The Middle East Private Equity Landscape


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The Middle East Private Equity Landscape

  1. 1. The Middle East Private Equity Landscape Key Market Opportunities & Developments Arif Masood Naqvi Executive Vice Chairman & CEO 20 th September 2005
  2. 2. <ul><li>Introduction </li></ul><ul><li>Private Equity in the Middle East </li></ul><ul><li>Drivers of the Private Equity Industry </li></ul><ul><li>Regional Private Equity Trends </li></ul><ul><li>Conclusions </li></ul>
  3. 3. Christopher Columbus <ul><li>Conceived of special incentives (carried interest) to take the trip to the “new world” </li></ul><ul><li>All expenses paid </li></ul><ul><li>10% of all profits (no preferred return) </li></ul><ul><li>5% of all gold </li></ul><ul><li>Title of Admiral for life </li></ul>
  4. 4. <ul><li>Picked site of National Capital of the US – included land on which he held options to buy </li></ul><ul><li>Worked for “expenses” only </li></ul>George Washington
  5. 5. Global Private Equity Syndrome <ul><li>Prematurely grey hair </li></ul><ul><li>Inability to remember city or country in which one is awakening </li></ul><ul><li>Persistent daze / jet lag / hoarse throat </li></ul><ul><li>Equating sleep on an airplane with real sleep </li></ul><ul><li>Inabilities to remember (or be present at) birthdays, anniversaries, or school conferences </li></ul><ul><li>Contact with new friends concerned about holding charitable dinners in your honour or naming school buildings for you </li></ul><ul><li>Frequent musings about the fairness of pre-nuptial agreements </li></ul><ul><li>Doubling of golf handicap every 6 months </li></ul><ul><li>Ability to schedule annual physical only every five years </li></ul><ul><li>Frequent spousal / child discussions about the value of sound estate planning </li></ul>
  6. 6. Why is there growth in this industry? <ul><li>Professionals enjoy approximately 20% carry (25% - 30% in best venture funds) – flock to industry and provide product to investors </li></ul>Profits Available Capital Regional Macro Trends Returns Key Factors Description <ul><li>Returns are consistently better than other investment opportunities </li></ul><ul><li>With public returns expected to go down in the coming years, private equity is even more attractive </li></ul><ul><li>IN THE END, THE RETURNS ARE THERE – THAT IS BY FAR THE KEY FACTOR </li></ul><ul><li>Economic disequilibriums, corporate restructuring, acceptability of selling assets, rapid technological change, and available financing – all provide private equity opportunities </li></ul><ul><li>Investors have an abundance of equity capital – the rise in public markets has ironically provided more capital for private equity (percentage allocation might stay same – but base is larger) </li></ul>
  7. 7. Performance of Private Equity US Private Equity 10-year returns 1 European Private Equity 10-year returns 1 <ul><li>Private equity on average has outperformed public equities benchmarks over a 10 year period by 4.3% in the US </li></ul><ul><li>Top quartile managers have outperformed by a much wider margin of 31.6% </li></ul><ul><li>Selection and access to top quartile funds is required to achieve superior performance </li></ul>Premium of 31.6% Premium of 26.0% 1. % annualized net IRR: Net 10-year returns for period ending 12/31/03; Net IRR is the rate of return after the exclusion of management fees, expenses and carried interest. Source: Thomson Financial/Venture Expert and MSCI
  8. 8. Private Equity Evolution <ul><li>Investment professionals moving abroad, taking their private equity skills with them </li></ul><ul><li>Support infrastructure is changing to assist global investing (lawyers, accountants, consultants, investment bankers, commercial bankers etc) </li></ul><ul><li>General acceptance in local markets of foreign based private equity firms </li></ul><ul><li>Once was a Cottage Industry in the United States </li></ul><ul><li>First firms were early 60’s U.S. venture firms - $10 million in capital was large (often took a year to raise that amount) </li></ul><ul><li>Firms were “Mom and Pop” businesses – no succession planning </li></ul><ul><li>In the 70 – 80’s, private equity spread to Europe (firms there were typically supported by large institutions or one-two investors – less entrepreneurial) </li></ul><ul><li>Ever growing amount of investment by firms outside of their home </li></ul><ul><li>Emergence of global, mega funds and firms </li></ul><ul><li>Expansion of private equity programs by global banks, investment banks, insurers </li></ul>1960’s Current
