GCC outbound investments fall Mena’s investment inflows down 12 per cent

Saudi Arabia is the only country to grow its outbound investments by a notable 350 per cent from $1.45 billion in 2008 to $6.5 billion in 2009. 

GCC’s outbound investments dropped 40 per cent while other Middle East and North African countries suffered from steep decline in inbound investments.

According to World Bank estimates, the Mena region saw a 12 per cent decline in foreign direct investment (FDI) inflows last year. And the GCC, which has had a history of substantial FDI outflows in the past, saw more than 40 per cent dive in 2009.

While there are signs of economic recovery, going back to boom levels in 2007-2008 is small, the World Bank said.

Mena’s FDI established an average growth of 32 percent between 2000 and 2005 and reached $35.3 billion, or 3.7 percent of GDP in 2008, with Egypt, Lebanon, Iran and Jordan as key recipients.

However, the Dubai financial crisis disrupted these flows. Outbound FDI from the GCC halved from 2007 levels by 2009. As a result, developing Mena countries such as Egypt, Lebanon, Iran, Jordan, Algeria, Tunisia and Morocco saw 12 per cent decrease in FDI inflows to $28.3 billion in 2010 from $32 billion in 2009.

Meanwhile, FDI outflows from the GCC in 2009 registered $20.3 billion, a 40.6 per cent decrease from $34.3 billion a year earlier. Outflows peaked in 2007 with $26 billion. There are no available estimates for 2010.

FDI is a foreign investment that establishes a lasting interest in or effective management control over an enterprise. It can include buying shares of an enterprise in another country, reinvesting earnings of a foreign- owned enterprise in the country where it is located, and parent firms extending loans to their foreign affiliates.

International Monetary Fund (IMF) guidelines consider an investment to be a foreign direct investment if it accounts for at least 10 percent of the foreign firm's voting stock of shares.

However, many countries set a higher threshold because 10 percent is often not enough to establish effective management control of a company or demonstrate an investor's lasting interest.

World Bank data shows the UAE recorded the steepest decline in FDI outflow (83 per cent) from $15.8 in 2008 to $2.7 billion in 2009. Qatar suffered a 37 per cent drop from $6 billion to $3.8 billion. Kuwait saw a modest slow down from $8.8 billion to $8.7 billion while Oman and Bahrain saw significant slump in FDI outflow.

Saudi Arabia is the only country to grow its outbound investments by a notable 350 per cent from $1.45 billion in 2008 to $6.5 billion in 2009.

“Developments among GCC economies suggest that the likelihood of a quick return to the halcyon days of 2007-08 is small, though signs of economic recovery and financial improvement are emerging,” the report said.

The World Bank said flows may nonetheless begin to take place across developing countries of the region, as trade and production agreements among Middle East and North Africa countries, and between Middle East and North Africa and the European Union begin to gather momentum.

“Even at reduced levels, FDI continues to dominate overall financial flows to the region,” it said.

Looking forward, the World Bank anticipates a resumption of growth in FDI over the period through 2012, with a continued—albeit more moderate— pickup in portfolio equity and private debt.

In terms of private capital flows, the developing Middle East and North Africa region saw a modest growth of 1.2 per cent, or $320 million to $25.8 billion during 2010. This in contrast with the sharp pick-up in flows into East and South Asia.

On an upside note, World Bank expects the region’s net private inflows - which comprise equity and debt - to grow 26 per cent next year to $32.4 billion.

Moderate gains in portfolio equity and medium-term debt flows were almost wholly offset by the decline in FDI noted for 2010. Equity flows increased for a second year in succession favoring the bourses of Egypt and the UAE.

“For the UAE market, improvements were centered in fall 2010 as the Dubai World restructuring was settled and banking results improved,” the report said.

Medium and long-term private debt flows increased by $6.7 billion, with issuance of $2.3 billion in international bonds and the undertaking of syndicated bank borrowing of some $2.7 billion.

Net flows from official creditors increased by $620 million to $2.9 billion in the year. But the decline in FDI by 15 percent to $20.8 billion dominates the flow of capital to the region.

The World Bank expects FDI growth to resume over the period through 2012, with moderate but continued pickup in portfolio equity and private debt.

by Sam Smith

Goldman sees $80 trillion emerging nation stock market by 2030

The market value of emerging market stocks may surge more than five fold to $80 trillion in two decades, overtaking developed nations, as China becomes the world’s largest stock market, Goldman Sachs Group Inc said.

Faster economic expansion and growing capital markets may lift emerging nations’ share of world equity capitalization to 55 percent by 2030 from 31 percent on Wednesday, Goldman strategists led by Timothy Moe wrote in a research report.

Institutional investors in developed nations will probably buy a net $4 trillion of emerging market equities, lifting holdings to 18 percent of their total portfolios from 6 percent now, Moe wrote.

In the report on Monday, Moe wrote: “The primary drivers are rapid economic growth and the maturing of equity markets that are at earlier stages of development."

“Developed market institutional asset management pools will need to increase their holdings of emerging market equities.”

The MSCI Emerging Markets Index has more than doubled since the beginning of 2000 even as the MSCI World Index of advanced nation shares dropped about 21 percent.

Emerging economies will expand 6.4 percent as a group next year, compared with 2.4 percent in developed nations, according to forecasts by International Monetary Fund.

