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GHANDOUR: The investment environment for GCC private equity firms is likely to become more challenging.

Gulf private equity had vintage year in 2007, but conditions set to tighten.

Last year saw the Gulf private equity industry pass some crucial milestones. The first billion dollar transaction took place when Abraaj Capital took over Egypt Fertilisers Company for US$1.4 bn; Abraaj's Infrastructure & Growth Capital Fund was the first billion dollar fund; and the industry in general continued its strong growth.

A new report from the Gulf Venture Capital Association (GVCA), in collaboration with KPMG and Zawya, estimates that new amounts committed to private equity funds in the Middle East more than doubled in 2007, rising to $6 bn from a total of $2.7 bn the previous year.

Private equity houses in the GCC had more than $13.3 bn under management in more than 76 funds. More than 62 investments, totalling $3.5 bn, were made last year, up from $1.8 bn in more than 50 investments in 2006.

Despite subdued market conditions, exits were also up slightly. Nineteen investments were sold for a total of $1.6 bn, compared to 17 exits in 2006 with a combined value of $200m.

Egypt has been the top recipient of funds in the past decade, thanks in part to large transactions like the Egypt Fertilisers acquisition, accounting for a 37% share of investment. The UAE was second with 19%, while Saudi Arabia was third with 15%.

Imad Ghandour, chairman of the information & statistics committee in the GVCA and executive director at the UAE's Gulf Capital, said: "We expect this growth in the industry to continue into 2008, but the investment environment will be more challenging.

"Economic fundamentals remain strong in the Middle East, but all financial players will feel the heat of the global meltdown. Hopefully, our region will be the least affected."

Companies that have received private equity investment from GCC firms have also fared well on the whole, helping the industry's image. Companies covered by the report increased their sales by more than 92%, their exports by more than 95%, and their profits by more than 92%.

Private equity companies also increased their employment levels and research & development spending substantially.

The report found that the time taken for private equity funds to make a first close had lengthened slightly: from three to nine months in 2005, to six to 18 months by 2007, but this timeframe is typical for other regions.

The picture for Gulf private equity firms is bright at present. As funds grow in size and increase their use of leverage, it remains to be seen whether the after-effects of the credit crunch will squeeze their opportunities.

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