  9. 9. <ul><li>Introduction </li></ul><ul><li>Private Equity in the Middle East </li></ul><ul><li>Drivers of the Private Equity Industry </li></ul><ul><li>Regional Private Equity Trends </li></ul><ul><li>Conclusions </li></ul>
  10. 10. Note: Excludes all VC and real estate funds Source : Gulf Venture Capital Association, Zawya, Company websites, AltAssets, Industry Interviews There are approximately 27 PE firms in the Middle East, primarily concentrated in the UAE… <ul><li>UAE: </li></ul><ul><li>Abraaj Capital </li></ul><ul><li>HSBC Private Equity </li></ul><ul><li>Injazat Tech. Fund </li></ul><ul><li>Ithmar Capital </li></ul><ul><li>Shuaa Capital </li></ul><ul><li>The GCC Energy Fund Managers </li></ul><ul><li>The Group </li></ul><ul><li>The National Investor </li></ul><ul><li>Lebanon: </li></ul><ul><li>Middle East Capital Group </li></ul><ul><li>Capital Trust Group </li></ul><ul><li>Byblos Bank </li></ul><ul><li>Tunisia: </li></ul><ul><li>Tuninvest </li></ul><ul><li>Egypt: </li></ul><ul><li>Citadel Capital </li></ul><ul><li>EFG Hermes </li></ul><ul><li>Gulf Arab Investment Co. </li></ul><ul><li>Oasis Capital </li></ul><ul><li>Jordan: </li></ul><ul><li>Foursan Group </li></ul><ul><li>The Jordan Fund </li></ul><ul><li>Kuwait: </li></ul><ul><li>Kamco </li></ul><ul><li>Global Investment House </li></ul><ul><li>Kuwait Financial Center </li></ul><ul><li>Bahrain: </li></ul><ul><li>Emerging Markets Partnership </li></ul><ul><li>Gulf Finance House </li></ul><ul><li>Saudi: </li></ul><ul><li>Amwal Al Khaleej </li></ul><ul><li>Athar Al Majid Hold. </li></ul><ul><li>Swicorp </li></ul><ul><li>India: </li></ul><ul><li>Over 100 foreign PE players operating </li></ul><ul><li>Morocco: </li></ul><ul><li>ATLAMED SA </li></ul>
  11. 11. Note: Excludes all VC and real estate funds Source: Gulf Venture Capital Association, Zawya, Company websites, Private Equity Online, Industry interviews … With over 24 traditional private equity funds…
  12. 12. … With over US$ 2.3 billion in total fund size Note: Excludes all VC and real estate funds Source : Gulf Venture Capital Association, Zawya, Company websites, AltAssets, Industry Interviews
  13. 13. There are another 17 funds currently being raised for over US$ 2.6 billion Note: Excludes all VC and real estate funds Source : Gulf Venture Capital Association, Zawya, Company websites, AltAssets, Industry Interviews
  14. 14. The majority of funds currently in the investing stage primarily do not have a sector focus and invest across the MENA region Diversified 38% Infrastructure 33% Real Estate 9% Technology 20% Sector Focus of Funds Currently Investing Source : Private Equity Monitor (Zawya) GCC 6% Worldwide 19% MENA 32% Other 14% Egypt 19% Kuwait 10% Geographic Focus of Funds Currently Investing
  15. 15. Source : Global Venture Capital Database 2004 Global Private Equity Firm Distribution Comments <ul><li>Region was historically small with deal flow and exit opportunities rare </li></ul><ul><li>Regional turmoil and strict regulations for foreign investors </li></ul><ul><li>More recently, the regional dynamic has changed with relative government stability, gradual improvement of regulations, developing capital markets, and increased liquidity looking to be deployed within the region </li></ul>With the exception of India, global private equity firms have historically ignored the region… * Currently minimal competition from global players in the region *Excluding India
  16. 16. Large-tier PE firms are concentrated in Europe and the US with only regional PE firms covering the local market * Include only private equity funds Source : Abraaj Capital Analysis Global Reach Americas Europe Asia Middle East Carlyle Blackstone* Abraaj - $700 million Shuaa - $200 million CVC Partners $42 billion $31 billion $14 billion Texas Pacific Group $15 billion Bain Capital $26 billion Silver Lake $6 billion Global Reach of PE Firms Apax Partners $18 billion
