Dubai: Private equity industry in the Middle East and North Africa (Mena) has emerged stronger from the global financial crisis and the recent political turmoil in the region, according to a recent survey of the industry by PricewaterhouseCoopers (PwC) and Insead Abu Dhabi.

The research has shown confidence returning to the PE industry. The firms are particularly optimistic about the prospects of sectors such as health care, education, consumer goods and oil and gas, which are likely to benefit from government spending plans and regulatory changes.

Industries such as railways, toll-ways, ports and utilities are also attractive to investors as they draw billions in capital spending.

Mena PE firms began in 2010 with renewed hope after the global financial crisis brought an abrupt end to the meteoric rise of the nascent PE industry in the region. Fundraising had become anaemic, with insufficient new capital flowing into the industry. Despite the sizeable amount of dry powder accumulated over the boom years, deals had stalled as acquisition fin-ance became expensive and difficult to obtain.

Additional problems resulted as companies' valuations remained high, apparently not reflecting the new economic and financial realities. Meanwhile, equity market corrections and the limited appetite of trade buyers combined to render exits challenging.

In hibernation

The attention of key players in the industry turned to managing a huge legacy of assets, mainly purchased when valuations were high and leveraged financing was cheap and easily accessible. As the world economy gradually recovered in 2010, PE activity began a slow recovery in many markets globally; however, the PE industry remained in hibernation in the Mena region throughout most of the year.

The new research shows the regional PE industry is ready to deal with new realities on their home turf and expand outside the region.

"We conducted this research over a large scale of firms; what's interesting is that findings show PE firms plan expansion outside the region in places like Turkey, India, sub-Saharan Africa, and several firms are even considering riskier markets such as Iraq," said Yousuf Bazian, PwC's leader in Middle East Corporate Finance and Private Equity.

"Within the region, however, PE firms say they are likely to invest more in Egypt, Saudi Arabia and the UAE," he said.

The report shows the level of fundraising, investments and exits in the Mena region remained well below pre-crisis levels, despite the renewed growth of the regional economy. According to the IMF, the Mena's aggregate GDP grew by an estimated 3.8 per cent in 2010, up from 1.8 per cent in 2009. But neither the number of new acquisitions nor the number of exits exhibited much sign of recovery from their 2009 lows.

Modest rise

Fundraising activity remained far below its pre-crisis level and is best reflected by the statistics of the total Mena market in 2010: the number of funds rose modestly to eight from the historic low of seven in 2009 and remained well below the highs experienced before the crisis. While 2010 showed an increase of 23 per cent $1.4 billion (Dh5.1 billion) relative to $1.1 billion in 2009, the figure remained far below the peak of $6.5 billion in 2008.

The number of exits in percentage terms appears robust with an increase of 67 per cent in 2010. However, in absolute terms, the increase was only to a ten from the incredible low of six recorded in 2009; this number remained far below the peak of 2008 when 24 exits were realised.

And most GP's are delaying exits until 2012 due to the lack of liquidity in local stock markets and the limited appetite among trade buyers.

Industry dynamics presented in the report may force PE firms to rethink their way of conducting business, from the way of sourcing companies to value creation, structuring controls and reporting. The political uncertainties affecting some Mena countries may also offer new long-term possibilities for PE firms in areas such as small and medium enterprises, Greenfield projects and distressed companies.

The survey showed the small- and medium-sized enterprises (SMEs) sector has emerged a new investment target for the regional private equity players.