The Upside of Turbulence


2 May 2011

We are witnessing today the most fundamental revolution in the Arab political landscape in four or more decades — just in the wake of the deepest global financial crisis in a century. Political and economic storms have engulfed many countries around us, and the repercussions of these events are still unfolding.

Where does regional private equity stand in light of these events?

In the face of such momentous events, private equity is likely to sit on the sidelines until political uncertainties ease. Most private equity funds were not designed to operate in such turbulence, and their teams are not accustomed to managing political risk.

They are constrained by their modus operandi: they focus on improving a company or bet on a sector, and they shy away from taking the risk of more exogenous and binary factors like change in regulation, government, or market direction. Their modus operandi also requires them to quantify future returns at a time when no one can project the events of next week.

Opportunity in volatility

But volatility brings opportunities and rewards of the same scale as the size of the gigantic events surrounding us. A quick review of some of the biographies on Forbes' billionaires list — like Lakshmi Mittal or Warren Buffett — also confirms the notion that extraordinary wealth is created in turbulent times.

Mittal acquired many of his initial steel factories in the 90s from governments in Kazakhstan and similarly unappetising countries, and Buffett invested billions during the latest financial crisis to start reaping the rewards years later.

As I scouted the region in the past two months from Tunis to Cairo to Dubai, I started to encounter deals valued at steep discounts like I have never seen in the past decade. Not even during the financial crisis. There is a fire sale on many quality assets in Egypt and Tunisia, from beach villas to listed stocks.

Capital starved

In both Egypt and the GCC, promising companies are being sold at book value or below. Others, shunned by banks and investors in these turbulent times, are starving for capital to exploit the tremendous growth opportunities resulting from the petrodollar windfall.

However, beware! Investing in the region now may be as lethal as it may be rewarding. Navigating risks will require intimate and continuous knowledge at the most senior levels. Mitigating risks is a priority over quantifying future returns. The short-term focus should be on navigating through changes of government, regulation, and economic misfortunes.

Tackling the emerging opportunities in the region will require speed, flexibility, and a new set of investment rules. Unfortunately, many of these opportunities will not show on the radar screens of most PE funds in the region or fit their investment strategies.

Hence, the challenge: Will private equity funds change their mandate and their strategies as drastically as the region is changing itself?

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