The increasing appeal of private equity

Two recent deals have again highlighted the region's continuing love of private equity. No, I'm not talking about Abu Dhabi's deal to take over Manchester City; rather, I'm referring to Abraaj Capital's acquisition of a 50% stake in Turkish luxury yacht manufacturer, Numarine, and Global Investment House's purchase of a controlling stake in Al Sawani Food and Industrial Supply Company.

These deals follow a recent stream of PE transactions involving regional financial players. Whilst observers may think that the smart money has been going into regional real estate and distressed Western financial companies, private equity has emerged as a crucial part of regional investors' portfolios.

A look at the newspapers last month showed the wisdom of taking a diversified approach. Local stock markets tanked during August, on the back of some gloomy predictions about regional real estate price bubbles and corruption probes. Meanwhile, Western real estate values are under pressure as a result of the so-called ‘credit crunch'.

This all suggest that private equity, now a part of many high net worth individuals' strategies, seems certain to stay that way. The market has responded with a host of products that offer an increasingly noticeable amount of scope and variety.

A number of funds offer the opportunity to invest in emerging markets outside the Middle East, such as Pakistan, whilst others are focused on emerging sectors such as healthcare and bio-tech. Others take an opportunistic approach, assessing each potential investment on its merits and those of its particular sector.

Private equity can be a win-win for all involved. PE firms will generally talk of returns in the 15% per annum range, a respectable amount by any estimation. Also, because a fund's investments are spread across a number of firms, a couple of failed investments can be offset by successful ones.

For the companies receiving the money, the situation is also positive. Many pre-IPO companies typically run into problems because of lack of funds or management expertise. PE companies can help on both fronts, with big benefits for the wider economy.

For the investor, the timeframe of PE deals could be particularly beneficial in the current environment. Private investors will usually stick with a company for two or three years before exiting through an IPO or private sale. So as the global economy starts to slow down, PE investors will have the comfort of knowing that they have a set of maturing assets waiting to be cashed in at the end of the downturn.

David Ingham is the editorial director of ITP Business.

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