Capital gains

Gulf Capital CEO, Dr Karim El Solh tells Claire Ferris-Lay why the crisis is creating opportunities for the private equity industry.

Anyone who thinks private equity is dead, should speak to Dr Karim El Solh of Abu Dhabi-based Gulf Capital. Last month the CEO defied the global recession and announced a $466m fund, two thirds of which was subscribed to by foreign investors.

"It was an eye-opener for us," El Solh says. "If you look at most of the funds launched here, they are raised locally. We were very surprised to see that international money is chasing opportunities in the Gulf. If you put that into perspective, the Gulf is expected to grow by 4.5 percent over the next two years, it's not the six to seven percent we saw in the last five years, but it's respectable by any measure.

"Only China and India are growing faster than the Gulf countries," he adds.

The number of private equity operators in the Gulf increased to 125 as Gulf economies boomed on the back of record high oil prices. Funds raised by private equity firms in the region reached $6.4bn in 2008, compared to $5.8bn in 2007 and $2.9bn in 2005, according to Gulf Venture Capital Association (GVCA).

But the global economic downturn has forced many fund managers to focus on their existing portfolios rather than raise funds for new ventures. According to the European Private Equity and Venture Capital Association, European private equity fundraising dropped 2.5 percent to $110.7bn in 2008 while in the US investment declined eighteen percent in 2008 compared to the previous year.

El Solh says that the success of the firm's fund, which has attracted investors from sovereign wealth funds, financial institutions and pension funds from across Asia, Europe, the GCC and the US, is largely due to Gulf Capital's proven track record of investing in long-standing market leaders rather than start-ups, which are typically more risky.

"The partial reason behind the success of attracting global investors is that Gulf Capital, as a firm, has developed a unique investment strategy; we specialise in acquiring majority stakes in well-established market leaders in the Gulf," he explains.

"The average age of our portfolio companies is about 31 years old. We are not doing green-fields or start- ups, we are buying into well-established, good management, good track record companies, which we can find, grow and either very quickly take public or sell to financial or trade buyers."

He adds that Gulf Capital's less risky attitude has attracted the likes of pension and endowment firms who typically shy away from high risk investments.

"By definition when you buy a market leader with a good track record it means you are taking less risk, but still these companies are growing very fast so from a risk perspective we have a very appealing investment style.

"That is why a lot of global sovereign wealth funds and insurance companies, who have a long-term view but have to protect the capital and investments for their beneficiaries, are comfortable investing with us."

Does this mean, as CEO Middle East suspects that the less risk taken, the less money made in the long term? El Sohl smiles: "We are taking less risk, but it's still growing very fast so we are able to generate very appealing returns, so on our risk reward basis the profile is very attractive," he says.

Whatever Gulf Capital's investment strategy, it is clear that El Sohl has confidence in his future investments - he has already committed $149.7m of the firm's own cash to the fund.

He explains that it is important for Gulf Capital to always be the largest investor: "We are putting our money where our mouth is and showing commitment in a way they [our investors] really like."

The fund is Gulf Capital's second since it first established in 2006 with the sole aim of becoming, in El Solh's own words, "a home-grown regional private equity champion." At the time Gulf economies were booming and El Sohl, who led and executed initial public offerings (IPOs) for Aldar Properties and Aabra Petroleum Investments while at The National Investor, raised an unexpected $330m - five times the capital it expected - from 300 of the region's most prominent Middle East businesses. Today, with the launch of GC Equity Partners II, Gulf Capital's assets under management are set to exceed $1bn.

"If fund raising continues at this pace we hope to exceed $1bn, which is an important critical mass point for us because once you pass the $1bn mark, you start generating significant profitability for the firm. Hopefully in four to five years we want to cross the $3-5bn mark and [we will] be seen as one of the largest alternative asset management firms in the region. It's ambitious, but we have strong goals and aspirations," he says.

Biggest sector growth

El Sohl and his team have already committed almost a quarter of the fund in two transactions. Both are a clear indication as to which sectors it sees the biggest growth in over the next few years. One transaction was for a majority stake in Gulf Marine Services (GMS), an operator of jack-up barges, while the other was in a Saudi-based education company, Maarif.

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