Private Equity in the Middle East

7/28/2019 Private Equity in the Middle East

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Private Equity in the Middle East

Jaideep Dhanoa

Nawaz Isaji

Frederico Teixeira

Nico Vivaldi

Christian Weniger

Abu Dhabi Action Learning Module

MBA Programme


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Team composition

Frederico Teixeira

Worked for McKinsey & Company across banking, energy, telecom, public affairs and public sector, with extensiveexperience in Africa. Performed corporate finance analysis for banking units in asset management, insurance,trade finance and wholesale banking.

Nicola Vivaldi

Worked in investment banking in London advising companies on capital structure and financing strategies in

event driven situations. During INSEAD he has been involved in principal investing with a private capital fund inLondon. Nicola is a CFA and Chartered Accountant.

Jaideep Dhanoa

Jaideep is a TMT specialist with substantial commercial management and VC experience in bringing to marketand scaling consumer web products. He has led the market-entry and monetization strategies forIndian Cricketsglobal internet & mobile rights, and ESPNs online business in APAC.

Christian Weniger

Christian previously work in the Private Equity industry. He led the European Secondary investment activity ofAuda Private Equity, a family-office backed PE investment firm with $4.6 billion AUM. He specialized in IslamicFinance through his masters degree.

Nawaz Isaji

Nawaz started his career as a lawyer in Sydney, advising on foreign investments, and then moved into strategyconsulting with PricewaterhouseCoopers. He has worked across a number of sectors including energy, oil andgas, telecoms, financial services and FMCG.


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The PE industry is composed of three maingroups of players

Source: MENA PE Association, Booz & Company.

Regional

pure players

Global PE

firms

PE firms with

government

links

Middle East-based firms withinvestments focused on the region (e.g.

Abraaj Capital, Gulf Capital, Amwal alKhaleej, Citadel Capital)

Firms headquartered elsewhere, butinvesting in the region, like CarlyleGroup and Colony Capital

PE Firms linked to other entities suchas governments or banks

Also includes SWF previously investingin PE funds as LPs that are becoming

increasingly active in direct investments

Strong local roots, business networkand market knowledge

Strong global brands, raising fundsrelatively easily

Fewer local connections whencompared to regional players

Largest group of different players Small share of private equity for

each player (not very important forthe industry as a whole)

Types of firms Key strengths / characteristics


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GCC PE industry started in early 2000s,followed by a 2008 credit bubble

Birth of PE Small to mid-sized PE funds, very few

players in the market (2000s)

USD 120mn raised by Abraaj Capital and HSBC

Establishment of USD 1bn infrastructure fund sponsored byIslamic Development Bank and a group of sovereign wealthentities

Significant number of start-up firms start coming into theregion to exploit IT opportunities

Explosive growth International large size Funds start locating

into the region (2004-2007)

First notable success registered when Aramex got listed on theDubai Financial Market

Significant number of new first time funds and asset managementcompanies emerge

Institutional investors also backed PE funds, and international PEfund managers relocate in the region

The PE Asset Bubble (2008)

Too many players start to chase too fewdeals

- with asset overpricing

- flooding liquidity

- short term-flips of assets

- weak corporate governance

The 2008 crash and the future perspectives

The shakeout closed many firms anddepressed the market, but AUM were kept ata constant level

Slowly beginning of new venture capital andprivate equity firms to support SME growth(2010-present)

2000 2002 2004 2006 2008 2010 2012 2014

Source: MENA PE Association, Qatar Financial Centre.


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66

14

4

6

11

1718

10

2

5

2

The 2008 bubble provoked a major declinein fundraising and investment

Source: Booz & Company, Zawya Private Equity Monitor.

20032002 2006200520040

2009 201020082007

5

10

15

20

Funds(#)

Funds raising money (#)

Funds investing (#)

Total amount raised (USD bn)

0

1

2

3

4

5

6

Amount raised(USD bn)

2001 share of emerging market PE was less than 2%

By 2008, PE as an asset class remained small, but showed significant growth, accountingfor 10% of emerging PE, with a total of 150 funds


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but total AUM remained stable, despite a

decline in the number of transactions

Source: Zawya Private Equity Monitor, Markaz Report, Booz & Company.

Key characteristics

Trusted networks,relationships andconnections as akey driver for doingbusiness in the ME

Active role playedby LPs in dealsourcing, with theindustry relyingheavily on theirnetwork

Number of

transactions

Transaction value

(USD mn)

90

2,100

117

7,500

110

3,250

77

850

70

850

72

220

20112008

19.9

2007

13.4

2006

23.2

2010

22.4

2009

21.0

7.8

Evolution of total AUM invested in the region

(USD bn)


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The majority of private equity activity inMENA focuses on minority stakes incompanies

Private equity typically used for

companies looking to either raise

growth capital and/or cash out somevalue for shareholders

Typical 25% IRR threshold and 2.0x exitmultiple are set as the minimum to enter adeal with growth capital companies

Family businesses are particularly

sensitive about giving up majority

control; exceptions occur for subsidiarieswhich are underperforming

Put options generally required by PE

houses to guarantee a liquidity event

Difficult IPO environment outside SaudiArabia (strict regulation)

Minority stakes are hard to sell to non-

financial buyers

PE companies set customary minority

protection rights to hedge the fact they

own a minority stake in the companies

Drag / Tag-along rights

Board seats proportional to percentageowned

List of reserved matters

Characterized mainly by minority stakesand conservative multiplesMinority stakes negotiated mainly to

growth / venture capital investments

and contracts usually including specific

guarantees to protect exit failures


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Investments have been focused on a limitednumber of countries and key sectors