Prospects for faster growth spurred investors to add money to emerging market equity funds for a 14th straight week even as they pulled $6.87 billion from global stock funds, research firm EPFR Global said on Wednesday.

The 21 country MSCI emerging gauge has gained 1.2 percent this year, while the MSCI World index declined 4.2 percent amid concern that stagnant jobs growth and spending cuts by indebted governments will hamper economic recoveries in the US and Europe.

The emerging gauge is valued at 14.2 times reported profits, compared with the MSCI World, which trades for 15.1 times earnings, according to data compiled by Bloomberg.

The MSCI China Index of Hong Kong traded shares has slipped 3.4 percent this year and the Shanghai Composite Index, comprised of stocks traded mostly by mainland Chinese investors, has dropped 18 percent.

The market value of Chinese shares may climb to $41 trillion by 2030 from $5 trillion on Wednesday, topping the $34 trillion projection for the US, Moe wrote.

Moe wrote: “Emerging equity market capitalization could increase substantially."

Moe also added: “Investors, financial intermediaries and developed-market corporates will have significant opportunities as well as challenges from these shifts in the equity landscape.”

Sovereign Wealth Funds and the Global Economic Crisis

Sovereign Wealth Funds and the Global Economic Crisis

The global economic crisis has left many sophisticated institutional investors reeling. Most are yet to fully recover even though markets have clawed back some of their early losses. Worst hit are the hedge funds with exposure to financials and commodities. For instance, New York based Ospraie Fund that was worth some $2.8 billion at the start of August 2008 wound up later in the year as its holdings took a massive hit due to falling commodity prices. London based RAB Capital, which invests in small cap mining stocks, had to seek protection from redemptions due to falling commodity prices and consequent poor performance. Assets under management by RAB have reportedly fallen by 74% in 2008.

It is not only regular hedge funds that have crash landed but also mighty Sovereign Wealth Funds (SWFs). The Monitor Group, a US based consulting firm, estimates SWFs to have lost $57.2 billion on the publicly disclosed investments of $125.7 billion they have made since 2006. According to a working paper on Gulf Cooperation Council (GCC) SWFs published by The Council on Foreign Relations (Brad Setser and Rachel Ziemba), SWFs in the GCC have lost as much as $350 billion in 2008. SWFs elsewhere haven’t faired any better.

SWFs are returning to the market again and are making big investments. Some of these investments are in strategically important assets to their sponsors; i.e. their respective governments. SWFs have made a wide range of investments covering a multitude of sectors such as banks, real estate, energy and technology.

With their massive wealth and sprawling investments, SWFs have marked the rise of state capitalism. Owned directly by a sovereign government and managed independently of other state financial institutions, SWFs were created to manage the country’s foreign exchange reserves. Some high profile SWF investments include $3 billion in Blackstone Private Equity Firm by the Chinese Investment Corporation (CIC), $75 billion in Citigroup by Abu Dhabi Investment Authority (ADIA) and $800 million investment by Mudabala Investment Company from Abu Dhabi (Mudabala).


The advent of SWFs was viewed by many with considerable hostility and even prompted Mr. Larry Summers, the former US Treasury Secretary, to express concerns over potential threats by SWFs. Mr Summers’ concerns stem from the differences between investments by governments through SWFs and those by other conventional institutions as the former may have different motives. Mr Henry Paulson, another former US Treasury, urged the International Monetary Fund (IMF) to develop “best practices” to govern SWFs investments to, “demonstrate to critics that SWFs can be constructive, responsible participants in the international financial system.”

Those were the heady days of 2007-2008, when markets were defying gravity and oil was reaching new highs. And most of the SWFs are actually from oil rich nations. With government coffers brimming with foreign reserves on the back of the oil windfall, SWFs such as ADIA, Kuwait Investment Authority (KIA) and Qatar Investment Authority (QIA) were making inroads into markets in the West with investments in large corporations, banks and private equity firms.

Given the influence SWFs can exert and the magnitude of funds under their management (estimated to be $3.22 trillion), an analysis of SWFs and their investment strategies would prove to be appropriate. So what are the implications of these losses to the investment world? What have been the responses by SWFs? How will they change the investment strategy of these funds? What would be their role in a post financial crisis environment?


We interviewed investment officials and policy makers from several prominent SWFs to determine the answers to the questions above. In a series of articles we will be publishing views, findings and conclusions, of course within the boundaries of confidentiality.


One notable observation was that SWFs have started reducing their investment time horizons in response to market uncertainties and declines in reserve transfers. This appears to be the case particularly for SWFs established by oil producing countries. Views on expected returns have changed, leading to the postponement of some investments. It is fair to say that SWFs will not be making aggressive investments such as those in 2007 – 2008, unless of course the assets are at fire sale prices.

SWFs are also moving towards the establishment of stabilisation funds, to insulate their respective economies from falling commodity prices and export earnings. They are also expected to provide stability in fiscal revenues and protect against Dutch disease. Russia’s Stabilisation fund is a classic example which prevented the emergence of Dutch disease in the country.

SWFs as stabilisation funds are also expected to make investments in ailing domestic companies, as indicated by Kazakhstan’s sovereign wealth fund Samruk-Kazyna. The fund is seeking to buy gold, copper and iron assets which would benefit companies such as London listed KazakhGold Group (LSE: KZG), Kazakhmys (LSE: KAZ), Eurasian Natural Resources Corporation (LSE: ENRC) and Toronto listed Alhambra Corporation (TSX: ALH). Similar investments in local companies are expected by Singapore’s Temasek, CIC and Brazil’s SWF.

