Articles and opinion
According to the MENA Private Equity Annual report, the commitment period of 75 funds targeting the MENA region between 2005 and 2008 will mostly have expired by the end of 2012. This means that a number of managers will need to begin fund raising next year.
Whilst there is plenty of interest in the MENA region amongst overseas investors who recognise the potential for growth, this is coupled with uncertainty and lack of confidence due to poor understanding of the culture, performance and risks.
Rosalyn Breedy, of Breedy Henderson Solicitors, highlights that the family-based culture of the MENA region may be better understood by family offices than institutional investors, and this is a market that MENA fund managers should seek to cultivate.
However, in order to capitalise upon this interest Breedy urges MENA fund managers to work together with other professionals to improve the quality and quantity of information available to European family office investors.
With a strong family business culture in the MENA region, company owners are understandably not keen to sell controlling stakes in their business, which can be unattractive to certain groups of investors. However, most family office investors understand this and they may appreciate the opportunity to have access to regional family business contacts and involvement.
Access to exit has proven difficult in the MENA region. According to the Gulf Venture Capital Association of 218 investments made by regional PE funds since 2004, only 14 had reached exit by 2009. Since the financial crisis, it has been difficult for sellers to achieve the valuations which they had been hoping for.
Compared to institutional investors, where the typical five-to-seven year investment time frame for private equity investment may no longer be appropriate, family offices take a longer term approach. The family office may even be able to contribute their experiences of succession and divestment of operating businesses. In fact, there could be a mutually beneficial relationship for both parties, which fund managers could leverage to secure opportunities thereby increasing deal flow.
In September 2012, the Deloitte Private Equity Confidence Survey reported a bounce back in confidence amongst regional fund managers and a more positive look for the long term prospects for private equity in the MENA region. The main focus remains in education, healthcare and oil and gas services but also a growing demand for consumer retail and food.
However, risk is not well understood, partly because of the diversity of political, economic and cultural profiles across the region. Fund managers, and their professional bodies need to clearly articulate and put into perspective the specific risks faced by the region, for example using the independent OECD data.
Following the Arab Spring, and more recent conflicts, political risk is clearly a concern that is been on the minds of external investors. However, political risk is very country specific as can be seen from the performance of the Gulf Co-operation Council countries and those countries offering stable environments need to make this clear.
Volatility in certain countries has made it difficult for fund managers to make revenue assumptions for the future. To underpin their assumptions and provide confidence to investors, fund managers should incorporate substantive research from independent bodies on the political situations of the individual MENA countries as part of their sales presentation. Investors are aware that there is no return without risk. Indeed, they face differing political risks in their own home markets. The provision of reliable independent facts and figures will enable them to appraise the investment opportunity adequately.
Trade associations and professional advisers, both outside and within the MENA region, need to work together to develop creative solutions. The old western models cannot simply be copied, but a few lessons can be learned. For example, MENA funds could learn much from the approach of the offshore jurisdictions, whose representatives regularly visit the European financial capitals to articulate their key sales messages, connect parties, and develop creative approaches to structuring funds, deals and exits.
16th November 2012 .