Private equity to emerge stronger

Dubai: Capital availability is unlikely to pose problems for the regional private equity industry as most of the players are flush with liquidity and the region's gross domestic product is set to grow 3.5 per cent in 2010, said a recent research by Insead, an international business school in partnership with Booz & Company.

Middle Eastern private equity firms are sitting on about $11 billion (Dh40.3 billion) in funds raised before the economic downturn. The study estimates that even if investments were to return to the fast pace of 2005-2007 it would take more than five years to place all of this capital.

To take maximum advantage of Middle Eastern opportunities, PE firms are expected to specialise in the industry segments where they are predominantly active.

The survey of industry participants shows that going forward, regional PE firms will have to provide more operational support to their portfolio companies, helping with operational activities such as executive recruitment and partnership development.

"In order to take advantage of Middle East opportunities in 2010 and beyond, PE firms must act as active owners. They have to provide more support to their portfolio companies, helping with strategic and market positioning, financial discipline, and filling the management gap," said Ahmed Yousef, Principal with Booz & Company.

Regional focus

The dominant trend since the beginning of the region's PE industry has been a broad Middle Eastern focus with the majority of opportunities and transactions occurring in Egypt, given its maturity, depth and strong economics.

According to Citadel research, Egypt accounted for 40 per cent of deals in the Arab world, followed by the UAE (27 per cent). Funds have been opportunistic and have kept their regional scope relatively open. Nevertheless, there seems to be a shift in focus.

The report takes a close look at the role of family-run enterprises in the region and the associated investment challenges for the private equity industry.

The research shows that while the recent crisis may have affected the investment capital of family businesses, they are still important investors.

New opportunities

Moreover, as they re-evaluate their existing portfolios and divest non-strategic companies, family businesses may present new opportunities for local well-connected private equity firms.

"Private equity in the Middle East has evolved to play a critical role in the region by injecting cash, human and logistic resources, and managerial and technical assets into local businesses. Private equity is also closely tied with the transition of family businesses to corporate structures and the development of regional regulation", said Laura Morales, INSEAD's Global Private Equity Initiative Director.

Investment trends in the region indicate that key players invest across a range of sectors. However, given the expertise required to succeed in a more challenging environment, firms are increasingly focusing on specific sectors, such as infrastructure.