Down, but not out: Mideast private equity fights on

As one area of the Middle East’s alternative asset classes continues to flourish, another is struggling to reinvent itself. The venture capital industry in the region is enjoying a purple patch, as governments around the region from Amman to Muscat look to support SMEs as part of diversification efforts. Sovereign funds, too, are either making direct investments or backing venture funds in the hope that they will unearth the next MENA unicorn, following Dubai-based Careem’s $3.1 billion (Dh11.38bn) sale to Uber last year.

Yet in the private equity space, more firms are either consolidating or simply shutting up shop due to the difficulty in raising new capital.

“Private equity as an asset class has been consolidating in the region,” says Karim El Solh, co-founder and co-managing partner of Abu Dhabi-based Gulf Capital. “It’s a bit of a Darwinian consolidation, where the top 20 per cent account for 80 per cent of assets under management. That’s happened in the US, Asia and it’s happening now [in the Middle East],” he adds.

At the height of the industry’s fortunes in the region before the 2008 financial crisis, there were more than 100 private equity firms in the region, Mr El Solh says. “Today, you’re looking at about a dozen, essentially. So, a big consolidation, but you have firms that are emerging as bigger and stronger firms and the weaker ones are being eased out,” he argues.

The main challenge, according to Imad Ghandour, co-founder and managing director of private equity firm Cedarbridge, is raising capital.

“If you break down private equity, there are three big stages you have to fundraise, you have to invest and you have to exit. If there is no fund-raising, then eventually there will be no exit in the long term. Today, what you are seeing is exits from funds raised many years ago and that will continue as these funds wind down,” he says.

Others are not quite so pessimistic. Fund-raising by regional private equity houses may not be at the highs of 2008, when about $5bn was raised, but the average amount raised by regional participants in the sector has still averaged about $1bn over the past five years, according to the leader of EY MENA's transaction services advisory team, Matthew Benson.

Data provided to The National by Preqin, which tracks the alternative asset industry, says three private equity funds with exposure to the Middle East closed last year, which was one less than in 2018.

In terms of deals, Preqin data shows there were 12 Middle East private equity buy-out deals done last year, which was four fewer than in 2018, but the aggregate value rose to $1.5bn, compared to $600m in 2018.

This was largely due to the $1bn buy-out of Dubai-based Gems Education, which saw CVC acquire a 30 per cent stake as investors including Fajr Capital, Blackstone Group Bahrain’s sovereign fund Mumtalakat and Malaysia's sovereign fund Kazanah sold their stakes.