Initial majority of opportunities and transactions occurred

in Egypt, with recent shift to a broader region

Saudi Arabia attracting a lot of interest because of its largeand young population, growing economy and a committedgovernment

UAEcontinues to be a popular destination for fund

managers, and it is expected to further evolve given itseconomic and demographic prospects

Key players are recently investing in healthcare, real

estate, and food and agriculture

Healthcare (biotech and pharmaceuticals) is expected toyield the most attractive opportunities

Construction: ME economies have a pressing need todevelop/upgrade infrastructures

Food & Agriculture: the GCC regions are almost entirelyfood import dependent, which pushes investment upwards

6%

7%

8%

8%

17%

Financialservices

Others

Transport

Healthcare

Food andagriculture

Manufacturing

11% Energy

11%

Constructionand real estate

13%

Tech, mediaand telecom

19%

Geographic focus concentrated in Morocco, Egypt, UAE and Saudi Arabia

Sector focus on healthcare, real estate and food and agriculture

Investment volume since 2006

Investment volume since 2006

5%

7%

29%

UAE

Morocco

14%

Egypt14%

Bahrain

0%

Tunisia

3%

Turkey

4%

Jordan

10%

5%Lebanon

Saudi Arabia

Outside MENA

5%

Other MENA

Kuwait

4%


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but are expected to diversify in the

coming years


As MENA countries make concerted efforts to

diversify their economies and build regulatory

institutions, they are likely to attract further

investment

Further cash inflows into Saudi Arabia:

continuous interest given the size of itspopulation (and economy) and the commitmentlevels of its government

Jordan, Kuwait, Turkey and similar: althoughnon-typical investment locations, these regionsare likely to follow, as their legal and regulatoryinfrastructure has already developed to a

sustainable basis

UAE: likely to see a big rise in terms of FDIinflows, as they follow on the 2030 plan for theregion

The INSEAD-Booz & Company report indicates

that investment is likely to follow demographic

and social developments in the GCC

Infrastructure: traditionally been provided by thegovernment. However outside of the GCC, PEis increasingly being used as a fundingmechanism for infrastructure projects

Energy: increasingly being seen a potentialinvestment avenue as oil-rich countries aim todiversify their energy mix. Both Masdars Clean

Tech Fund (Abu Dhabi) and Catalyst (Jordan)have started the movement to investing in cleantechnology technologies in the region

Geographic focus diversification Sector focus diversification


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Exits are yet limited, but regional GPs areoptimistic about long-term prospects

Source: Zawya Private Equity Monitor, AMIC.

Minimal leverage on deal execution, preference for growth capital, often buying-in rather thanbuying-out, more operationally involved in the investments to ensure operational improvement given

family-offices based customers Number of exits recorded in the region still small, in part due to recent crises and relative young age

of the industry and limited data on private placements

Lack of maturity and depth for IPO exits and limited trade buyers restrict the potential exit strategies

In the majority of GCC states, foreign ownership restrictions apply to limit the percentage holdingthat a non-local can have in the investee company - barrier for overseas PEs

1

2

3

4

Characteristics of deal structures and exit strategies

7

3230

20

30

2325

30

2006

35

Exits / divestments

(#)

20

15

105

020112010200920082007


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GPs believe the market returns will keep

moderate but recover quickly

Source: Booz & Company, 2010 GVCA Private Equity & Venture CapitalReport.

Moderate

Pre-crisis

level

Industry

returns

Imminent

rebound

3-5 years

Reboundperiod

Total

Total

48%

10%

58%

21% 21%42%

69%

31%

100%

PE firms are beingpushed to specializeinto differentindustries in order toprovide more support

and expertise

GDP growth likelynot to be a problem,as oil prices remain ata sustainable highvalue

Positive cashpositioning leave PEfirms with current USD11 bn of dry powder


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Long term prospects for Private Equity inthe GCC look promising

There will be a tremendous need for private equity as a more common tool to

unlock value in the coming years

Family businesses are becoming more institutionalized and seek world-class

corporate governance policies, instilled in their culture (noticeable shift over thepast ten years in welcoming third parties to their board)

Second and third generation family businesses face transitional challenges Checks and balances by non-involved family members on those involved

Certain shareholders need to monetize holdings

International banks in the region becoming more conservative with their lendingactivities (no more name lending and banks taking credit outlook into account)

Companies beginning to see value-add of financial buyers

Reference valuation pre-IPO; taking the lead of an IPO committee Assisting in financial strategies including optimal debt/equity rations, acquisition

analysis and margins analysis


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Case Study:The successful exit of Aramex

Established in 1982 and headquartered in Amman, Jordan, Aramex is a

global transportation and logistics services company providing a variety of express,logistics, freight forwarding and domestic distribution services. In 1997, it was listedon the NASDAQ and was the first international company in the region to do so.

In 2002, the company was acquired in a leveraged management buyout by AramexCEO and co-Founder Fadi Ghandour and Abraaj Capital for a total consideration ofUSD65 mn.

Abraaj Capital is now the largest private equity player in the Middle East, with morethan USD6.2 bn AUM.

Acquisition structure: Leveraged buyout structure financed by USD25 mn in equity,USD30 mn in a 5-year syndicated senior loan notes led by Export and FinanceBank, Jordan, and USD10 mn in mezzanine debt.

Exit: The company was listed again on the Dubai Financial Market in June 2005through an IPO for USD190 mn. This record breaking issue was oversubscribed byabout 80 times. Abraaj achieved a 3x return, and Aramex now has a market valueapproaching USD1 bn.

Private Equity in the Middle East

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