  17. 17. By the end of 2005 it is estimated that the total PE industry will have US$ 5 billion of funds under management Middle East PE Total Fund Size (US$ million) Comments <ul><li>Funds under management were estimated to be approximately US$ 280 million in 1998 </li></ul><ul><li>Consisted of a number of relatively small funds from Capital Trust, EFG Hermes, Tunisvest, etc. </li></ul><ul><li>Between 1998 – 2002, funds increased with additional firms entering including Emerging Markets Partnership (Bahrain), Atlas Group, Foursan Group, Injazat, Rasmala, etc. </li></ul><ul><li>The last couple of years have seen a number of new entrants including Global Investment House, Ithmar Capital, Shuaa Partners, etc. </li></ul><ul><li>If all announced funds reach their targets within 2005, there will be US$ 5.0 billion of PE funds in the region </li></ul>Note: Does not include VC and real estate funds Source: Gulf Venture Capital Association, Zawya, Company websites, Private Equity Online, Industry interviews CAGR 49% CAGR 53%
  18. 18. Private Equity allocation versus other asset classes Stocks 35.7% Bonds 54.7% Real Estate 5.1% Cash Equiv. 3.9% PE 0.6% GLOBAL Total Investable Capital Market - $87.2 trillion Note: As of December 2004 Source : Ennis Knupp & Associates <ul><li>Difficult to estimate the size of total investable capital market: </li></ul><ul><ul><li>Equity market cap of over $900 billion </li></ul></ul><ul><ul><li>Absence of bond markets </li></ul></ul><ul><ul><li>Lack of publicly traded real estate securities </li></ul></ul><ul><ul><li>Middle East estimated to have up to $2 trillion in investable net worth </li></ul></ul><ul><li>US$5 billion commitment to Private Equity as a % of total investable capital is below global standards </li></ul>Regional Perspective
  19. 19. <ul><li>Introduction </li></ul><ul><li>Private Equity in the Middle East </li></ul><ul><li>Drivers of the Private Equity Industry </li></ul><ul><li>Regional Private Equity Trends </li></ul><ul><li>Conclusions </li></ul>
  20. 20. Drivers of The Private Equity Industry Macroeconomic Conditions <ul><li>Stable economic growth and macroeconomic environment </li></ul>Description <ul><li>The Region has witnessed impressive growth rates despite unstable political environments in some countries </li></ul>Regional Perspective Regulatory & Economic Restructuring <ul><li>Improvement in regulatory infrastructure and shift in economic policies caused by privatizations, globalization and efficient deployment of capital </li></ul><ul><li>Improving regulatory environment in most countries with competition to attract capital </li></ul><ul><li>Economic liberalization under way in a number of countries and family businesses undergoing generational change </li></ul>Availability of Capital <ul><li>Financial institutions and pension funds providing capital </li></ul><ul><li>Post 9/11 the appetite of local investors turned to regional investment opportunities </li></ul>Exit mechanism <ul><li>Availability of exit routes either through trade sales or IPOs </li></ul><ul><li>Increasing IPO and M&A activity, as well as impressive performance of stock markets </li></ul><ul><li>New exchanges like DIFX to be launched shortly </li></ul>
  21. 21. Source: Economist Intelligence Unit Majority of countries in the region are growing at above 5% p.a. <ul><li>With real GDP growth in most countries exceeding 5%, the regional economies are amongst the fastest growing in the world </li></ul><ul><li>Real GDP growth is expected to increase faster than the rate of population growth leading to an accelerated growth in living standards across the region </li></ul>Note: Bubble size not to scale Real GDP Growth Average 2005 – 2006, % Nominal GDP US$ million, 2005E Pakistan Qatar Saudi Arabia Egypt Bahrain Oman UAE Kuwait Morocco Jordan Lebanon India GDP: 750,000 Population Size Tunisia
  22. 22. Source: Economist Intelligence Unit, Moody’s Investor Service Large forex reserves, low inflation, and budget surpluses in many countries have led to economic stability and growth Total Forex Reserves 2005E, US$ billion CPI Inflation Rate 2004 - 2005E, % 4.1% 0.6% 4.1% 4.9% 2.4% 2.5% 7.3% 3.0% 3.6% 6.4% NA 2.4% 2.0% Budget Balance % of GDP, 2005E (4.3%) 18.7% 3.6% (7.0%) (6.8%) (10.7%) (3.1%) 33.2% (9.6%) 14.8% 11.5% (-3.3%) 7.7% Credit Rating Moody’s Baa3 Baa2 A1 Ba1 Ba1 B3 B2 A2 Ba2 A1 Baa2 Baa2 Baa1