According to the International Monetary Fund (IMF) some SWFs are seeking indirect hedges in response to falling commodity prices. This would change the asset allocation strategy in the SWF portfolios resulting in overweighting assets that are negatively correlated with the price of the commodity that funds them. For example, though not exactly a SWF, Gazprom’s investment in Airbus Industries provides a natural hedge against falling energy prices. This may lead to SWFs seeking investments in new sectors and new regions as well as different asset classes that they have not invested in before.

This bodes well for sectors such as natural resources, particularly mining, as they currently have a relatively low exposure amongst current SWFs. At present, SWFs have the highest exposure to banks and financials, even after the market meltdown, followed by real estate and energy. As SWFs seek to diversify into other sectors, the mining sector emerges as an attractive candidate.

While SWFs have already made investments in the mining sector, it is worthwhile highlighting the latest SWF investment in a mining company. The China Investment Corporation (CIC) invested C$1.75 billion (US$1.5 billion) in Teck Cominco's (TSX: TCK.A and TCK.B, NYSE: TCK) outstanding Class B subordinate voting shares. This acquisition represents approximately 17.2 per cent equity and 6.7 per cent voting interests in the company. Other SWFs may also make similar investments in mining companies with Chinese SWFs however securing the lion share.


SWF investments in the energy sector is expect to be relatively low however, as most of the large SWF sponsoring governments already have an exposure to the sector either through investments already made or naturally through their own economies. SWF investments in oil are therefore expected to come from SWFs from countries that do not have oil resources (such as Korea Investment Corp, Temasek and Government of Singapore Investment Corporation) or from industrial nations such as China and Japan that are heavy energy consumers.

While the objectives of SWFs sponsoring governments cannot be fully ascertained, some display very clear-cut investment aims. For instance, Singapore’s Temasek Holdings acts like a reserve investment corporation seeking to generate returns to its sponsors through investments in diverse industries including energy and resources. Stabilisation funds such as the Kazakhstan National Fund seek to insulate the economy against the price swings of oil, gas and metals, on which the country heavily depends. The Government Pension Fund of Norway seeks to facilitate government savings necessary to meet future public pension expenditures and to support a long-term management of petroleum revenues.

However, concerns by the likes of Mr. Summers and Mr. Paulson are not ill-founded and it is imperative to determine if SWFs can be used as a government policy tool. Sponsoring countries could use the SWF muscle in a protectionist backlash. SWFs such as CIC can not only ensure base metal and energy supplies, they may also use their clout to gain access to greenfield energy and mining projects in places such as Africa.

Governments have so far not used their SWF clout as a policy tool. SWFs such as Temasek, ADIA, KIA and QIA have indeed remained passive partners. In the case of ADIA, Yousef al Otaiba, Abu Dhabi’s director of international affairs, even assured that they have no plans to use investments by ADIA as a foreign policy tool. CIC in its investment in Teck has also assured that they seek to be mere passive investors. One would fervently hope that SWFs would indeed follow similar policies and usher in a more effective system of corporate ownership.

Sources & Acknowledgements:
Sovereign Wealth Fund Institute, International Monetary Fund, International Financial Services London, Council on Foreign Relations, The Economist, Individual Sovereign Wealth Funds, The Monitor Group

SHUAA sees overwhelming investor interest during GCC Investor Conference in London

SHUAA sees overwhelming investor interest during GCC Investor Conference in London

31 May 2009
Dubai - 31 May 2009: SHUAA Capital (ticker symbol: SHUA.DU), the GCC's leading financial services institution, saw significant interest and renewed optimism towards the Gulf region during its two day GCC Investor Conference in London.
Mr Majid Al Ghurair, Chairman, SHUAA Capital commented:

"The conference was a great success and we saw real optimism amongst international investors towards the GCC. This demonstrates the widespread belief amongst investors that regional markets are likely to recover more quickly from the global crisis than many in the developed world. The strength of the GCC economies lies in the vast hydrocarbon reserves and the initiatives governments have taken to modernise, liberalise and regulate their markets and in the programmes to educate their growing populations. As the hosts of this conference, we are proud to be continuing our longstanding tradition of attracting foreign capital to the GCC."

Conference participants included the senior management of 17 leading GCC companies and over 150 international investors who together discussed each company's investment case and equity story during a series of one on one meetings.

H.H. Sheikh Khaled bin Zayed Al Nahyan, Chairman, Bin Zayed Group commented:

"As Dubai 1.0 witnessed a strong focus on developing its hardware, I believe that we now have in place the financial and economic infrastructure to enable Dubai to develop its software, or knowledge infrastructure, that will help it rebound more quickly than other economies. Dubai 2.0 will symbolise an economic model that can compete globally with its state-of-the-art soft and hard infrastructure, cutting edge technology and an entrepreneurial environment that supports creativity and unrestrained flow of capital. Dubai's solid achievements over the last few years enable it to now consolidate its position as it moves ahead with its recovery."

