Dubai: Over the past decade, the GCC sovereigns have undergone major economic transformations with an aim to diversify their oil-dependent economies. Historically, the GCC nations have been able to self-fund their economic development but foreign investments have become imperative in diversifying their revenue base, especially in the wake of the low oil price scenario. With a particular emphasis on the services sector, the countries have continued to make huge inroads in their diversification agenda by implementing several policies and reforms to strengthen the business environment, develop infrastructure, and increase financing for regional companies, especially the SMEs. Thus, the start-up ecosystem, a bedrock for the SME industry, has surfaced as a new growth engine for the region.

Steering investments in areas such as technology and automation, these ventures have not only facilitated job creation but also fostered innovation, increased competition, and efficiency across all major sectors. Such positive developments have paved the way for the rebirth of PE and VC investments in the GCC. Moreover, initiatives such as the opening of key sectors for FDI and rising PPPs have facilitated the inflow of foreign capital, creating an environment conducive for foreign investments.

Most notably, as part of their respective long-term economic plans, the regional governments have been working incessantly, in collaboration with the private players, to boost key economic sectors such as health care, education, transportation and logistics (T&L), e-commerce, and food and beverages (F&B) amongst others, while also improving their outcomes. As we stride into 2018, let’s look into what makes these sectors promising and attractive for potential investors.

Health care

The GCC has witnessed significant growth across several sectors over the last decade, and the health-care industry has emerged as one of the most critical sectors for pursuing economic diversification. The region has made considerable efforts to upgrade its medical facilities, leading to the expansion of health-care spending which has multiplied 3.8x to $64.1 billion (Dh235.38 billion) over 2004-14 (14.3 per cent CAGR) vis-a-vis 1.8x for the world, and is further expected to reach $19.6 billion by 2018. Since the dip in oil prices, the GCC governments have started looking at private sector involvement as an alternative to sustain health-care funding and are keenly promoting PPPs, rolling out mandatory insurance coverage and encouraging private players to set up facilities. Further, the sector is witnessing a structural shift as a younger, more health-conscious population is seeking preventive care rather than curative care.

The entry of foreign players through strategic collaborations are expected to further transform the healthcare landscape as they help develop new products and services, particularly across the digital space with key participation by both PE players and institutional investors. Deal activity in the regional health-care space during the last decade has been buoyant with M&A deal value clocking more than $3,598 million from a total of 72 deals announced between 2006-16; while, as many as 67 PE deals worth $837.8 million were struck between 2006-17, as per disclosed values. Most notably, with $381 million in medical tourism revenues in 2016, Dubai has emerged as the undisputed regional leader, substantiating UAE government’s initiative to establish the country as a hub for medical tourism.

Education

In the current age of globalisation, education is the best investment that any nation can make for its long-term economic health.

The GCC educational sector too has received a much-needed impetus over the past decade with the governments realising its importance in building a skilled workforce and creating employment opportunities. Over the last 5 years, despite a sharp dip in oil prices, the government expenditure on education grew at a CAGR of 2.6 per cent from $63.7 billion in 2012 to $72.3 billion in 2017.

Moreover, the region’s growing expatriate population, driving the demand for private schools with international academic curriculum, is making the education sector one of the most popular investment destinations. With the governments opening the sector for private players, the region is already witnessing increased private participation and higher enrolment rates at educational institutions.

Additionally, large PE funds are increasingly scouting opportunities in the GCC education industry, while the deal activity has remained robust with a total of 25 deals struck in the region during 2010-2017 worth $114.8 million as per disclosed values. According to Al Masah, the GCC private K-12 education market is expected to reach $25.6 billion by 2020, growing at a CAGR of 17.6 per cent.

Moreover, GCC is witnessing a rise in the integration of technologies such as e-learning platforms or use of artificial intelligence (AI) in the education sector and many intentional e-education providers are targeting the region to expand its market. UAE has emerged as the hub for higher education in the region, housing prominent international universities and institutions.

Food and Beverages (F&B)

Rising expat population and a growing tourism industry, coupled with the influx of several international food joints due to the rapidly changing consumer palates makes the GCC F&B sector ripe for investments.

The regional market was valued at $21.5 billion in 2016 and is expected to grow at a CAGR of around 8 per cent to reach $29.3 billion by 2020.

Additionally, the growth is expected to bolster on account of an estimated 25 million tourists to visit the EXPO 2020 in Dubai, the fast growing QSR segment (58 per cent market share), a rising trend of dining out, and government’s thrust towards building a strong hospitality sector. This is likely to have a substantial impact on the GCC F&B industry which will require hefty investments to expand and support the growing demand, especially in the UAE where the total number of outlets is expected to rise to around 7,603 outlets by 2018.

The sector, with possibly the lowest level of saturation, has attracted a total of 24 PE deals between 2006-17, while 26 M&A deals took place in the GCC’s food service sector during 2010-2017.

Transportation and logistics (T&L)

The GCC region for long has remained a strategic hub for international trade and commerce between the East and West and plays an important role in the movement of goods throughout the world.

The logistics market forms a fundamental part of the GCC economy and is expected to reach $66.3 billion by 2020, growing at a brisk pace of 7.3 per cent CAGR.

Saudi Arabia and the UAE, the two most important logistics markets in the GCC, have been spending dynamically in building their infrastructure, accounting for 13 per cent and 10 per cent of their GDP in 2015, respectively.

However, the logistics service provider industry in the region is highly fragmented and is on the brink of consolidation with larger private players looking for market dominance. The influx of integrated service providers is a major trend in the market, with companies increasingly focusing on improving their core competencies, while increased competition has necessitated outsourcing to 3PL/4PL players for the companies to maintain their market position.

Going forward, growth in the sector is imminent as the regional governments are actively taking several initiatives such as setting up of free trade zones, providing incentives for air and sea transports, increase spending for logistics infrastructure and allowing private investment through PPPs.

Since 2010, the sector has attracted a total of 47 M&A deals and 20 PE deals; and is expected to further offer tremendous opportunities for private players as the region’s infrastructure project pipeline remains robust.

E-commerce

The GCC e-commerce market, though at a nascent stage, is changing at a rapid pace, driven by exciting new trends and features, new ways to make online purchases, the impact of consumers engaging with brands through social media and the demand for global product availability.

The market is expected to gain further momentum and become one of the fastest growing sectors due to its robust potential amid a rising millennial population, coupled with growing international and domestic players to maximize untapped opportunities.

According to AT Kearney, GCC’s e-commerce market is expected to grow at a CAGR of 30.2 per cent to $19.8 billion by 2020 from $5.3 billion in 2015. UAE and Saudi Arabia remain the key markets and are expected to cumulatively contribute over 80 per cent of total e-commerce transactions by 2020.

Over the last couple of years, e-commerce has become one of the most attractive space for PE investments across GCC, with 36 deals struck since 2015. Furthermore, recent transactions like Amazon buying the leading regional player Souq.com demonstrate the huge potential global players and investors see in this market.

Moreover, the health care, education and F&B sectors primarily act as a hedge against the cyclical sectors, which are highly correlated to oil prices such as the banking and real estate sectors, making it even more attractive for investors.

These sectors being defensive in nature, are expected to remain resilient in the current economic scenario and gain strong momentum going forward. Most notably, the regional deals landscape illustrates that there’s plenty of room for all players (PE and institutional investors), including homegrown brands and established international brands eyeing expansion in these sectors.

Going forward, early stage VC and PE deals with technology start-ups aiding the growth of the defensive sectors will attract international and local interest, helping increase M&A activity in the region.

— Shailesh Dash, Founder and CEO, Al Masah Capital Management Limited