  23. 23. The regional equity markets have added significant depth and liquidity since 2002, creating a viable exit mechanism for PE players Market Capitalization* (US$ billion) Average Daily Value Traded* (US$ million) Average Daily Volume Traded** (million) Market Capitalization/GDP* (Percentage) *Excludes Tunisia ; **Excludes Morocco and Tunisia Source: Shuaa Capital, Relevant stock exchanges
  24. 24. In 1999, the GCC and ME region had negative FDI inflows, however, post 9/11 there has been a reversal of capital flight and increased amounts of FDI… Source: UNCTAD CAGR 15% CAGR 35% FDI Inflows US$ million, 1999 - 2003 CAGR 33% CAGR 34%
  25. 25. Source : Energy Information Administration, Bloomberg Comments … Which combined with oil prices over US$ 60 per barrel has created a tremendous amount of excess liquidity looking for investment <ul><li>Due to high oil prices, the GCC economies (especially Saudi Arabia and Kuwait) have recorded large budget surpluses for FY 2004 and FY 2005 </li></ul><ul><li>Oil prices are expected to come down to US$ 25 – 30 per barrel over the next five years </li></ul>Historical and Projected Oil Prices 1980 -2015, Brent Crude US$ per barrel Asian financial crisis <ul><li>OPEC raises production triggering a price war </li></ul><ul><li>Iran/Iraq tensions </li></ul>Iraq war Peak Price - $68.00 Aug 2005 Gulf war Current Price - $60.10
  26. 26. Examples of privatizations in recent years illustrate the drive towards increasing the role of the private sector in the economy resulting in increased deal flow for PE… Completed Privatization Examples Source: Zawya, Saudi General Investment Authority, United Nations Development Program
  27. 27. Source: Dealogic, Thomson Financial … As can be witnessed in the increased regional deal flow over the past four years Comments <ul><li>There have been 626 deals announced in the first 5 months of 2005 or 67% of the 2004 total </li></ul><ul><li>The value of deals has increased at a CAGR of 16% from 2002 – 2004 </li></ul><ul><li>The total value of deals announced in the first 5 months of 2005 has already exceeded the 2004 total by 21% </li></ul>Value of Deals vs. Number of Deals Announced ( 2002 – May 2005 , US$ million)
  28. 28. Investment Opportunities: GCC IPO Market Characteristics of Current GCC IPO Market <ul><li>Excess capital chasing few investment opportunities </li></ul><ul><li>IPOs over-subscribed well over 50 times, especially in the U.A.E. Miniscule allocations for non-founder investors </li></ul><ul><li>Significant capital gains for investors available to get large founding blocks </li></ul>* Portfolio companies of Abraaj Capital Limited Source : Zawya as of September 8 th , 2005
  29. 29. Investment Opportunities: Privatization Robust Privatization Pipeline with several companies being taken public by various governments in the region in 2005 Source : Zawya
  30. 30. Investment Opportunities: Family Groups Source : Zawya Family Groups within the region are looking to monetize their investments in their respective companies by exiting or cashing out IPO Pipeline of Family led Enterprises (2005) Company Country Sector Equity Offered Rotana Hotel Management Co. UAE Travel and Tourism - Axiom Telecom UAE Telecom - Swiss Arabian Perfumes UAE Consumer Goods - Al Bassami International Group Saudi Arabia Transport 30% Nasser Rashid Lootah and Sons UAE Conglomerate 55% Jabal Omar Development Co. Saudi Arabia Construction 12% Al Habtoor Hospitality UAE Travel and Tourism -
  31. 31. <ul><li>Introduction </li></ul><ul><li>Private Equity in the Middle East </li></ul><ul><li>Drivers of the Private Equity Industry </li></ul><ul><li>Regional Private Equity Trends </li></ul><ul><li>Conclusions </li></ul>
