New index will help GCC firms attract investment and expertise

Gulf 100 will rank fastest growing entrepreneur-led companies

Dubai: The stakes have just gotten higher for Gulf entrepreneurs. A new ranking regime is being created — the Gulf 100 — which will showcase companies where the entrepreneurial light is shining brightest.

A similar ranking has already been created in Saudi Arabia and the new one will cover businesses in the other Gulf states.

"The GCC 100 is not [about] membership — it's a ranking of the fastest growing entrepreneur-led companies in the region," said Atif Abdul Malek, chief executive officer of Arcapita, the Bahrain-based financial institution closely involved in the process.

"The idea behind it is that [the provision of] a credible and well-backed platform to showcase the importance of entrepreneurial companies is a vital step towards attracting more capital and expertise into the region," he said.

"Companies which feature in the rankings — from Saudi Arabia, South Africa and Lebanon — have all reported a rise in interest and other positive dividends as a direct result," Abdul Malek added.

"Arcapita's aim is to support an initiative that we believe will help the GCC to develop a more entrepreneurial culture, which is necessary to prepare for the more developed economies in the future."

So, what do businesses need to have to make it to the final rankings — beyond that of being an entrepreneur-owned enterprise?

According to the promoters, the platform is open to any company that is privately owned with ten or more full-time employees as of end-2010. It should have an operating history of three years or more, and sales should be in the region of $100,000 (Dh367,300) in 2008 and $500,000 as of last year. Franchisee operations as well as government-funded private companies are excluded from the rankings.

"In this region, for early-stage growth companies, capital is often more easily accessible from informal networks of families and contacts than it is elsewhere in the world," Abdul Malek said.

"Probably the biggest challenge is the training of human capital to compete with the highly competitive markets elsewhere around the world, as well as the relative lack of experience available outside the core industries supported by the oil and gas infrastructure."

Much has been said in the recent past of private equity starting to chase possibilities in the private enterprise space. But, going by actual evidence, as of now it's proven to be more of a sentiment than actual practice.

Abdul Malek explains why.

"Private equity as an asset class targets growth capital investments in established companies," he said.

"Typically, entrepreneurs aiming to fund early-stage ventures look to bank finance, venture capital investment or angel investors to secure capital."

Supporting development

Would his bank itself get into the scene at some stage?

"The bank invests in developed companies all over the world; our interest in the GCC 100 is in supporting the development of a more dynamic entrepreneurial environment throughout the region, thereby helping to create the conditions that will one day produce the kinds of companies that Arcapita would like to invest in."

While not in the investment banking space, Arcapita invests on a deal-by-deal basis in private equity, real estate and infrastructure transactions around the world, Abdul Malek said.

These are then syndicated among its pool of investors, many of which are based in the GCC.

"We are beginning to add funds alongside our deal-by-deal model to allow us to attract more of the large institutional pools of capital in the region," he added.

Is a stock market listing the eventual destination that the GCC's privately owned powerhouses should aspire to?

Some of the individual Gulf states are already preparing the groundwork for such a transition. Abdul Malek would not be drawn into the debate. His response: "It entirely depends on the circumstances of the individual case."

Part of wider network

The Gulf 100 is part of the AllWorld Network, set up in 2007 by Deirdre Coyle, Anne Habiby and Harvard Business School's Michael Porter. The stated aim was to find the growth entrepreneurs in the emerging economies, and thus create an information system and network.

The AllWorld network has already compiled country rankings for Saudi Arabia, South Africa, India, Lebanon, Jordan and Turkey. The GCC 100 intends to encourage entrepreneurs from the other five Gulf states.

Signs US$ 25.5 Million Agreement to Finance Completion of Shorouk's New Paper Mill

03 April 2011
The IFC joins Sphinx Private Equity Management and Grandview, Citadel Capital's small and mid-cap investment portfolio company, to finalize the debt and equity financing for the completion of environmentally-friendly paper mill that will create 850 jobs and ease Egypt's reliance on imports

Grandview Investment Holdings, a company managed by Sphinx Private Equity Management, announced today that the International Finance Corporation (IFC) is supporting job creation and reducing greenhouse gas emissions in Egypt by investing to complete the construction of a new paper mill, a project initiated by El Motaheda S.A.E., a subsidiary of Modern Shorouk for Printing and Packaging.

The IFC will contribute an equity investment of up to $10 million and a loan of up to $15.5 million to complete the building of the facility, which began two years ago. The mill, to be located 60 kilometers outside Cairo in the Sadat City industrial zone, will use recycled fiber from local waste paper to produce duplex board, which is used to make boxes for retail products.