Sanjay Uppal, Chief Financial Officer, Emirates NBD commented:

"The uncertainties posed by the current global economic downturn have necessitated continued, if not increased, engagement with the market and Emirates NBD have maintained an active dialogue with the regional and international investor community throughout the crisis. The SHUAA Capital GCC Investor Conference in London provided an excellent opportunity to continue this dialogue at a time when sentiment is showing signs of improvement and the outlook is starting to become clearer."

Zeina Al Tabari, Chief Corporate Affairs Officer, Drake & Scull International PJSC said:

"We are very pleased to have been given the opportunity by SHUAA Capital to explain our investment case to such a wide range of leading international investors. Importantly, our discussions also focused on the strong fundamentals supporting GCC economies and equity markets which make the region a very attractive destination for foreign investment.'

The conference also saw keynote speeches and panel sessions with regional business leaders and experts including H.H. Sheikh Khaled bin Zayed Al Nahyan, Chairman, Bin Zayed Group, UAE; H.H. Sheikha Hanadi Al Thani, Chairperson, Amwal Investment Co., Qatar; Mr. Abdulrahman Alsufiyani, VP SAGIA Funds Initiative, Regional Development, Saudi Arabia; Mr. Husam Hourani, Managing Partner, Tamimi & Company; Mr. Tom Healy, Chief Executive Officer, Abu Dhabi Stock Exchange; Mr. Abdullah Bin Saleh Al Suweilmi, Chief Executive Officer, Saudi Stock Exchange (Tadawul); and; Mr. Kito de Boer, Director, Middle East North Africa, McKinsey & Company.

-Ends-

About SHUAA Capital psc:
Since 1979, SHUAA Capital has played a prominent role in shaping the financial services landscape of the GCC and will continue to be at the vanguard of regional integration into global financial markets. www.shuaacapital.com

SHUAA Capital psc maintains a leadership position in Investment Banking, Asset Management, Brokerage, Private Equity, Finance, and Research. Headquartered in Dubai, in the United Arab Emirates, SHUAA Capital has a regional presence with offices in Abu Dhabi, Riyadh, Doha, Cairo, Beirut and Istanbul.

Embedded in the dynamic economic environment of the Gulf Cooperation Council (GCC), SHUAA Capital provides a broad range of financial services to corporations, governments, institutional clients, and high net worth individuals.

Euromoney Conference discusses future of financial sector in Saudi Arabia

Euromoney Conference discusses future of financial sector in Saudi Arabia

The Euromoney Conference has completed two days of discussions at the Faisaliah Hotel, Riyadh on the current global financial situation and the effects it is having on different industries in the Saudi Arabian market.

Saudi Arabia: Thursday, May 21 - 2009

The conference was addressed by H.E. Dr. Ibrahim Al-Assaf, Minister of Finance, Kingdom of Saudi Arabia, who said:
'Saudi Arabia has continued to follow an expansionary fiscal policy. The 2009 budget includes a 36% increase in investment spending.'


He added, 'The current expansion of investment expenditure, which covers infrastructure, public services, education and health sectors, will provide great trade and investment opportunities for the private sector both at home and abroad. We expect contracting firms and suppliers to take full advantage of these opportunities.'

The second keynote speech was delivered by H.E. Abdullah Alireza, Minister of Commerce and Industry, Kingdom of Saudi Arabia. In it he spoke about the future vision of the Saudi economy until 2025, focusing on diversification of the sources led by the private sector to provide well-paying job opportunities, high quality education and excellent health care.

'Saudi Arabia has carried out many steps to achieve this goal including increasing sustainable economic and industrial growth, developing the business environment and infrastructure, continuing high rates of spending and supporting the national private sector,' he added.

'This vision sends a clear message to the world that Saudi Arabia will not accept being or being looked at as a fuel station but rather as a laboratory of distinction and as an incubator of innovation and invention. There is no room for reversing this policy,' he stated.

H.E. Dr Mohammed Al-Jasser, Governor, Saudi Arabian Monetary Agency (SAMA), explained the fiscal policy in the Kingdom, 'The Saudi Arabian economy is still exposed to the vagaries of the oil market so that our growth is much more volatile than in the advanced economies which are highly diversified. The result is that we have always used fiscal policy as a powerful counter-cyclical tool to stabilize the growth path.'

Mubarak Al-Khafrah, Chairman, National Industrialisation Company (Tasnee), gave an insight into the view of the global economic crisis from a private sector perspective, 'The Saudi economy has faired better than most economies in the world coping with the financial crisis. We still need a lot of work through co-operation between the public and private sectors to withstand the impact of this crisis while at the same time pushing for our economic growth which is critical for our prosperity.'

Day two was opened with an address from H.E. Dr. Jobarah Al-Suraisry, Minister of Transport, Kingdom of Saudi Arabia who commented, 'Saudi Arabia has not postponed or cancelled any public sector projects. At the beginning of the crisis it was announced that none of the Government’s projects would be affected and the largest ever budget in the Kingdom’s history was immediately put in place. The North-South Rail Project connecting Jordan and Riyadh is on track and will be completed next year. The express train connecting Jeddah to Mecca and Medina has already started and is due for completion in 2012.'

The conference included a series of discussion panels on topics on the global economy, Saudi Arabian macroeconomy and Government finance, the private sector response, equity markets, infrastructure investment, real estate and power and water. Panelists included representatives from both the public and private sector.

