Optimism is returning to regional private equity

Dubai: The level of optimism in the private equity industry in the Middle East and North Africa (Mena) has improved substantially this year compared to last year, according to a recent survey by Arbor Square Associates conducted for Deloitte.

While there is now perceived to be less uncertainty in the global economy and more encouraging signs within Mena (Middle East and North Africa) itself, private equity executives in the region view the next 12 months with an element of caution.

Commenting on the survey results, Richard Clarke, Managing Director of Transaction and Recognition Services Middle East Region of Deloitte, told Gulf News that after going through the financial crisis there is a greater sense of realism among general partners (GPs) and limited partners (LPs).

"The perception of the market on fundraising remains tough. However, the overall negative perception has subsided substantially compared to last year. Many GPs are left with funds raised in the past. These firms have an opportunity to invest at attractive valuations," said Clarke.

Buyers are seen to be in a better position now and most GPs expect investment activity to rise, with valuations beginning to stabilise.

Positive shift

"We can see some signs of a positive shift in sentiment among GPs in the region compared to the results of the 2009 survey," said Chris Ward, CEO of Deloitte Corporate Finance in the Middle East.

"Strong domestic economies and favourable demographics, for example, are just two of the many strengths cited by GPs that Mena has to offer."

The study shows that there is a widely held view among GPs that the global LP appetite for the Mena region will increase over the period, fuelled by market recovery and, in particular, interest in new and specialist sectors. However, many in the industry admit that LPs have become extremely cautious on fund allocation.

"In times of crisis funds generally move towards safe havens. One of the things that will define GPs' ability to attract funds will be their track record. In this context the factors such as factors such as brand image, demonstrable ability to add value and personnel chemistry will be key factors in attracting funds," said Clarke.

Exit activity in the region is expected to resume after a long lull. However, the current environment is difficult for exits.

"Trade sales and acquisitions will be most common, but we are hearing that the main obstacle is valuations. Trade buyers are looking for attractive deals and there is still an expectation issue between buyers and sellers. IPOs are picking up, but expectations are modest," he said

The fundraising environment in Mena remains tough, but sentiment appears to be moving in a positive direction. As private equity's recovery starts to build, most Mena GPs view the role of government in this process as supportive. However, there is still some way to go in easing legislation, such as that relating to foreign ownership laws, and overall market regulation.

In terms of geography, the lion's share of deal activity will remain in the three key hubs: Saudi Arabia, Egypt and the UAE, but there is greater recognition now of the role more frontier markets could well play in the future, with Iraq, for example, noted for its untapped potential despite the evident risks.

Key

• Over the next 12 months entry multiples are expected to remain at the same levels.
• The majority of participants (45 per cent) expect returns achieved from private equity exits to stay the same over the next 12 months.
• The environment for exits is difficult, but trade sales are expected to be the most common exit route in the next 12 months followed by initial public offerings (IPOs).
• More defensive sectors, such as health care and education, will continue to be popular in the coming year, along with oil and gas, the consumer sector and infrastructure.