"Sphinx has worked diligently with the IFC over a period of one year to finance the debt and equity for this project, which will satisfy regional demand for a critical product in the paper packaging industry," says Sphinx Private Equity Management Chairman Marianne Ghali. "We are extremely pleased that the IFC continues to support SMEs in Egypt. We view this as a very positive step as the SME sector will be of critical importance to the country at this unique moment in its economic development."

El Motaheda will create an estimated 300 direct manufacturing jobs and a further 550 indirect jobs through the collection and transport of wastepaper. In addition, availability of high-quality locally produced duplex will help replace imports, benefiting domestic and regional consumer goods companies and, ultimately, individual consumers.

"Our goal is to transform Egypt into a regional hub for the packaging industry, becoming the primary provider of high-quality packaging materials for multinationals and exporters alike," said Ibrahim El Moallem, Chairman of Modern Shorouk for Printing and Packaging.

"Central to our business proposition is leveraging Egypt's skilled labour force and key geographical locations," noted El Moallem. "We have grown remarkably in the past five years in part through the development and continuous training of our staff. On completion of the duplex project, we will be a fully-integrated packaging solutions provider for the region."

Grandview, which invests in small- and mid-cap opportunities in Egypt, joined forces in 2006 with Modern Shorouk for Printing and Packaging, one of the leading players in the field of paper, to create the National Printing Company, El Motaheda's parent company.

National Printing Company stands today as one of the largest converting and consumer-products printing houses in Egypt. Through key subsidiaries Modern Shorouk for Printing and El Baddar for Packages, the National Printing Company produces books, folded board boxes, corrugated boxes and sheets, laminated packaging, and paper cups and bags.

The expansion into the manufacturing of duplex paper comes as part Shorouk Group's vertical integration strategy.

Egypt produces an estimated 60,000 tons of solid waste each day, of which around 12,000 tons is paper, yet the country imports wastepaper and pulp for its paper-product industries. El-Motaheda mill and its domestic supply chain promise to significantly reduce the volume of discarded wastepaper and help eliminate carbon emissions from its decay.

"Grandview has pursued a strategy of investing in growth sectors where Egypt enjoys considerable competitive advantages. The fund's participation in this important project aims to provide value-added services to support regional expansion, financial structuring and improved corporate governance," added Ghali.

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

Standard Chartered Private Equity has closed a $75m Mezzanine Investment

Standard Chartered Private Equity has closed a $75m mezzanine investment in Hassan Mohammed Jawad & Sons (Jawad Business Group or 'JBG'), a family-owned private company based in Bahrain.

This is Standard Chartered Private Equity's (SCPEL) first proprietary investment in the Middle East.

SCPEL managing director and regional head of MENA private equity Taimoor Labib said they believe this to be the largest MENA corporate mezzanine investment to date and is a strong indication of their belief in the JBG senior management team.

"As the proprietary investor for Standard Chartered Bank, we are one of the few organizations in the MENA private equity space capable of executing large ticket transactions across asset classes," Labib said.

JBG is a diversified mid-market retailer in the GCC with approximately 660 stores in Bahrain, UAE, Qatar, Kuwait, Saudi Arabia, Oman, and India with distribution centers in Bahrain and Dubai.

JBG's main franchises include Accessorize, Monsoon, The White Company, Mango, Bhs, Pumpkin Patch, Hush Puppies, Chili's, Lakeland, Dairy Queen, Costa Coffee, Burger King and Papa John's Pizza in several GCC countries.

Private equity sector faces shakeout

Industry players need to reset their expectations in new business environment

• By Babu Das Augustine, Deputy Business Editor
• Published: 00:00 September 13, 2010
• 

• In the first half of this year, the value of private equity investment in the Middle East plunged to a low not seen since before the financial slowdown. But the region has a young and promising population that with increasing wealth and increased political stability could constitute a major driver for economic growth and increased demand for products and services.
• Image Credit: MEGAN HIRONS MAHON/Gulf News

Dubai: The Middle East private equity (PE) industry that went through a phase of breakneck growth between 2004-08 and a drastic slowdown during the last two years is facing shakeout and needs to reset its expectations in the new economic environment, said analysts and industry players.

From 2004 to 2008 alone, global PE growth in the Middle East reached 70 per cent. Yet despite its rapid ascent, it is an industry that is still trying to find its footing.