Delegates were also able to attend a series of focused workshops during the course of the conference discussing GCC capital markets, strategic alternatives for capital raising, domestic consolidation in the Kingdom, the future of economic diversification and financing regional economic growth through Sukuk.

The Euromoney conference was attended by 1,200 delegates over the course of the two day event.

'The conference has been a great success with many different view points on the current global financial situation and how new models should be created to free the restrictions in the financial markets and improve the availability of finance in the future. We would like to thank all the speakers, delegates and our sponsors for helping to create a very informative and interesting conference,'

concluded Richad Banks, Director, Middle East, Euromoney Conferences.

Middle East Private Equity Raises Record $6.4 Billion in 2008 Press Release

Middle East Private Equity Raises Record $6.4 Billion in 2008
Press Release

Of the $19.6 billion raised since 2000, $11 billion remains available for acquisitions

Middle East private equity fund managers raised a record $6.4 billion in 2008, up more than 10% over 2007 and more than double the amount raised in 2005, according to Gulf Venture Capital Association's (GVCA) 2008 report on Private Equity & Venture Capital in the Middle East, which was released today at the Dubai International Financial Centre.

Large size funds are primarily responsible for this growth, with the average fund size in 2008 being $258 million, compared with $213 million in 2007 and just $177 million in 2006. This trend is driven by the need for more flexibility in structuring deals and the past success of large buyout transactions, according to the 2008 GVCA report, developed in cooperation with KPMG, and Zawya, and supported by Hawkamah - The Institute for Corporate Governance.

Three regional funds have crossed the $1 billion mark, and as the report notes, the current economic downturn may make it more difficult for all but the most established fund managers to secure the successful closure of these larger funds.

Yet, there is also tremendous liquidity among regional funds, which are cash rich with $11 billion in capital under management yet to be deployed. The report notes that this "dry powder", as it is called, gives private equity a strategic opportunity vis-à-vis target companies, given the limited scope of other funding sources available in the current environment. This liquidity results from both an increase in fundraising and a decrease in deals, with the number of private equity investments dropping by 22% between 2007 and 2008, as well as the total investment size, which fell by 31%.

The report found that over the past four years, Egypt, Saudi Arabia and the United Arab Emirates were the largest recipients of private equity funds, at 33%, 15% and 14% respectively. The majority of funds are Middle East and North Africa (MENA) focused, with Turkey sometimes included as part of that region. Regional players are experiencing an increasing request for funds with a mandate that includes MENA, to expand and include South Asia, Southeast Asia and/or Africa.

The sectors of focus for portfolio acquisitions during 2008 were healthcare, transport, power & utilities and construction. Healthcare likely would remain a top recipient of private equity funds in the next few years.

In terms of fund strategies, more and more funds are seeking controlling stakes. While in 2005, only 3% of transactions were control buyouts, by 2008, some 26% of transactions volume and half of transactions values were control buyouts.

The report was optimistic about the future of private equity in the region, noting that as an asset class, it does not have a short-term investment horizon and so is well placed to weather the current crisis.

Imad Ghandour, Chairman of the GVCA Information & Statistics committee, said, "The economic fundamentals of the region remain strong and are supported by aggressive fiscal policies. Governments' reserves will continue to trickle down to the rest of the economy - sustaining corporate profits and public investments. A sober market will offer better valuations, and hence better returns for private equity. Although the increased attention from international players that the region witnessed in 2007 may be disrupted, we expect the disruption to be temporary. As a matter of fact, we expect the robust economic performance of the region to attract additional allocation from international institutional investors over the medium term."

Although fundraising in the region has been strong, when compared with the total value of announced fund sizes, it is clear there have been delays in reaching target sizes. In fact, after excluding one major fundraising, only 16% of the total amount announced in 2008 was actually raised in the same year, compared with 65% in 2005. Roughly half of the funds announced in 2006 have so far been raised, and approximately $11.7 billion of announced funds in 2006-8 have yet to make a close. The report suggests that this is because fund sizes are much larger, as well as recent constraints on liquidity.

While 2008 saw an increase in the total value of sale activity, which reached $3 billion, most of this was due to one major exit of $2.5 billion; excluding this one-off transaction, sale activity decreased by approximately 60%, as did the number of exits, which dropped from 17 in 2007 to 11 in 2008. The report suggests that there will be fewer exits in the current economic climate, as funds won't be able to achieve the returns traditionally targeted and exit options shrink, particularly with the sharp decline in regional IPOs. Trade sales were named as the most likely exit over the next couple years.

Ihsan Jawad, CEO of Zawya and board member of GVCA, said "Private Equity in the region is developing in many ways that are unique in comparison to the developed world. Transparency remains a major barrier that hinders this mode of investment from becoming a strong component in the GCC financial system. More research efforts and collaboration is needed by all practitioners to elevate the current opacity of the private equity market."

Of the 18 private equity fund managers interviewed for the report, most said they were established in the last five years. They expressed an expectation of consolidation in the industry, a decrease in investment, and lower portfolio company growth. This means portfolio companies will be held longer and fund managers will be increasingly active in managing their companies in order to add the maximum value.

