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Since 2014, the Gulf’s private equity (PE) industry has been facing challenges in the wake of macroeconomic slowdown combined with oil price volatility and rising geopolitical risk. To top it off, the collapse of region’s biggest buyout firm further worsened the situation and significantly eroded institutional investor confidence.

As a result, fund raising remained subdued with only eight MENA-focussed PE funds ($406 million raised) closing in 2018 compared to 10 ($1.2 billion raised) in 2017 and considerably lower than the $14.3 billion raised in 2015. Prominent PE firms such as Abu Dhabi’s Waha Capital and Kuwait’s Global Investment House either scrapped or delayed their fund raising plans citing negative investor sentiments.

Similarly, the deal activity also lost momentum with only 17 PE-backed buyout deals in MENA region in 2018, which was the same as in 2017, but considerably lower than completion numbers in 2016, 2015, and 2014, when 32, 31, and 46 deals were completed, respectively. Despite these headwinds, the long-term prospects remain positive as stabilizing oil prices and anticipated economic recovery will support the diversification and development related efforts, combined with the governments’ pro-business reforms aimed at strengthen entrepreneurship and small and medium enterprises (SMEs).

Stability as a spur

Given the stabilization of oil prices, the GCC economies are expected to post strong recovery, supported by rise in investment flows and private consumption. According to IMF, the UAE economy is expected to achieve an average real GDP growth rate of 2.5 per cent over the next five years, while Saudi Arabia is expected to deliver 2.4 per cent real GDP during the same period.

With this economic recovery backdrop, the GCC PE activity is likely to pick up both on the new investments and exit sides. Moreover, in the past four to five years, GCC governments have undertaken several landmark decisions ranging from expansionary budgets, stimulus packages, pro-business reforms, FDI opportunities, etc. in a bid to develop a sustainable and diversified private sector.

The 100% factor

For instance, the UAE recently approved 122 economic activities across 13 sectors for up to 100 per cent foreign ownership, offering new opportunities for international investors in lucrative fields such as e-commerce, IT, healthcare, education and renewable energy.

The Emirates also initiated a “golden card” permanent residency programme, along with long-term residence visas for professionals and retirees, which have encouraged more entrepreneurs and businesses to invest in the country. Similarly, Abu Dhabi’s Dh50 billion stimulus (to be provided over three years), and the implementation of structural reforms (lowering fees and easing business licensing and registration) have provided impetus to the emirate’s private sector.

Saudi Arabia turns on incentives tap

Alternatively, Saudi Arabia’s pledge to raise the GDP contribution of SMEs to 35 per cent by 2030, along with boosting FDI to 5.7 per cent of GDP by 2030, and its $200 billion privatization programme, are measures undertaken to transform the Kingdom into an “open for business” economy. These have shaped a conducive investment environment, particularly for start-ups and SMEs, enabling them to attract greater investments across the region.

The GCC is home to several noteworthy and successful companies, from prominent regional unicorns such as Careem and Souq, to fintech platforms such as YallaCompare, Souqalmal, and PayTabs; logtech company (Fetchr); and e-commerce players (Mumzworld, AWOK, the Luxury Closet) among others, which have attracted significant funding and valuations over the years.

Moreover, these companies have witnessed high exit valuations, with some of the largest GCC exits in the past few years. Careem was acquired by Uber for $3.1 billion while Souq.com was acquired by Amazon for $580 million.

Mouth-watering returns

Notably, Careem’s initial investors are said to have received a 500x return whereas newer investors such as Saudi’s STV Ventures, saw as much as a 2x return in just five months. Such success stories are testament to the region’s global appeal, while also suggesting the opportunities within its secondary private market.

Growing number of tech hubs, accelerators, incubators, and PE/VC firms coupled with government’s favourable policy stance has fostered an entrepreneurial culture in the region. SWFs (sovereign wealth funds) and government investors have worked to create regional PE hubs in recent years, such as in Oman with its accelerator/incubator Oman Technology Fund and its first strategic VC firm IDO Investments, as well as Abu Dhabi’s Hub 71, launched this year with Dh535 million.

Several free zones have also emerged in the region, which focus on the development of startups and SMEs and encourage new technology and innovation, such as Flat6Labs, FinTech Hive, Astrolabs, Cloud10, and DTEC. As a result, the GCC has seen startups emerge in newer tech-enabled segments such as IT, e-commerce, fintech, edtech, medtech, healthtech, agritech, logtech and proptech, which are increasingly garnering investor interest.

These offer new economic opportunities and remain crucial for the region’s economic diversification agenda. In 2019, a majority of domestic PE deals were secured in tech-based sectors, led by e-commerce/online marketplace (14 deals worth $111 billion), followed by edtech (two deals worth $13.6 million), fintech (four deals worth $9.6 million) and IT (six deals worth $5.9 million), highlighting the attractiveness of the region’s technology space.

Moreover, fintech startups in the GCC are expected to attract $2 billion in private funding over the next 10 years, compared to $150 million worth of investments over the last decade.

In the current era of heightened global uncertainty driven by volatile capital markets, PE has proven to offer multitude of benefits to investors, enabling them to diversify the portfolio while cherishing higher absolute and risk-adjusted returns. Anticipated economic recovery and the governments’ pro-business stance will continue to nurture the regional SMEs and startups, which will present plethora of investment opportunities for both domestic and foreign investors.

While the corporate governance-related concerns might attract higher investor scrutiny going forward, they are unlikely to deter investor confidence in the long term as evident from the recent investments of New York-based KKR & Co. and BlackRock Inc. in Abu Dhabi’s oil pipelines or London-based CVC Capital Partners’ stake purchase in private schools operator - GEMS Education.

Shailesh Dash is a UAE based entrepreneur and financier.