Dubai: The private equity industry in the Middle East and North Africa (Mena) region has been facing challenging times in fund raising in recent years and the recent developments relating to Abraaj is expected to impact investor perceptions.
Fund raising remained challenging for the private equity and venture capital business in the region in 2016 and 2017, according to data Mena Private Equity & Venture Capital Association.
During the last two years, conditions remained 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. Analysts placed the fund raising in 2017 was below $500 million.
Industry sources said the challenging environment to raise money has been made worse by the recent controversy at Abraaj, the region’s biggest buyout firm, which is facing litigations from lenders and investors on charges of loan defaults and comingling of funds.
According to the Mena Private Equity Association, 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.
According to industry insiders 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 recognise profits for investors on vintage funds.
The regional industry leader Abraaj’s general partner (GP) role and the company’s ability to resolve litigations and deliver the expected returns will be factors that will have a bearing on the industry for many years ahead.
Disgruntled Limited Partners (LPs) in Abraaj funds include as the Bill & Melinda Gates Foundation and International Finance Corporation (IFC), the World Bank’s private investment arm, who alleged improprieties against Abraaj could adversely impact perceptions of LPs.
In the wake of the Abraaj case, Abu Dhabi-based Waha Capital has reportedly abandoned its plans to raise $300 million. “PE fund raising has been under stress in the region in the recent years. The news from the industry is not great for GPs. Winning back LPs’ confidence under the current circumstances will be a huge challenge,” said the CEO of a UAE based private equity firm.
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.
Venture capital (VC) investments in the Middle East and North Africa (Mena) region made significant gains last two years and has been evolving as a popular asset class among regional investors. Venture capital fund raising also has been facing significant slowdown during the last two years. Analysts expect the woes to the PE industry is likely to be reflected in VC fund raising too.
Quick facts on private equity investments
Dubai: In the context of the recent reports on Abraaj Group and private equity industry, here are a few terms that are frequently used in our reports. Following are quick definitions and meanings of frequently used terms.
Private equity
Private equity is capital that is not listed on a public exchange. Private equity industry is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity.
Leveraged buyouts
A leveraged buyout (LBO) is the acquisition of a company using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans, along with the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.
Venture Capital
Venture capital is financing that investors provide to start-up companies and small businesses that are believed to have long-term growth potential. Venture capital generally comes from well-off investors, investment banks and any other financial institutions. However, it does not always take just a monetary form; it can be provided in the form of technical or managerial expertise.
Angel Funds
Angel investors invest in small start-ups or entrepreneurs. Often, angel investors are among an entrepreneur’s family and friends. Angel investors are a class of well-to-do investors, usually experienced industry folk who take equity stakes in start-ups. They take very early-stage businesses under their wing. Typically, institutional investors such as venture capital funds or private equity funds do not like to commit capital to tiny businesses. Nor do they like to bet their shirt on firms that are yet to prove themselves in the marketplace. Angel investors literally step in where others fear to tread.
Limited Partners (LPs)
In the context of private equity, a limited partner (LP) is a third party investor in a private equity fund. Private equity firms raise private funds in general partnerships where they manage the capital as the general partner. Investors are then canvassed for investment commitments up to a specific allocation for the fund. The investors who commit and subsequently invest in the fund become limited partners of the general partnership.
General Partners (GPs)
In the context of private equity (PE), the general partner, or GP, refers to the PE firm that manages a private equity fund. These funds are usually set up as general partnerships with the third party investors being the limited partners and the PE firm acting as the GP. In addition to raising the funds and administering the daily operations of the fund, the GP is responsible for identifying and closing on investments, assisting the company management teams in maximising value, and liquidating investments so distributions can be made out of the partnership to the limited partners.