These efforts should include corporate governance, according to Dr Nasser Saidi, Director of Hawkamah. "MENA private equity can, and should, play a critical role in diffusing good corporate governance practices across portfolio companies, in terms of board structures, executive compensation better aligned with long term shareholder interest and underlying risk, improved risk management, transparency and disclosure requirements and minority interest protection. This benefits all parties, as empirical evidence shows that investors are willing to pay a premium for companies with good corporate governance. The current global financial crisis has reinforced the view that improved corporate governance practices lead to sustainable growth and value of companies, with a focus on the medium and long-term and away from short-termism. This is why Hawkamah has launched a Private Equity Task Force to develop corporate governance guidelines for private equity firms and portfolio companies in the MENA region."

Elaborating on the role of fund managers toward their portfolio companies given the current environment, Vikas Papriwal, Partner in KPMG's Private Equity and Sovereign Wealth Funds practice, said, "With attractive exit options scarce at present, the focus for many private equity firms is now the workout of their existing portfolio - with operational improvements, debt restructuring and working capital management at the core. Discretionary spending is being restricted, including expansionary capital expenditures, and business plan timelines are being reassessed, as entities look to weather the storm. However, no one doubts that opportunities will exist once we are over the worst."

The GVCA report compiles comprehensive information and statistics about private equity funds and investments across the Middle East, and contains nine articles on current topics in the industry. The 125-page report also provides a detailed survey of 18 private equity fund managers regarding their views looking back at 2008 and ahead to 2009. There also is a special section dedicated to sovereign wealth fund strategies and investments.


About GVCA
Gulf Venture Capital Association ("GVCA") is the non-profit trade and industry association for Venture Capital (VC) and Private Equity (PE) in the Gulf Cooperation Council. GVCA organizes conferences, industry forums, training and workshops. In addition, GVCA periodically publishes information and statistics about the regional activity of VC and PE. GVCA is based in Bahrain.

GCC sates may invest $9tr abroad

Several trends have emerged indicating where a mammoth $5 trillion to $9 trillion in oil revenues in GCC states like Qatar will be invested over the next decade.

In 2002, nearly 85 percent of the Gulf's wealth was invested abroad in financial instruments mostly linked to the US dollar. However, by 2007, this had fallen to 75 percent due to the rising investment within the Gulf region itself.

There will be increased investments onshore in the MENA region and in Asia, a shift in allocation to alternative investments and more direct investment strategies, an increased sophistication and institutionalisation of the Gulf region including the growing importance of corporate governance - a soaring demand for Islamic products and greater importance of Sovereign Wealth Funds (SWFs), according to Investcorp, a Bahrain-based investment products provider with over $15bn of assets under management.

Gary Long, Investcorp President and Chief Operating Officer (COO), speaking at the Harvard Club in New York, said the oil boom will translate into an investable asset pool in excess of $10tn by 2020.

Long, who addressed the Club along with Ramzi AbdelJaber, head of Investcorp's Business Development Unit, emphasised the new and increasing tendency of GCC investors to make local investments.

Increasing investment in the MENA region and Asia had in turn led to an increased demand for alternative investments such as private equity and hedge funds.

This shift in strategy has been driven by the need to invest more aggressively in hard and social infrastructure to cater to fast-growing populations following decades of under-investment and the emergence of more attractive onshore investment opportunities buoyed by the strong regional economic growth.

Fueling these trends are predicted record figures for the region's oil revenues which will far outstrip the region's current GDP of $800bn.

(MENAFN - The Peninsula)

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

$4tr in Middle East Capital Eyes Equity Investments

DUBAI — Led by Abu Dhabi Investment Authority — the world's largest Sovereign Wealth Fund (SWF) with estimated assets of $875 billion — up to $4 trillion capital available for investment from the Middle East is increasingly targeting equity investments around the globe.

According to a global management consulting firm, the region's high private and public sector investment power, bolstered by rising oil revenues and increasing foreign exchanges reserves, is underpinned by SWFs which currently have a combined $3.3 trillion assets under management, up 18 per cent between 2006 and 2007.

With the Middle East based SWFs currently accounting for 50 per cent, global assets under the management of these funds are expected to reach $5 trillion in 2010 and $10 to $ 15 trillion in 2015.

"This dramatic growth is supported by rising oil revenues and by increasing foreign exchanges reserves of some Asian countries. The objectives of these funds are to protect the budget and the economy from excess volatility in exports and / or to diversify from non renewable commodity exports," said A.T. Kearney in its latest report.

"With the rapid growth of assets, SWFs are under growing pressure to invest. They have accomplished a strategic shift in the way the money is being invested," Kearney said. Traditionally, countries turned their surpluses into risk-averse financial assets. China, for example, supported the US consumption economy by buying government bonds. SWF are now favouring equity-type investments to benefit from higher revenues and to gain exposure to strategic companies with more capabilities and know-how in industries that are crucial to their own economies.

"With the world's biggest Sovereign Wealth Fund — the Abu Dhabi Investment Authority (ADIA) — as one example, the UAE is moving towards these private equity-style deals," the report said.

Kuwait Financial Centre (KFC) in a recent research titled "The Golden Portfolio," said in the GCC 36 SWFs hold 131 Gulf-listed companies accounting for 27 per cent of region's market capitalisation valued at $300 billion.

KFC's Head of Research M. R. Raghu, and Sarah Al Khaled, an analyst, pointed out that apart from the big and most quoted names like ADIA or Kuwait Investment Authority (KIA), SWFs also include a variety of government agencies that manage money either directly or indirectly. The categories may include pension funds, ministries, fully owned companies.

