Challenging times ahead for Mena private equity industry

Abraaj case likely to worsen perceptions the industry is grappling with while throwing spotlight on general partner’s role

The private equity industry in the Middle East and North Africa (Mena) has faced fundraising challenges over the last few years but recent developments at Abraaj, the region’s biggest buyout firm, are expected to worsen the perceptions of investors.

Data published by the Mena Private Equity & Venture Capital Association show that economic headwinds and geopolitical factors weighed heavily on the private equity and venture capital industries in 2016 and 2017.

While seven funds were set up in 2016, the number of closes declined to nine.

The amount of funds raised came in at a low of $582 million (Dh2.13 billion) and analysts say 2017 fund-raising was below $500 million.

Industry sources believe the fallout from Abraaj’s woes only serves to deepen the misery. The embattled private equity firm is facing litigation from lenders and investors following accusations of commingling funds and charges pertaining to loan defaults.

With industry insiders saying difficulties associated with raising funds on the market reamin a challenge for general partners (GPs), many are now opting for alternative channels that include co-investment options, according to the Mena Private Equity & Venture Capital Association.

The main causes remain unchanged — a combination of an economic slowdown, coupled with external views on geopolitical factors, and the inability of some players to exit and recognise profits for investors on vintage funds.

General partner role

The general partner role at Abraaj, the regional industry leader, and the company’s ability to resolve its legal challenges and deliver expected returns will be factors that will have a bearing on the industry for many years to come.

Disgruntled Limited Partners (LPs) in Abraaj funds include the Bill & Melinda Gates Foundation and the International Finance Corporation (IFC), the World Bank’s private investment arm, which alleged improprieties by Abraaj could adversely affect perceptions of LPs.

In the wake of the Abraaj case, Abu Dhabi-based Waha Capital reportedly abandoned plans to raise $300 million.

According to the chief executive officer of a UAE-based private equity firm, private-equity fund-raising in the region has endured a stressful time in recent years.

Confidence obstacle

“The news from the industry is not great for GPs,” the CEO, who requested anonymity, said. “Winning back LPs’ confidence under the current circumstances will be a huge challenge.”

Cumulative funds under management in the region’s private equity industry at the end of 2016 increased to $27 billion while four funds closed in excess of $50 million last year, compared to five in 2015.

Two funds raised in excess of $100 million, compared to three in 2015.

Venture capital (VC) investments in the Middle East and North Africa (Mena) region made significant gains over the last two years and have been evolving as a popular asset class among regional investors.

VC fund raising also has faced a significant slowdown during the last two years. Analysts believe the PE industry’s woes will likely be reflected in VC fund raising too.