes, creating the legal framework for ownership and eventual sale.
Other countries that have provided private equity opportunities recently include the UAE, Saudi Arabia and Egypt, according to Firas Nasir, co-head of Carlyle MENA.
Saudi Arabia is more mature than other markets in the region, and has a strong industrial base and scale, because of its size and population.
“Saudi Arabia does not have as large of a population as Egypt or Turkey but it has developed a strong industrial base, so there are assets that you can invest in,” he says.
Other markets in the region are interesting, but their size and lack of maturity can be an issue.
“The UAE is special in that it has become a platform for international corporations and for regional companies with a multi-market geographic footprint.” says Nasir.
“These entities are based here because of the ease of doing business and the ability to attract talent. They aren’t necessarily dependent on the UAE as an end-market.”
What is lacking in much of the region is a private equity “ecosystem”, according to Mezias. While issues of foreign ownership and regulations are factors in stifling private equity, it is a shortage of managerial and organizational capabilities on the ground that is the main issue, be believes.
“I think in general the capabilities on the ground need to be built up. If we look at how that happened in Turkey, it was Turkish domestic firms and Turks themselves building their own economy. This allowed private equity to come in and share their knowledge,” he says.
“One of the values private equity brings is managerial capability, teaching firms how to scale, more efficient research and development; but all that requires a certain level of capability on the ground, what in management literature we call absorptive capacity.
“So, it is great that private equity firms have these smart people that know how to do these things, but they need an audience on the ground that is at a certain level in order to be able to succeed. And I think really the problem has been the lack of capability on the ground.”
This lack of an ecosystem has many implications for private equity. It means that there are not many good firms to be acquired and that there is a lack of good deals to be made. It also means there is an immaturity in many companies that have not moved beyond the family firm model. The Turkish market has critically moved further along in the family firm process to the critical third generation where they are often ready to look for outside investors.
“I think a lot of firms in the Gulf and the MENA region just haven’t gotten there yet,” says Mezias.
One of the most attractive industry sectors for private equity managers across the region is consumer goods and services, according to Nasir. This is driven by fast growing populations, heavily weighted towards youth and with large amounts of disposable income.
“There are no personal income taxes in the GCC countries. Individuals in their 20’s and 30’s often continue to reside with their families and have jobs that pay well, so there is significant disposable income. This drives spending on retail, consumer products, casual dining, etc. We believe that these sectors have strong momentum going forward.”
Other interesting sectors include healthcare, which requires significant investment across much of the MENA region, and some areas of manufacturing. It is important though to make sure these companies are not concentrated in one market as this could pose a potential threat if that country was to experience a market slowdown for any reason, political or otherwise.
Tourism has also seen an up-tick in recent years, particularly in Dubai, and could see further advances with the football World Cup coming to Qatar and if social and political stability continues.
There are many positive factors that could help to boost the fortunes of private equity in the coming years. If the political and social situation in Egypt becomes calmer it could be a real engine for private equity across the whole MENA region, according to Mezias.
“If Egypt stabilizes, investors start entering Egypt again and it begins again to follow this path of development that I think it was on before the unrest a little over a year ago, I think that becomes a regional exemplar for people throughout MENA to understand and see this can happen in the Middle East, this can happen in a country that is culturally similar to us. And I think that becomes a way for people to understand what private equity means in this region,” he says.
In the GCC the Arab Spring has had a positive effect on private equity because it has galvanized governments in the region to invest heavily in their economies to redistribute wealth into projects that create jobs and into grants and subsidies aimed at improving healthcare and education.
“In the GCC, you are seeing incredible growth in businesses that are exposed to consumer spending.” says Nasir.
The GCC has also shown itself to be a resilient region in the midst of the financial crisis and the Arab Spring combined. This confidence has had its own effects, including rising tourism in the UAE, partially as a result of tourists choosing it as a destination over other parts of the MENA region that are deemed less safe.
The GCC has benefited tremendously from government fund injections.
“This is going to continue for a number of years because governments are going to realise this is something you cannot really just turn off and because they have the resources to do it with oil prices at $100 a barrel while the break even budget for the GCC economies is about $60 to $70 a barrel. There is a lot of room for them to spend money and also they’ve accumulated significant surpluses over the past few years where oil prices have been. So the war chest is full, income is positive, they have the resources and they’ve certainly recognized the need.”
This of course is not so true of Bahrain, which has suffered from sectarian issues, or other parts of the MENA region, where volatile social and political situations have had a damaging effect on their economies in the short term.
Other positive factors on the horizon include the potential upgrading of Qatar and the UAE to MSCI emerging market status as well as the invitation for Jordan and Morocco to join the GCC.
“One can’t say how likely these are to happen but they would certainly be positive,” says Nasir. “They would help improve the investment climate in both Qatar and the UAE and would certainly revitalize the Jordanian and Moroccan markets.”
So there are a range of factors that should see an increase in private equity opportunities in the medium to long term.
“I would think private equity will continue to improve, but I think there is a real opportunity to jump start that and to start having it grow much more quickly if facilities on the ground start to be improved and that attracts more domestic money,” says Mezias.
The encouraging of managerial talent through educational facilities and visa and immigration initiatives could be a start, he adds.
“I think the long term outlook has got to be pretty good because generally investments in the south and east globally are developing and emerging economies over the next 50 years are going to be far more profitable than investments in the developed world.”
Firas sees the MENA region as holding significant opportunities going forward.
“Right now the world is becoming a crowded place,” he says. “There are thousands of alternative investment firms hunting for investment opportunities in other parts of the world. The unique thing about the GCC is the limited international presence.”
“We are very optimistic about the future prospects of the MENA market. Carlyle will continue to be an active investor with a focus on helping our partners grow their companies and enhance their value. In the future, North Africa will be a tremendous place to do business. Meanwhile, the GCC will continue to be vibrant, with GDP growing at four to five percent over the next several years. I think it is and will continue to be a great place to own companies and we’re pretty positive about it.”