The report said SWFs could also be an opportunity for developed countries, when most of their economies are slowing down. "In the short-term, the SWF can help to absorb the liquidity crisis; in the long run, they will be valuable partners for Western companies to back their growth and to finance innovation," said Cyril Garbois, Principal and expert for SWF, A.T. Kearney Dubai. Early this year, SWF from Asia and Middle East injected billions of dollars of new capital into troubled financial institutions and contributed this way to the stability of the whole system.

"Because of this new way to invest, concern about the political purpose and influence of these funds, and developing countries' investors in general, has risen among Western countries. The criticisms raised when Dubai Ports World planned to purchase operating rights to several US ports through the acquisition of P&O, or when the Chinese energy firm CNOOC tried to buy Unocal, are vivid examples. International bodies such as the International Monetary Fund and OECD are working on rules to prevent discrimination against SWF but also to answer to the need of more transparency in their investment processes," the report pointed out.

The rising power of the regional SWF and their private equity oriented investments are also an opportunity for the Middle East economy itself. The study revealed that private equity and SWF investments accelerate the growth of job creations. "More than one million jobs have been created through private equity investments in Europe in the last four years" said Dr. Dirk Buchta, Managing Director, A.T. Kearney Middle East.

"With $4 trillion available in the Middle East for investment and very healthy SWFs, the outlook for economic development in the region is very positive," said Dr. Alexander von Pock, Manager of Financial Services, A.T. Kearney Middle East.

The report shows that companies financed by private equity and SWF grow faster than those traditionally financed. Private equity firms often invest in mid-size companies, mostly former family owned businesses — of which the Middle East has many

By Issac John

There have been no examples of any SWF abuse

While the rest of the world is still split on whether they love or hate sovereign wealth funds, or SWFs, Lehman Brothers last month became the first investment bank to announce a fully fledged division to handle and grow its business from such funds.

Even the International Monetary Fund (IMF) has waxed hot and cold on the role that sovereign funds play or have the capability of playing in the world's financial markets. On the one hand, it has called sovereign wealth funds a stabilising force; on the other, it has demanded more transparency about their business because they have the potential to carry out transactions based on non-commercial motives. The IMF has estimated that deployable assets by these funds will grow to as much as $10 trillion (Dh36.73trn) in the next five years.

This is the universe in which Makram Azar, Lehman's freshly minted Global Head of Sovereign Wealth Funds, will operate. Azar dismisses the hype surrounding sovereign funds saying the headline-grabbing deals of the past six months in Western financial institutions such as Citibank and Merrill Lynch make up a minuscule percentage of SWF activity. The bulk of investments are not in the mergers and acquisitions arena, and therefore not on a newspaper's radar.



How would you classify a sovereign wealth fund? How does it differ from a state-owned investment company?

It does not, necessarily. Different countries have different ways of deploying their wealth. We want to capture the whole universe. So, I'm not focused so much on the name, I'm focused on the client base. Wherever the money comes from the sovereign, I'm there. Lehman was the first mover in this – and I cover Norway to Alaska, not just the Gulf. Some of these institutions do much more than just mergers and acquisitions – but it is the big deals such as Citigroup or Morgan Stanley that grab the headlines. Most of the investments are below the surface, people don't actually see them.

What's your view on the guidelines that the IMF wants sovereign funds to create and follow? How do you respond to fears that investments by these funds may have political undertones?

Up to now, most of these fears have not been well founded. There have not been any examples of an abuse or a deal made by a sovereign fund for the wrong reasons. If you own five per cent of a big bank, what does it really mean? Where is the concealed agenda? I don't see it. I think this has been used a lot for domestic political reasons. The DP World investment in United States' ports [as part of the Dubai-based company's acquisition of Peninsular & Oriental Steamship Company] is a perfect example of this. There was no security threat. DP World is not a sovereign wealth fund but it is a state-controlled company. That said, there are some sensitive sectors and industries that the US in particular may want to protect – more from the Chinese, I think, than from the Gulf. So let's see where it leads in terms of the guidelines.

What do you see happening in future that can ease such fears?

Well, for one thing, the US presidential campaign will soon be over. That's one aspect. And over time, when they see that there has been no abuse or misuse of the funds for any political agenda, the fears will ease off. You build trust in a relationship over time.

What kinds of guidelines do you see coming in?

I think a lot of the guidelines will have to do with transparency and some sort of limits on the amount of control that can be exerted on companies in the West.

Will that make your job easier or harder?

Frankly, I'm neutral on this. It might define more clearly what the sovereign wealth funds can or cannot do, rather than stumbling on an obstacle after the fact, similar to what happened with DP World.

Where do you see the biggest deals happening for you in this arena?

Again, you have the deals that grab the headlines – these are only a small fraction of the pie, which today may be $3.5 trillion. Of this the investments made in the Western institutions were $60-$80 billion – which is nothing. Abu Dhabi Investment Authority, for example, has hundreds of billions of dollars but their headlining deal was Citibank for $7.5bn. The rest of their investments are below the radar, so to speak, for the newspapers. They invest their money every day in the markets – and that's what we're going after, not just the M&A deals. For instance, if they have $100bn to invest they may put 50 per cent in fixed income, 40 per cent in equity, and 10 per cent in more aggressive asset classes spanning hedge funds and private equity etc. We offer all of that. We are not here to just work on the M&A deals.

