Sunday, October 19, 2008

Private Equity Market Drying up Even in the Middle East

I came across an interesting FT article about the demise of the Private Equity market in the Middle East which has been flushed with petro-dollars.  The "L" in the LBO market has disappeared while the strategic buyers with strong balance sheets can simply cherrypick among distressed assets or struggling leveraged firms in the region:

"....Until recently, the Middle East had hoped to sidestep the worst of the financial storm thanks to abundant Gulf oil money. Now even the region's buy-out kings are in a more sombre mood.

"There are new realities in the world," says Ahmed Heikal, chairman of Citadel Capital of Egypt. "People are taking a long, serious look at their portfolios, reassessing their business plans, and delaying exits and fund raising."

Though bankers say leverage is less used in the Middle East than in the west, debt is still a central part of most private equity players' strategy. Typically, a transaction would be leveraged four or five times the target company's earnings before interest, taxes, depreciations and amortisations, according to experts. But international banks that could previously be relied on to supply the needed debt are now rapidly deleveraging.

Local houses are suffering from a domestic cash crunch that economists expect will curtail lending, despite recent liquidity injections. The little credit that remains is much dearer, making deals less profitable. The cost of leverage has doubled in recent months, says Karim El Solh, chief executive of Gulf Capital, an Abu Dhabi-based firm.

"Some people are still in denial," he says. "We are looking at an LBO [leveraged buy-out] industry without the L for a while now."

Private equity has been a fashionable industry in the Middle East in recent years, but the momentum is slowing. Last year 10 funds managed to raise $3.5bn, but so far this year only three funds have been announced and only $1bn committed, according to Preqin, a private equity data provider Preqin estimates that 25 funds are still actively trying to raise approximately $12bn. Private equity insiders say they may face difficulties reaching their targets.

Over 100 funds have been raised in the Gulf in recent years, but not all have performed as expected. The next time investors are approached "they might be less keen on parting with their money," says Mr El Solh.

"In a storm, even turkeys can fly . . . [but] we will now see a consolidation in the region."

The firms that do have cash to spend may still find the Gulf a challenging place to invest.

Most companies are owned by families who have little interest in relinquishing control, and many private equity firms have headed into the wider Middle East to countries such as Egypt, Jordan and Turkey more receptive to investment.

Even more than the rest of the Middle East, the Gulf thrives on personal relationships, and to do deals "you have to drink a lot of coffee with the owners", admits Mr El Solh.  Thus, most deals in the Gulf are minority stakes, such as Bahrain-based Investcorp's $98m purchase of a 36 per cent stake in Redington Gulf, a unit of the Indian IT distributor Redington India.

Given market turbulence and poor investor sentiment, firms sitting on mature investment portfolios may also have to sit tight a little longer before exiting. The MSCI Arabian Markets has plummeted 32 per cent this year. And for the foreseeable future "there are no exits. Period", says Mr Heikal....."


1 comment:

Anonymous said...

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.