Dubai: Fund raising remained challenging for the private equity and venture capital business in the region in 2016 and the conditions are likely to remain the same in 2017, according to Mena Private Equity and Venture Capital Annual Report.
Conditions remain challenging due to economic headwinds and geopolitical factors. While seven funds were raised in 2016, the number of closes declined to nine and funds raised were at a low of $582 million.
The largest Mena focused fund raised was the Gulf Capital’s $250 million (Dh017.9 million) Gulf Credit Opportunities Fund II, a mid-market focused debt fund. Other major funds raised included the $110-million NBK Mezzanine Fund.
According to the Mena Private Equity Association, a non-profit organisation supporting the development of the private equity and venture capital industry in the Middle East and North Africa, 2016 was the most challenging year since 2011 in terms of fund raising and closes. Difficulties associated with raising funds in the market have led many general partners to (GPs) to source funds through alternate channels including co-investment options.
“Fund-raising in the region remains a major challenge faced by GPs. The main causes continue to be a combination of economic slowdown, external views on geopolitical factors and the inability of some players to exit and recognize profits for investors on vintage funds,” said Sam Surrey, principal director, financial advisory, Deloitte.
The underlying trend continues to be that funds are raised by the major industry players with a confirmed track record, who are able to continue to attract investors to the blind pool [raising money without any stated investment goals] concept.
“Under the current economic and geopolitical conditions in the region, it is difficult for private equity players to raise funds under blind pool concept. People want visibility of the portfolios where their money is invested. Increasingly investors from outside are worried about the geopolitics. The recent developments relating to Qatar could be a point of disruption,” said Dr Helmut Schuehsler, CEO of specialist private equity firm TVM Capital Healthcare Partners.
At the end of 2016, cumulative funds under management of private equity industry in the region increased to $27 billion while four funds disclosed closed in excess of $50 million last year compared to five in 2015. Two funds raised in excess of $100 million, compared to three in 2015.
A survey of the GPs from the region showed that growth capital remains the main focus of fund managers. However, some funds classified as growth capital also consider investments where there is a buyout element.
As in previous years, the dominance of growth capital can be seen as a result of the target of PE firms in the region to increase value from growing the business and profits rather than the use of leverage which is a reflection of an emerging market where returns are predominately measured by earnings growth as opposed to leverage. To grow businesses, PE firms tend to be extensively involved in providing support through direct involvement and additional resources.
Venture capital fund raising also faced significant slowdown compared to 2014 and 2015 levels that were the highest since 2008. “Given the increasing focus on venture capital in the region this trend is somewhat surprising but reflects the broader short term fund raising challenges faced by alternative asset managers. We also caution that, as with private equity, not all investments are being made through the blind pool structures that are captured in this survey,” said Surrey.
The private equity industry experienced significant growth over the period to 2014/2015, but 2016 saw a slowdown, reflecting the sustained impact of lower oil prices on the broader economies of the region, pockets of geopolitical instability and shocks to the wider global macro environment, all of which affected broad investor sentiment.
Fund managers generally expect this trend to continue in 2017. Adapting to a ‘new normal’ of lower growth is therefore high on the agenda of private equity investors in Mena.
In 2016 there was a more marked divergence between trends in private equity and venture capital than has been seen in previous years. The overall number of deals increased, as venture capital investment levels continued to grow but the decline in the number of higher value private equity transactions precipitated a decline in the total value of investments made.