Appetite for private equity investment rises in the region

Dubai: The panic generated by the global financial crisis gouged huge chunks of flesh out of the stock markets and private equity as investors ran for cover into cash, commodities and treasuries.

Banks stopped financing projects or buyouts. And funds that raised money to invest privately into the corporate sector witnessed their traditional investors and leverage options vanish into the ether.

As global economies start recovering, stock markets are cautiously optimistic and the outlook for the private equity industry is brighter.

MerchantBridge, a direct investment and private equity firm established over a decade ago by industry veterans focused on the Middle East and Europe, has closed multiple deals in the past five years. It is authorised and regulated by the UK's Financial Services Authority and has offices in Dubai, Baghdad, Basra and Riyadh.

MerchantBridge also offers corporate finance advisory services in select situations to multinational corporations and governments such as the UK Ministry of Defence on their offset programme in Saudi Arabia.

Gulf News caught up with Basil Al Rahim, MerchantBridge Group Chief Executive Officer, for a chat on the prospects of private equity in the new economic dawn. Excerpts: 

Gulf News: MerchantBridge had to move out of private equity and into consulting when the market for PE deals collapsed. How did that affect bottom lines and work processes? Did you need to reinvent the business? 

Basil Al Rahim: The PE market did not necessarily collapse. We are looking at a number of lucrative opportunities as the market weakens, and as funding is less available.

We have stayed away from high valuations in 2008 and 2009 as we did not understand them. Today, we are seeing valuations we like and are selectively pursuing opportunities both in the region and beyond. In terms of advisory, we continue to be active in this area as we have advised our clients on M&A transactions and continue to advise governmental institutions on initiatives such as privatisation.

As a result of the major international banks retreating from the region, MerchantBridge has had the opportunity to offer corporate finance advisory to medium-sized transactions, and we have therefore received excellent investment prospects that we were not able to see in the past.

Diversity is the key to MerchantBridge's success, by entering previously unexplored investment avenues. 

Research suggests that the returns on private equity investments are improving. What is your view?

Absolutely. We believe that the next three to five years will be vintage years for private equity. With improved valuations as a result of the financial crisis, we think that returns will significantly improve when compared to the past five years.

Moreover, as the regional PE penetration as a percentage of GDP is at 0.2 per cent today compared to 1.3 and 2.7 per cent in Europe and the Americas, respectively, PE transaction volume is expected to increase and new players are expected to enter the market, especially as the market continues to offer attractive opportunities.

This tells us that the region is in need of further investment. Private equity investments are long-term investments with periods ranging from 24 to 60 months. We believe the medium and long term outlook for the region remains strong with improving valuations for some funds. 

Are investors coming back to private equity funds? What has been the experience of MerchantBridge in this matter?

Yes. Many investors have started to re-think their investment strategy to include more strategic long-term investments. We continue to see that PE investment appetite is on the rise.

Another important factor is that bank financing, especially for SMEs, continues to be difficult. The region is full of opportunities today, especially as infrastructure projects continue to fuel the growth engine for the region.

Banks are still tight, which allow PE investment companies to have better opportunities to provide capital for small and medium-sized companies. Currently the most successful sectors for PE investments in ME are oil and gas services, telecom, health care, financial services, infrastructure and education. 

What would you say are the challenges facing private investments globally?

The biggest hurdle facing international PE houses today is access to leverage. In the past, leveraged buyouts (LBOs) provided the most attractive returns for PE firms. Today, access to debt markets still remains a challenge. This means that PE firms would have to resort to more conservative capital structures, which lowers potential financial returns should firms ensure successful plan execution for their transactions. 

The Middle East was a hub of private equity investments at one time. What is your view of the region today from that perspective?

The reason many investors came into the Middle East PE market in the past was because capital markets were booming. A number of PE firms looked at investments as purely pre-IPO [initial public offering] plays.

In effect, they would buy a business six to 12 months before listing, with the PE firm providing value in helping in the listing process. Today, we see that the value to be brought by PE players is via operational enhancement and growing the business as opposed to trading multiples.

Our model is very different, in that we try to bring in a technical partner in most of our transactions. As an example, in one of our most recent transactions, Kerbala Cement, we tied up with Lafarge, the largest cement producer in the world. In the past we have tied up with Qtel [Qatar Telecom] and QNB [Qatar National Bank] in telecoms and banking through our investments in AsiaCell Iraq and Mansour Bank Iraq, respectively.

Increasing trade within the region also offers attractive opportunities. 

What are exit strategies looking like these days? Are exits still hard to engineer?

We tend to have a longer investment horizon than most PE firms in the region. Thus, we look at a number of exit routes, ranging from trade sales to IPOs. In many cases, we bring in technical partners and negotiate mutual exit terms and/or options with them.

The fundamentals are still in place in the Middle East. I expect we will go through a period where we will need to clean up the system and have demand take up existing inventory.