Industry is going through a consolidation phase

By Babu Das Augustine

July 15 2014

Dubai: The 8th edition of the “Private Equity & Venture Capital in the MENA Region” annual report is a status report on the state these industries and overall economic environment in the region. Recent years saw these industries going through the cyclical ups and downs of a crippling financial crisis. The challenging environment has profoundly impacted the stakeholders in the investment community. Imad Ghandour, Managing Director at CedarBridge Partners and a member of the Association’s Steering Committee, spoke to Gulf News on key trends in the industry.

Since the beginning of the financial crisis PE fund raising has been on a decline with 2013 witnessing further decline. Do you expect a reversal of this trend this year?

What we are witnessing is less of a retreat in fund raising and more of a consolidation of the PE industry. Most, if not all, of the successful fund managers like NBK Capital, Gulf Capital, or CedarBridge, were able to raise money for their new funds — and in most cases, the current fund being larger than its predecessor. However, since 2008, the number of PE players has shrank from around 100 to currently no more than a dozen active managers.

We have also to consider that the region has witnessed many crises since 2008, and albeit these crises, private equity funds were able to raise hundred of millions of dollars each year. The region has not stopped to be in crisis in one form or another since 2008, but successful private equity managers were able to deliver returns every year as witnessed by the many exits announced recently. Consequently, I don’t know of any successful fund manager who was unable to raise money and meet its fund raising target.

Evidence suggest that market sentiment and investment activity is improving in Gulf countries and some of the Arab spring countries like Egypt, do you expect to see a pick-up in PE deals across these countries this year?

There is ample private equity activity in the region. Local players have invigorated the deal-making pace in the GCC and Egypt. The UAE and Saudi Arabia will remain the most favourable destination for private equity due to the size and nature of these countries. Egypt have seen a flurry of due diligence activity which will eventually lead to many investment closures. More importantly and as a testimony of the attractiveness of the region, international private equity funds like TPG have been keen to invest in the region as well.

Please consider that a deal takes many years to materialise in PE. For example, the well publicised Kudu deal hit the market in 2012 and until today has not been concluded. This is why PE is sometime referred to as patient equity.

The region has also witnessed a rise in venture capital activity over the past five years, and 2014 will be no exception. This will deepen the investment ecosystem, and make the private sector more prosperous.

Last year saw a number of PE fund announcements but many are yet to close. Does this mean investor confidence in PE is still lagging?

I believe that many funds that has announced their fund raising intention have actually reached first or final closure, especially those that are repeated funds. At least four fund managers were able to raise +$100 million in the last 12 months, and are probably waiting for the end of summer to announce the good news. We have to consider that the fund raising cycle in private equity extends over several years — sometimes two years or more. Unfortunately, this is the nature of the industry in the region and also globally.

What’s the size of the dry powder?

The size of real dry powder has decreased considerably as funds reached the end of their investment cycle or refrained from doing new investments. Three years ago the size of the dry powder was estimated to be around $11 billion, but has been reduced to less than 50% of that amount currently.

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