Arab corporate world can tap alternative funding channels

The global financial crisis and the current political events across the Arab region are a testimony of the urgent need for an alternative but complementary source of finance to the traditional capital markets and commercial banks. In particular, as regional corporates begin to re-invest and develop their businesses to tap into the broader regional long-term economic growth story, the lack of funding is emerging as a key challenging issue, mainly for many quality organisations.

Within this environment, the structured finance industry, in its private equity (PE) and credit components, can fill an important part of the large funding gap and, thus, capture an increasing share of the regional corporate house’s financing needs.

The PE firms have accumulated, during the past decade, large amount of funds in order to tap the Mena opportunity. With more than $23 billion (DH billion)raised since 2003, as per data gathered from the Mena Private Equity Association, and representing 0.9% of 2011 GDP, PE fund raising activities of the region surpassed that of other major emerging markets such as China, Brazil and Russia.

However, a big part of these funds are yet to be deployed, with market estimates placing the dry powder at least at $5 billion. When compared to global regions, Mena PE investment activity is growing from an exceptionally low base and has a long way to catch-up, as the whole industry is still at its nascent stages of development. Based on figures from the Emerging Markets Private Equity Association (EMPEA), PE investments as a percentage of GDP reached only 0.03 per cent and 0.01 per cent during 2010 and 2011 respectively in the MENA region, compared to World averages of around 0.33 per cent.

In addition to private equity financing, another mean of funding emerging in the marketplace is the credit financing. In many cases where regional corporate houses are not willing to open-up their equity base to external investors, the debt alternative is frequently sought.

Corporate debt issuances in the Arab region have grown at a fast pace over the past decade, largely outperforming the equity issuances on public markets during the recent years. With around US$ 345 billion issued since 2005 and averaging 3 per cent of GDP per annum, the corporate debt market has firmly grown to become a major source of financing. Looking forward, more room for growth is available if compared to similar performance in mature markets such as Western Europe which actually averages a ratio of debt issuance to GDP of around 19 per cent per year (Refer to Figure 8).

As companies increasingly acknowledge that a major opportunity exists within debt, structured finance companies are increasingly adopting instruments combining a mixture of equity and debt. The emergence of mezzanine financing as an attractive financing instrument thanks to its hybrid nature is a prime example of it. This structuring of Mezzanine finance is highly flexible and is not typically found in senior debt or asset-based bank loans.

Structured Finance industry is being increasingly seen as a viable alternative source of financing to the traditional bank loans and capital market funding, with the current trends in the Finance industry also strongly favouring the emergence of structured financing. These businesses are financing the entire capital structure of large organisations from debt to equity, encompassing a wide array of hybrid instruments.

— The writer is the Head of Research at Gulf Capital.