Dubai: The UAE accounted 62 per cent of Middle East and North Africa (MENA) private equity investment activity by value in 2016, a substantial increase from 2015 according to Private Equity & Venture Capital Annual Report of the MENA Private Equity Association.

In terms of volume of deals too, UAE emerged the largest market in 2016 with 34 per cent of deals concentrated in the country.

“As the regional economy continues to develop and grow, private equity has an important role to play in helping good companies become great ones. This year’s report has shown a particular increase in appetite for investments in technology-related sectors, such as IT, FinTech, and e-commerce. This is a space the Centre will continue to develop via enhancements to our funds platforms and regulations, as well as initiatives such as FinTech Hive at DIFC,” said Salmaan Jaffery, chief business development officer at DIFC Authority

The promotion of the venture capital industry has become increasingly prominent, with numbers of incubators and accelerators increasing, alongside a developing legislative framework in the UAE.

“Last year private equity increasingly viewed the UAE as the most attractive MENA market in the short term in regards to stability and availability of large and quality assets. More uncertain market conditions in other GCC markets attracted fund managers more towards investing in the UAE and adopting a wait-and-see approach with other countries,” said Sam Surrey, principal director, financial advisory, Deloitte.

Data shows that 2016 marked divergence between trends in private equity and venture capital than has been seen in previous years. The overall number of deals increased, as venture capital investment levels continued to grow. The decline in the number of higher value private equity transactions led to a decline in the total value of investments made.

The upsurge trend in PE and VC investment activity continued in 2016. Disclosed transactions reached 244, recording the highest since 2008. However, the value of disclosed investments decreased by 25 per cent to $1.1 billion (Dh4.04 billion); a reflection of the more challenging investment environment. Leading transactions included Careem, the UAE headquartered regional provider of transportation solutions, raised $350 million in 2016.

Saudi Arabia witnessed a considerable decrease in deal value and volume in 2016 driven by the persistency in low oil prices and uncertainty regarding the impact of regulatory and fiscal reform. A number of investors commented that this makes the forecasting of a potential investee’s future results more difficult resulting in a lower level of deals in the Kingdom.

Egypt experienced a fall in investment activity levels in 2016, which was anticipated given foreign exchange instability and political factors. However the survey of PE and venture capital investors showed Egypt will remain a market that investors have strong desire to access, should conditions prove suitable.

As in 2014 and 2015, divestments remained a major focus for portfolio managers in 2016, with general partners (GPs) being under pressure to monetise returns on assets held in vintage funds from pre-crisis years. However, exits have proved to be difficult as lengthy holding periods and the slowdown in recent years may have depressed IRRs on portfolio investments. Whilst this may encourage further extension to the holding period to allow time for recovery, current growth levels may still not be adequate to regain returns to levels initially forecast.

The industry faced difficulty in executing attractive exits in 2016. This is evident from the lack of available information regarding exit valuations, which may be an indication of exit prices being below target.

Industry leaders expect overall trend of 2016 in terms of investments and fund raising to continue into 2017. “The extension of 2016 market conditions into 2017 and the continued gap between buyer valuations and target internal rate of returns from sellers indicate that exits that satisfy fund managers are expected to remain challenging in 2017,” said Dr Helmut Schuehsler, CEO of specialist Private Equity firm TVM Capital Healthcare Partners.