Many PE firms operating in the region were founded at the height of the industry's boom in 2007 and early 2008 as investors pumped money into the PE bandwagon.

But few knew where to invest. Some invested in real estate and listed equities, and some didn't invest at all. The investors will start to lose patience over the next few years as funds reach the end of their terms and exits remain elusive.

"In fact, only three per cent of the aggregate capital across all funds raised from 2000 to 2010 is under liquidation, representing only 15 funds, or about 11 per cent of the total number of funds", said Peter Vayanos, partner, Booz & Company.

Private equity investments globally as well as regionally were affected by the continued recession in 2009. PE industry in the Middle East and North Africa witnessed a decline in 2009, with fund managers raising only $1.06 billion compared to a near-record $5.4 billion in 2008. Investments also declined from $2.72 billion in 2008 to $561 million in 2009, according to the latest statistics from the Gulf Venture Capital Association (GVCA).

According to Zephyr M&A Report for the first half of this year, the value of private equity investment in the Middle East plunged to a low not seen since before the financial crisis.

Just $135 (Dh495.45) million of private equity transactions was recorded in the first half of this year — a decline of 78 per cent from $617 million in the second half of 2009 and 62 per cent from $355 million in the first half of 2009. There were just ten private equity deals targeting the Middle East and only three of these have known values. The UAE was targeted by private equity three times, while Saudi Arabia and Bahrain had two leveraged deals apiece.

Industry observers expect a turnaround in the near future. The region has a young and promising population that with increasing wealth and increased political stability could constitute a major driver for economic growth and increased demand for products and services.

Increasing appetite

"A survey of 46 PE professionals conducted by Booz & Company and Insead in April 2010 confirmed that 73 per cent of industry leaders will be looking to tap this demand over the next five years through direct investments in companies from the region," said Vayanos.

Recent figures on fund raising points to a steady revival in the industry. Private equity firms in the Mena region raised $1.25 billion in the first quarter of 2010, an 18 per cent per cent increase over 2009, as regional economies recovered and investor appetite returned.

"Overall there is a revival in the fund raising activity in the region, the size of regional private deals has clearly come down," said Vikas Papriwal, KPMG's UAE Country Head of Private Equity and Sovereign Wealth Funds, said at a recent presentation on trends in regional PE industry at the Dubai International Financial Centre (DIFC).

Leading regional players say there is an increasing appetite for both private equity venture capital (VCs) investing in the region. "There is a growing interest from regional investors in funding start-ups through VCs and angel funding," said Frederic Sicre, Executive Director of Abraaj Capital. Venture capital received significant attention in 2009 with 7 transactions estimated at $25 million was closed, a substantial increase over previous years.

"The outlook for private equity in 2010 and beyond remains positive. The story in the region continues to remain one of growth and economic stability, and private equity funds will have ample opportunities to invest profitably in the coming few years," said Emad Ghandour, executive director of Gulf Capital who also chairs GVCA's Information Committee.

Experts say investors looking to participate in the Middle East's next stage of growth will still need to be cautious. The region's heady growth over the last decade worked to cover up some critical weaknesses in the PE industry. As these weaknesses come into full view, investors will need to trust that they will be addressed.

For starters, significant gaps remain in the region's legal and regulatory frameworks. Bankruptcy laws, for instance, are still not in place in many countries in the region, leading to confusion when portfolio companies fail. Methods for dealing with closure are not explicitly detailed, and in most cases it is left to the parties to reach agreement with each other.

The enforcement of contracts is not always swiftly implemented; the procedural phases of filing, trial, judgment, and enforcement typically take an average of 635 days.

"Saudi Arabia ranks 140th out of 183 countries for enforcing contracts, according to the World Bank's International Finance Corporation. Syria is even more challenged, ranking 176th," said Ahmad Yousuf, principal, Booz & Company

Corporate governance is another area that requires development. The influence of family-owned businesses may hinder corporate disclosure and limits transparency.

"Corporate governance plays a crucial role in the PE industry not only because good governance has a positive effect on company valuation, but also because in most cases, PE funds have limited ability to sell their ownership stakes, and are therefore committed to staying with the company for the medium term. This increases their dependence on good governance, transparency and disclosure in invested companies," said Dr Nasser Saidi, Chief Economist of DIFC.

Hawkamah, the Institute for Corporate Governance has set up a Task Force on Corporate Governance in Private Equity with regional PE firms and international to assist regional PE firms and PE-backed companies with their corporate governance frameworks. The Task Force will issue its first set of guidelines on October this year.

