Private eye

zoom

zoom

Dave: some Middle East firms still have financial structures that make due diligence more difficult.

The credit crunch in global markets in recent months caused some high profile buyouts to stall - notably those of Boots and Hilton - but activity in the Middle East private equity sector seemed to maintain its momentum. This was due primarily to two factors: the region is awash with liquidity, and, excluding sovereign investment authorities, the deal size in the Middle East is nowhere near as large as in the West.

Dr Karim El Solh, CEO, Gulf Capital, says: "On the local side, we're not seeing much change or difference because local banks are still flush with cash and the economy is doing very well. Remember the local banks are mostly exposed to regional real estate and industry which are both doing very well still."

However, many of the international banks have become more risk averse - as have some people in the private equity industry.

"With the international banks we're seeing some hesitancy, a bit more of a cautious stance, but they're still willing to talk, which is good," says El Solh. "I think also what's interesting is the private equity firms realise what's happening globally and that sooner or later it's going to spill over to this region. You'll find that they're being more guarded and they're not asking for aggressive financing, like covenant-light financing and the like, so the proposals they're putting forward for bank finance are a bit more cautious."

Ennis Rimawi, managing partner at Catalyst Private Equity in Jordan, says that the credit crunch has not hindered the firm's transactions.

"Because of our focus in terms of deal size, the credit crisis hasn't really affected us," he says. "With regards to Catalyst, because our focus is more on early growth phase companies, they're not highly leveraged, and we don't rely on significant leverage in our transactions, or much leverage at all. These are typically very high growth companies that are equity funded.

"It's primarily affecting the buyout funds that are dependent on significant debt and significant leverage on balance sheets to make their transactions feasible or lucrative. That's what's happening with the KKRs and the Carlyles, and it's also affecting firms in the region."

The credit crunch may have made emerging market companies a more attractive proposition for international private equity firms and banks, which could either present local players with competition, or with the opportunity to tie-up with firms that have private equity expertise but lack local knowledge.

Ithmar Capital was the first private equity firm in the Gulf to form a strategic alliance with an international player. 3i has invested US$15m in the Ithmar Fund II, which will invest in growth capital and buyout investments in the GCC, and is expected to attract $250m in investment, helped no doubt by the big name attached to the project.

"Early on when we set up Ithmar Capital we realised that no private equity player in the region had any association with a pure-play international private equity player," says Khaldoun Haj Hasan, co-founder and managing partner, Ithmar Capital.

"The region has had initiatives from the likes of Deutsche Bank and HSBC, but at the end of the day they are merchant banking operations with private equity divisions, they're not pure-play private equity players.

"The fact 3i was one of the few publicly-listed private equity firms at the time meant high standards of governance and transparency, an area we could learn a lot from, and an area the region has to a certain extent lacked."

3i's long experience in the industry was also a factor. "They've been operating for such a long time it means they've got tremendous sector expertise, something we could also benefit from," says Hasan. "If you look at most of the private equity firms in the region, they are sector-opportunistic, and that's due to the fact that they probably cannot afford to be sector-specific at this point in time. There is probably not enough quality deal flow in a certain sector to allow you to have that specialisation."

3i is one of the largest oil and gas investors in Europe, so Hasan expects this particular sector knowledge to be extremely useful in the GCC.

He anticipates further tie-ups between international and regional private equity firms. "It's not enough just to be a great global brand in private equity and come into this marketplace and think that you can just succeed based on that," he says.

"I think you need to recruit the right people, have the right alliances, have the right networks.

"A lot of that could come by virtue of you tying up with a regional private equity player that has all these mediums. I expect more and more of this to happen and I think this will be better for everyone and better for the industry."

International firms can also bring staff with skills that may not be widely available in the region. "If you look at most of the private equity companies around, the dominant skill in them is transactional skills," says Hasan.

"We've made sure, other than the fact that we do have transactional skills in-house, we recruit people that are mainly from operational expertise or pure private equity expertise, and that's why we have to go out to the West and seek people with Western private equity experience to bring them to this part of the world."

There are also limits to the benefits of local knowledge. As with any emerging market, there can be challenges when conducting due diligence on some Middle East companies.

"Generally the businesses that are being looked at are family-owned or owner-managed businesses.

"The level of governance has not needed to be extremely robust. From the shareholders' perspective, as long as the business is making money they are happy - which part it comes from doesn't really matter," explains Ashish Dave, partner, KPMG.

"The financial infrastructure supporting the business was not always looked at as an area for investment. Investment was being made in products or inventory or new business ideas - because of the way demand has been growing, this was more profitable..

"When carrying out due diligence, the lack of good quality management information systems and, consequently, management information makes due diligence a challenge."

Print | Email | Discuss this article |

USER COMMENTS (0 COMMENTS)

POST A COMMENT

CLICK HERE TO POST A COMMENT

Add your Comment All posts are sent to the administrator for review and are published only after approval. ArabianBusiness.com reserves the right to remove any comment at any time for any reason. Please keep your responses appropriate and on topic.
Name *
Remember me on this computer
Email *	(Your email address will not be published)
City
Country
Subject *
Comment *
Notify me of further comments
Security Code *
Please click post only once - your comment will not be published immediately.