Private equity wave forecast for Mideast

Private equity wave forecast for Mideast

LONDON: The Middle East is set to enjoy a surge in private equity investment as Western markets continue to be squeezed by the global credit crunch, according to a report published on Wednesday. UK financial consultant Deloitte predicts strong growth on the back of the large availability of capital and says an increasing number of funds are expected to target the region, with particular focus on the Gulf Cooperation Council (GCC) states and Egypt.

Deloitte's upbeat news comes just days after Egypt's Weather Investments, which has a controlling stake in Orascom Telecom, announced the sale of 10 percent of its shares for around $1.5 billion to a group of US private equity firms led by Apax Partners, Madison Dearborn Partners and TA Associates.

The report is the latest bullish assessment of the Middle East's financial sector. Earlier this month Standard & Poors (S&P) gave what in the current global financial crisis amounts to a vote of confidence in Middle East equity markets. In its report the rating agency noted that the region's markets "have been resilient" amid the current market turmoil.

Meanwhile, Deloitte points to what it describes as a "perfect storm situation" of high levels of liquidity due to high oil prices and the increasing sophistication of the market in the region - including improved regulation and the desire of people to invest more in their home markets.

Deloitte predicts the hotspots for the coming year will predictably be the states of the GCC, along with Egypt, the only Middle East country combining scale with a history of industrialization. But Deloitte also flags up Algeria, Libya and Sudan as emerging markets, which Deloitte says are very much like GCC nations 30 or 40 years ago with "natural resources and scope for investment."

The good news is largely a reflection of the abundance of capital swirling around the region, courtesy of the seemingly unending upward climb of oil prices. But S&P noted that the scarcity of investment opportunities is also a significant factor in the performance of the region's markets. And there of course is the rub. For while private equity is desperately seeking homes for its investment bucks, there is a currently lot of cash chasing a very small number of investment opportunities in the Middle East.

Chris Ward, Deloitte's global head of corporate finance agreed supply and demand is a problem.

"Confidence levels are high for long-term growth prospects in the MENA [Middle East and North Africa] region and there is a growing awareness of private equity. But more needs to be done to raise the profile of the industry which currently has more capital to deploy than investment opportunities," he said.

There is also the issue of still restrictive foreign ownership legislation in the region, which, while changing, remains an obstacle to much investment. The key for Western private equity funds, as ever, and as Deloitte notes, will be for them to partner with local groups.

The report notes that many regional family businesses are now more familiar with private equity and are more open to talking to private equity investors. It adds that the rise in initial public offerings in the region also offers opportunities for private equity investment because many companies are likely to take on a partner when they go public that can guide them through the process.

Deloitte believes this will pave the way for Western private equity groups to make inroads into the market here. Timothy Mahapatra, managing partner for transaction services with Deloitte said: "Whilst domestic players are expected to be most active within the MENA region in the next 12 months, we are seeing a rising number of international private equity firms looking towards the region as a new and exciting area, rich in growth opportunities in what is still a relatively untapped market, to deploy capital. The attractiveness of the region from an investor perspective cannot be underestimated, with an economic climate ripe for conducting business in."

That sounds fine, but as Deloitte's report makes clear, private equity funds are primarily interested in energy, real estate and financial services sectors, all of which still continue to have restrictions on overseas investment in most Middle East states.

And while a recent report by consultant group KPMG estimated that more than 200 privatizations valued at over $1 trillion are in the pipeline in the next 10 years, the reality, as the Deloitte report notes, is that the region is unlikely to see kind the multi-billion dollar private equity deals common in American and Europe but will instead have to be content with deals of between $100 million and $1 billion.

By Michael Glackin