As limited partners prepare to make the leap of faith into a market poised for growth, the PE firms that judiciously apply their knowledge and talent stand to capture the benefits. However, general partners will need to adapt their practices to local and changing circumstances.

Family businesses

Family-owned businesses, which play an extremely important role in the Middle East's economies, offer sizable opportunity for PE firms. The restless entrepreneurs who have run many of these family-owned businesses for the past few decades are giving way to a rising second or third generation of family members who see the need to develop more focused strategies and more professional management approaches.

In the years ahead, these businesses are expected to divest some of their scattered holdings, scale up the businesses they retain, and seek to improve their overall performance. To do so, they need to acquire good management capabilities with a breadth of strategic, financial, and operational knowledge, a scarce resource in the region.

"The size of the opportunity is evident from the role that these companies play in GCC economies: They account for roughly 40 per cent of the region's non-oil GDP and 50 per cent of private sector employment," said Ahmad Yousuf, principal, Booz & Company.

Palestinian Venture Fund creates opportunity and optimism

An interesting take from from Jean Case on 18 Mar 2010

Following the Annapolis Israeli-Palestinian talks in 2007, Secretary of State Condoleezza Rice appointed a group of private-sector leaders to help ignite economic development in the West Bank. The idea was that the co-chairs would mobilize private sector resources and investment that could benefit the West Bank and bring new hope and prosperity to the Palestinians – all in an effort to facilitate progress toward a two-state solution to peace. The initiative was called the US-Palestinian Partnership (UPP).



Against the backdrop of recent weeks where diplomatic snafus and territorial disputes have fueled tempers and shone a spotlight on the inherent barriers towards progress, I am at an event today in New York City that signals what is working in the region, instead of what has not, and I am feeling very encouraged. Led by the private sector, UPP is announcing a new Middle East Venture Capital Fund that is in many ways the culmination of the work we began in 2007 and gives me great hope for what the future holds.



In less than three years, the U.S.-Palestinian Partnership has facilitated millions of dollars in new youth programs and initiatives from Intel, Cisco, Microsoft, USAID and others; convened hundreds of investors and corporate executives in Bethlehem and Washington through the investment conferences; and co-hosted G-Pals Days with Google for small business owners and software developers to gather in Ramallah to learn new skills and compete for development prizes. And, today I am smiling ear-to-ear because we are in New York to announce and celebrate multi-million dollar lead commitments from the Skoll Foundation and Soros Foundations Network to a new $50 million fund that will bring hope and opportunity to thousands of men and women in the West Bank. These investments follow the European Investment Bank’s (EIB) significant commitment to the fund. Read EIB's press release about the fund here.



The Middle East Venture Capital Fund will invest in entrepreneurial companies in the Internet, mobile and software sector that are growing out of the substantial community of software and telecom engineers and other entrepreneurs in Ramallah and throughout the West Bank. It will give US and global investors an opportunity to do well while doing good – making meaningful contributions towards creating a viable Palestinian state and getting a valuable financial and social return on investment in the process. And thanks to our partners at the Skoll Foundation, Soros Foundation Network and the European Investment Bank, we are within sight of meeting our investment goals in the fund.



Perhaps I’m so optimistic today because of some history. Many years ago, when I was at AOL, we acquired a young company in Israel called ICQ, which revolutionized instant messaging across the Internet. The investment was not only significant because of the value it added to AOL’s success at the time, and the value it created for the leaders of ICQ, but more importantly because that single transaction with an Israel-based company helped serve as a beacon of the burgeoning innovation and talent in Israel in the early days of that country’s efforts to grow an ICT sector. Since that early investment, a technology boom has taken place in Israel, and today the ICT sector has become a cornerstone of the Israeli economy. I can’t help but see the potential of history repeating itself as this new fund goes forward. In addition to a highly-educated workforce, low infrastructure costs and a burgeoning technology sector, the same entrepreneurial spirit and innovative thinking is alive and booming in the West Bank.



While the private sector can’t do much to address diplomacy or security, it can play an equally important role through the contribution of resources and investment to the region. It has been a complete delight to see the undaunted courage of private sector leaders who’ve stepped up and in the midst of troubles and strife, have made commitments to go forward with this important work in the West Bank. There is a passionate belief that there’s really money to be made here, but these leaders are equally excited about the potential for the prosperity and stability these investments might help enable. These good things only happen when people come together with commitment and passion – I am enormously grateful to those who have stepped up early and to those who are at the table with us now looking at future investments

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.”