  32. 32. There will be a number of trends emerging in the regional PE landscape over the next few years Variation in PE Performance Shari’a Compliant PE Institutional Investment Secondary Buyouts & Exits Emergence of International Players Trend Description <ul><li>Increased amounts of regional institutional investments as PE has become a viable asset class in the region </li></ul><ul><li>Assets allocated for PE abroad will increasingly be available for PE investment within the region </li></ul><ul><li>Rapid growth in Islamic banking, and other Shari’a compliant products in the region </li></ul><ul><li>Lack of Shari’a compliant investment opportunities in the region </li></ul><ul><li>Will be new and innovative Islamic PE structured funds introduced soon </li></ul><ul><li>Is a trend being seen increasingly frequently in the West </li></ul><ul><li>The rapid increase in firms in the region will allow PE shops to work together on sizeable transactions and create another viable exit route </li></ul><ul><li>Currently almost no international PE presence in the region </li></ul><ul><li>Dedicated PE firms will not enter the region very soon, however PE arms of investment banks that have had relationships in the region are looking to enter currently </li></ul><ul><li>As the number of PE firms and funds increase there will be significant variation amongst top and bottom quartile performance </li></ul>
  33. 33. With a large number of players in the PE arena LPs will be forced to carefully select their G.P.s Difference between Top and Bottom Quartile performance 1 US All Private Equity Europe All Private Equity US Stock Funds European Stock Funds Spread Top-Bottom 53.7% Spread Top-Bottom 46.5% Spread Top-Bottom 3.6% Spread Top-Bottom 2.5% <ul><li>Manager selection is the critical component to a superior performance in the private equity markets </li></ul><ul><li>Private equity quartile spreads are 15x to 20x greater than comparable public market spreads </li></ul>Notes: 1 Annualized net 10-year returns (12/31/93 – 12/31/2003); Source: Venture Economics Past performance is not indicative of future results -20% -10% 0% 10% 20% 30% 40% 50% Top Quartile Median Bottom Quartile
  34. 34. Advantage of Being Regional <ul><li>Expanded deal flow </li></ul><ul><li>Enhanced financial resources </li></ul><ul><li>More industry expertise </li></ul><ul><li>Ability to pursue / consummate trans-border transactions </li></ul><ul><li>Ability to recruit more senior, experienced professionals </li></ul><ul><li>Ability to centralize fundraising, back office tasks </li></ul><ul><li>Ability to franchise value </li></ul><ul><li>Ability to focus on the kind of performance investors increasingly want: </li></ul><ul><ul><li>Uniformity - No surprises </li></ul></ul><ul><ul><li>No embarrassments - Low-Beta approach </li></ul></ul><ul><ul><li>Predictability - Attractive but not heroic IRRs </li></ul></ul>
  35. 35. <ul><li>Introduction </li></ul><ul><li>Private Equity in the Middle East </li></ul><ul><li>Drivers of the Private Equity Industry </li></ul><ul><li>Regional Private Equity Trends </li></ul><ul><li>Conclusions </li></ul>
  36. 36. Regional Private Equity – Passing fancy or permanent addition to M.E. Investment World? <ul><li>Globalization in all business areas will accelerate – the same trend will continue for private equity </li></ul><ul><li>Impact of economic slowdown </li></ul><ul><ul><li>Will regional private equity recede or decline? </li></ul></ul><ul><ul><li>Will private equity return to early 90’s, traditional nature – smaller firms – one specialty – local focus only – no cross border operations? </li></ul></ul><ul><li>Economic predictions / private equity predictions </li></ul><ul><ul><li>Are often wrong (look at predictions a few years ago – Internet investing wave of future, not overvalued; high yield investing still attractive; IPO market would continue to provide exits) </li></ul></ul><ul><li>Regional private equity firms will continue their growth </li></ul><ul><ul><li>Newer funds will have a harder time getting capital </li></ul></ul><ul><ul><li>Continue to raise capital in meaningful amounts – investors will focus on brand names, predictability, and length of track record </li></ul></ul><ul><ul><li>Commercial banks, investment banks, insurance companies with global franchises will take advantage of them / grow their private equity franchises </li></ul></ul><ul><ul><li>Regional firms will provide their own internal funds of funds – to allow investors more balanced private equity portfolios </li></ul></ul><ul><ul><li>Emergence of new regional firms will be slowed down – portfolio problems will have to be addressed first </li></ul></ul>