Take that exit

The art of getting out when it’s good

When investors look for an exit they don’t want to be shown the door. They want to see the cash consideration that rewards them for their risk – and they want to look good in the process; good for having created employment, good for respecting the environment, good for having contributed to economic growth, and good in terms of delivering corporate citizenship.

This attitudinal evolution is welcome news for one particular branch of the investor community: private equity professionals. Where 1980s-style incarnations of the private equity (PE) investment model were popularly depicted as slash-and-sell raiders, the PE funds of today can instead flash constructive partnerships and growth narratives of invested companies as their merit badges.

This is worth pondering when the latest reports on private equity in the Middle East and North Africa show glorious numbers about recent performances in fundraising, investments, and divestments – colloquially dubbed ‘exits’ – of PE funds in the Gulf Cooperation Council, Egypt, and other countries of the region.

Across MENA, 2014 was the best year for the region’s private equity players in terms of fundraising and investing since 2008, according to the Ninth Annual Report by the Middle East and North Africa Private Equity Association (MENAPEA) that was released at the end of July. The report disclosed investments worth $1.5 billion, representing a year-on-year increase of 118 percent, alongside an increase in deal numbers from 66 to 72, and a rise in average deal size to $32 million, which MENAPEA notes as a “post 2008 high”.

When compared with the previous year, fundraising revenue in 2014 leapt from $744 million to $1.23 billion, and exits increased in number from 16 to 20. The United Arab Emirates and Saudi Arabia had the greatest level of investments when viewed by value, respectively attracting 59 percent and 21 percent of the total $1.5 billion invested in the region (see comment page 82).

GETTING THE RIGHT BACKERS FOR LEBANON

By this measure, Lebanon appeared only in the margins, attracting a reported 1 percent of investment value. Curiously, however, the ratio was partially inversed when viewed by volume instead of value. In the number of PE investment transactions, Lebanon accounted for 13 percent of all deals in the region, compared to the 21 percent for the UAE, and 10 percent to Saudi Arabia.

Similarly, Lebanon captured 27 percent of all reported venture capital (VC) investment transactions in MENA last year, making it the regional leader in VC investment deals and continuing a trend observed in 2011-13. The MENAPEA report attributed Lebanon’s attractiveness to the regional VC industry to the fact that “the country is characterized by small and medium sized companies [SMEs],” without attempting to answer the question of how Lebanon might be differentiated from any other Arab country by the number of SMEs in the economy. The report made additional reference, however, to the Lebanese central bank support for investments in startups and SMEs.

As the MENAPEA report doesn’t drill down into countrylevel numbers on VC investment values or PE fundraising results and exits, it consequently upholds the image that Lebanon is a serious regional laggard when it comes to investment performances in venture capital and private equity capitalism. This impression is extended to and confirmed for the entire MENA region by the 2015 Global Private Equity Report from US-based consultancy Bain. While Bain’s global report occasionally agreed with MENAPEA that for MENA 2014 was a PE bumper year, PE exits today between Cairo and Kuwait City are still dwarfed by the worldwide growth rate and performance, specifically in divestments. According to Bain, exits from global buyouts shattered all previous records in 2014. “At better than 1,250 sales, last year’s exit count surpassed its previous peak of 1,219 transactions in 2007. And total exit value, at $456 billion, also blew past its previous record of $354 billion in 2007 and was 67% higher than it was in 2013,” the Bain report specified.

However, statistical peaks and success stories are two entirely different things. Given the current surge in investor frustration with Lebanon, a single shiny PE divestment narrative may be equal in worth to an entire boom statistic elsewhere. Therefore, Executive made it a mission to learn more about a recent divestment under which the EuroMena 1 fund exited from Beirutrooted Chedid Capital Holding (CCH), a rapidly growing financial

IN THE NUMBER OF PE INVESTMENT

TRANSCATIONS, LEBANON ACCOUNTED FOR 13% OF ALL DEALS

IN THE REGION