Saudi Arabia Could Emerge As Safe Play Of The Mideast

By Mohammed Aly Sergie

7 August 2011

As democratic revolutions sweep away dictators in the Middle East, private equity firms have decided to retrench in many countries until the outlook becomes clearer, leaving elusive, yet increasingly stable Saudi Arabia as one of the last havens for deals

Egypt, the region's most populous country, was singled out by Carlyle Group's co-founder David Rubenstein in November as an investment target, but the ongoing struggle between the military caretakers and demonstrators is likely to spook investors for the foreseeable future.

Amid the chaos, Saudi Arabia, the largest economy in the Middle East, is now looking like the safest bet, as the kingdom uses the cash from high oil prices to appease its population with massive spending. Unlocking those riches, however, won't be a simple task for private equity firms.

The number of deals in the region has been on a steady decline since 2007. Only 24 private equity and venture capital deals were completed in 2010, down from 46 a year earlier, according to the MENA Private Equity Association's annual report released in July. Carlyle's acquisition of a 30% stake in General Lighting, Saudi Arabia's largest provider of lighting fixtures, was the only deal in the kingdom last year.

Just seven private equity deals worth $25 million were completed in the first half of 2011 in the Middle East, down from 12 valued at $157 million a year earlier, according to Zephyr, a research firm tracking mergers and acquisitions.

Long viewed as an attractive destination for capital, the kingdom has been difficult to tap, even for regional private equity firms.

"Saudi Arabia has been a net exporter of capital for a long time," said Imad Ghandour, managing director at Cedar Bridge Capital Partners, a growth-equity firm in the United Arab Emirates. Typical targets for large buyout shops tend to be owned by wealthy merchant families who are reluctant to give up equity, leading to the widespread complaint that deals are overpriced there, he said.

"Nobody is going to sell a good, decent company for a reasonable price," Ghandour said.

Still, many investors are actively seeking investments in the kingdom. Ghandour's firm made its first investment this year, buying a stake in a Saudi health-care company. Carlyle and the private equity arm of Standard Chartered PLC expect to close deals there this year. And last month, Kohlberg Kravis Roberts & Co. received a license from the Saudi Capital Market Authority, the first awarded to an international private equity firm.

One positive influence on the corporate sector is government spending. Saudi Arabia's $154 billion 2010 budget, which was already a record before the Arab Spring started, will be boosted by at least $129 billion over several years as the kingdom showers its citizens with cash in order to stave off protests. More than a third of the new spending - slated for higher wages, bonuses, unemployment benefits, housing projects and new jobs - will be allocated this year.

These measures have already boosted consumption, with some retailers reporting sharp revenue increases in the second quarter. With oil hovering around $100 per barrel, Saudi Arabia is expected to post a surplus this year despite its increased spending, and its central bank holds more than $500 billion in foreign assets which can plug future funding gaps.

Firms that want to benefit from the Saudi growth story in the near term might have to look at venture and growth-capital investments, which have become more prevalent in recent years as average deal sizes across the region dropped to $11 million in 2010 from $36 million a year earlier, according to the MENA Private Equity Association report.

Ghandour said investors that "come in and try to create companies" are likely to find success in Saudi Arabia.

"There are a lot of companies in the education and health-care sectors that would be open to private equity deals, whereby the foreign partner will bring expertise and capital, and the locals will bring local expertise and business potential," said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi, an affiliate of Credit Agricole Group.

For all its promise, Saudi Arabia still suffers from some political uncertainty, which has been heightened as Arabs across the Middle East demand accountable and transparent governments. But protests there have been limited and the kingdom, which is in a position of strength due to its wealth and military power, has been able to maneuver ahead of demands and placate most of its citizens.

"The Middle East, like most emerging markets, is turbulent," Ghandour said. "At the end of the day, you have 350 million people in the Middle East and huge reserves of oil. You have to find a way to benefit from that."

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