What is the average internal rate of return that you would have to look at when you get a fund-management mandate from a sovereign wealth fund?

The IRR is not ours, it is theirs. In the monetary markets, it is small return and low risk; 10 to 15 per cent would be in more aggressive investments where the IRR is greater and more than 20 per cent in private equity deals.

Where does it average out?

Well, when you put your money in the bank you get two or 2.5 per cent. You go buy a piece of real estate, you can expect a higher return. That's how they do it. In the more aggressive markets, they can expect an IRR of 10 to 15 per cent. In the less aggressive, it can be single-digit or low double-digits.

Does the competition to get SWF fund-management mandates push investment banks like Lehman to structure specific products with higher average returns?

We work with our existing products. We can create products, but at the end of the day our products channel investments into the areas in which the SWF wants to invest. For example, they may say they want to be present in the Asian markets. We tell them what to invest in and do it for them. An IRR is not something we can guarantee. We show them the returns we have generated over the past five years – we show them our track record.

What slice of the global sovereign fund market are you targeting?

The biggest possible! Lehman is the only investment bank that has created a global division that spans all the products across asset classes. I'm surprised that we are the first to do this as a global co-ordinated effort.

How much of Lehman's business do you see coming from this segment?

An increasing amount. What we are targeting is not a percentage of Lehman's business but a percentage of the SWFs' market – as large a market share as possible.

Sovereign funds are a growing financial force – is it a force for good? Or is it a force that the world should be wary of?

I don't see anything to be wary of.

Do you see them as saviours?

In the past six months they may have looked like saviours. But that's not their objective – which is to make money and get good returns on their investment. They will continue to invest wherever they see the potential to make money. They did not invest in Western financials to be saviours. They invested because they thought the sector had hit bottom and was going to bounce back.

They were wrong.

Yes. Everyone lost money on that call but so did all other investors in the equity markets during that period, including Western ones. But in five to 10 years you will see them making money on that investment.

Does that make sovereign funds more stable investors?

Yes, they do take a long-term view.

Sovereign funds today generate a lot of heated argument. One either loves them or hates them. What's the reality check here?

The world is focusing on $60-$80bn of sovereign investments that have taken place in the past six or seven months in M&A deals. If you look at the total pool of sovereign investible funds – $2-$3trn – that is a minuscule percentage. Something like 90 to 95 per cent of their investing is being done in mundane, everyday things. You can't mystify them based on the small percentage that is in the headlines. Look at Norway. It has half a trillion dollars, but nobody is saying anything bad about them. So, yes, it's a group of different countries, different people, different agendas. We cannot put them all under one blanket. Sovereign wealth funds have more money than hedge funds and private equity combined. They are different from each other. Is China, for example, the same as Saudi Arabia? I don't think so. At the same time, however, if you look at the banking crisis, all of them rushed to invest in Western financials. So there are commonalities as well – in investment philosophies, for instance.

What quantum of sovereign funds does Lehman have the mandate to manage today and how do you see that growing?

Sovereign wealth funds themselves are expected to quadruple in size over the next five years. This will come from oil revenues, commodity prices, trade surpluses – multiple things – anything that comes into the sovereign coffers. We will grow at a similar rate, or higher, as we gain market share.

Do you think the whole move towards transparency and international best practices will hurt the image of sovereign funds in the huge percentage of business they do in the non-M&A segments?

Definitely not. The liquidity and depth they bring to financial markets worldwide is seen as a boon to those markets. Because the sovereign funds have an increasing amount of money, they have to put it to work. That's very healthy for the markets; it's a lifeline for the markets.

What are the critical success factors of your division?

One is relationship-building, building trust. Others do this as part of their day job, so to speak, not in a fully dedicated manner. I wake up every day thinking about how I can take our relationships further. Secondly, it is the quality of investment products and ideas in our portfolio. You can't have one without the other.

Why are you basing this effort in Dubai? Why are you moving in from London? Is that because the IMF says half of all sovereign funds will be in the GCC in five years?

I have a map of the world in my office. If you look at it – from Norway right up there to South Korea and Alaska, Dubai is perfectly located. And of course I can focus on the Gulf more easily as well. This week I'm flying to China. Dubai is like the centre of the universe – at least the universe that I will be looking at. New sovereign funds are expected to come up – India, for example, is one. Saudi Arabia, Japan… It's fascinating!



Makram Azar, Global Head of Sovereign Wealth Funds, Lehman Brothers

Makram Azar joined Lehman Brothers in 1990. Before his new posting as global head of SWFs, he led the media, consumer and retail investment banking businesses in Europe and the Middle East. Under his leadership, Lehman Brothers was named Media M&A Bank of the Year 2007 by MediaFinance magazine for having advised on most of the significant 2007 transactions in the media sector. These included the takeover of ProSiebenSat1 by KKR and Permira, merger of Canal+ and TPS, and the sale of Endemol.

A Lebanese by birth, Azar has developed strong relationships in the region, including advising Saudi Prince Alwaleed bin Talal on an investment in Berlusconi's media company, a deal that could be seen as a precursor to regional sovereign fund investments in the West, which started more recently.

His new cross-divisional role based in Dubai, says Azar, is all about "building relationships and then doing deals together".


By Yazad Darasha on Sunday, May 18, 2008