Big push from private equity

Going into 2008, the GCC economies can expect their robust economic performance to continue. High oil prices, coupled with prudent government policies, have resulted in huge surpluses for Gulf states.

As these countries grow, private equity will play an important role in diversifying their economies. According to estimates, between 2003-06, nearly $30 billion has been invested in private equity across the GCC. With over $1.5 trillion of investible assets, the region has ample liquidity and currently, with more than a dozen buyout funds in various stages, it offers strong growth potential for this alternative asset class.

On the back of healthy growth, small and medium-sized enterprises are growing in the GCC. However, several enterprises are struggling to improve profitability and increase return on capital invested. Here, private equity can play a productive role through acquisition of strategic stakes in such private companies, and assisting (or at times, replacing) management.

Advantages

Several benefits accrue to the enterprise. The company can increase profitability, adopt international best practices and improve corporate governance. Furthermore, a deep-pocketed strategic investor provides a strong capital base to meet future growth as well as R&D requirements.

Large family groups influence a substantial portion of economic activity within the GCC's private sector. For many, lack of a coherent business strategy and synergistic focus have created opportunities for private equity to intervene and improve growth prospects through recapitalisation, restructurings and repositioning of competitive strategy.

The case of Saudi Arabia is pertinent. Given its strong growth, private equity investors can reap the benefits of deregulation and liberalisation that accrue to a country at this stage of its development. For an economy like that of Saudi Arabia's growing at over five per cent annually and with oil prices hovering over $90 per barrel, growth is expected to continue unabated over the next several years. The "two-pronged effect", i.e., benefits of the Saudi government's diversification programme as well as increasing private sector investment, is bound to further crystallise business opportunities. Several benefits of the private equity business, including improved human resource and management pools, further growth of small and medium-sized enterprise, can flow into the Saudi economy.

Profitable

The private equity business accounts for a small proportion of the GCC's overall economic activity. But there is huge room for growth. In the medium term, success will depend on the ability of investment advisors to identify value in businesses for investors, engineer a practical restructuring and buy-out initiatives, and lastly, execute a profitable exit strategy for the strategic investor.

In the long run, existing investors and business owners will have to realise positively strong investment returns that are enticing enough to lure additional players into the private equity arena. But increased investor participation is likely to limit the performance of the overall private equity business as increased capital seeks a finite amount of profitable investment opportunities.

- The author is CIO and head of asset management at FALCOM Financial Services in Riyadh, Saudi Arabia. The opinion expressed is that of the author and does not reflect that of the organisation he represents.