TAKING STOCK | Private Equity
GCC Private Equity Funds Closed Amount Raised, USDmn (LHS)
1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
0 2004 2005
market conditions and drop in viable PE targets. GCC private equity, still at a nascent
stage, witnessed stalled growth post 2008, when fund raising became anemic, despite sizeable amount of accumulated dry powder. Deals were stalled as acquisition finance became expensive and difficult to obtain. PE funds in the GCC have a broad
sector focus from healthcare, education, ICT, infrastructure and hard assets like real estate being the preferred investments. Consumer spending driven sectors such as restaurants, consumer goods, retail, ICT, leisure and entertainment sectors also had strong focus. Capital abundance and deal scarcity led to many specialised and sector-focused funds to broaden their mandate and become more diversified. Majority of the Private Equity funds raised in GCC region, fall under the buyout category. Buyout funds usually invest or acquire a controlling interest in mature businesses and turn around with their managerial expertise. Though leveraged buyouts (LBOs) are the most common form of buyouts in the western world, PE funds in GCC have refrained from using leverage and they focus on underlying earnings growth to achieve return for their investors. Private equity funds that are sharia-
compliant are faced with lesser investment opportunities and lack of uniform application of sharia standards
February 2016 |
www.wealth-monitor.com 19 7,078 5,516 12 2,930 7 1,304 2 214 2 329 4 3 1,157 2 95 153 1 17 2006 2007 2008 2009 2010 2011 2012 2013 2014
across the region. Multiple regulatory checks could lead to prolonged delays and increased costs. Other deterrents to Islamic PE include lack of qualified, trained professionals with expertise in investment strategies, legal documentation and sharia standards. Most of the economic activity in the
GCC is concentrated in state-owned enterprises that are rarely privatized. Even in those that are privatized, only minority stakes are sold that are usually reserved for and subscribed by nationals. Family businesses, which constitute the majority of GCC companies, are often reluctant to sell their stakes to private equity firms. Legal and regulatory framework in GCC countries are characterized by stringent ownership restrictions, weak bankruptcy laws and high set-up costs that dampen investor sentiments. But the entry of UAE and Qatar into MSCI Emerging Markets index has led to market reforms across the region, especially in Saudi Arabia, most of which are aimed at improving disclosures and standardizing corporate governance. Close to 80% of the companies in GCC fall under the SME category, which finds it hard to obtain adequate financing from banks due to stringent collateral requirements, including personal guarantees. Rise of private equity would be a boon for most SMEs and startup companies, and could serve as an alternative funding source to these segments.
Industrial Manufacturing 6.6% 8.2% Leisure and Tourism 8.2% Education Real Estate 9.8% 9.8% Food and Beverage 11.5% Information Technology 1,421 12 9
Sector Split of Investments Made
No. of Funds Closed (RHS)
10 12 14 16 18 20
0 2 4 6 8
(by number of transactions), 2014-15
Oil and Gas Media
Consumer Goods Construction
Services Transport
4.9% 3.3%
6.6% Retail
1.6% 1.6% 1.6% 1.6%
11.5% Healthcare 13.1% Financial Services 39 39
Sources: All the charts are from Zawya, Markaz Research
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