Partners in profit

zoom

Asset: The company believes in transparency for all of its transactions, according to Al-Khudairy.

This is an exclusive,” the PR manager tells me, as he ushers me down the corridor, “He’s flown in specially for the interview and you’ve been allocated thirty minutes.” As the saying goes, time is money and as the CEO of Amwal AlKhaleej, the Saudi-based private equity firm currently managing investments in excess of US$267m, thirty minutes with Ammar Al-Khudairy is valuable time.

As someone for whom numbers spell success or failure, I’m expecting Al-Khudairy to spend the next thirty minutes dazzling me with multiple digits but he puts any such expectations to rest in his first remark: “You know, my number one criteria in choosing an investment is the partnership. We buy into companies — we do not buy out companies. Our typical acquisition model is to buy a significant minority, not a controlling majority, and therefore the trust and chemistry I have with the owners is crucial.”

In fact, trust was a cornerstone in the foundations of Amwal AlKhaleej. “In the Gulf, we still view companies and institutions as people. If someone has built a company from scratch and it’s now worth a lot of money, they want to partner with people they trust and it was an integral prerequisite for the five founding partners,” explains Al-Khudairy who is himself one of the founding shareholders.

Founded on January 12, 2005 by five partners, Amwal AlKhaleej was set up by three individuals and two corporates. In addition to Al-Khudairy, the founding partners include equally well-known investment professionals and institutions, such as Mohamed Ali Alabbar, Dr. Fahad Al-Mubarak, the Al-Muhaidib Group and the Al-Fozan Group.

As Al-Khudairy recalls: “One of the primary driving factors that prompted us to set up Amwal AlKhaleej was a shifting tide of positive regulatory events in the region.” In particular, the setting up of Saudi’s Capital Market Authority (a government organisation with financial, legal and administrative independence) in June 2003, was seen as a significant step in improving the market’s efficiency.

“One of the important aspects of private equity is having a predictable, plannable exit strategy and before 2005, you couldn’t predict how to profitably exit because we didn’t have comprehensive regulation of IPOs and M&A activity,” says Al-Khudairy. “But since then the regulations have really tightened in Saudi Arabia, Egypt and the UAE and at the same time, there was the ascension to the WTO which meant more opening up of economies. Because the cycle of private equity is buying the assets, sitting on them for a while and then selling them, it was essential we had this transparency.” The first private equity firm to be headquartered in Riyadh, Amwal AlKhaleej is a regional private equity firm that sources, structures, and acts as an investor in strategic minority equity investments, private placements, privatisation, and buyouts in the MENA region. All its investments are performed through ‘Amwal’ funds.

Amwal’s first fund, Amwal 1, had a size of US$267m and was fully funded by the founding partners. “We didn’t want to experiment with anyone’s money but our own and fortunately the fund proved successful,” smiles Al-Khudairy.

Of course the fact that the founders were also the fund investors helped to strengthen the firm’s deal-sourcing capabilities, and to boost its public image: “As I said, people want to shake hands with people, not just institutions and people don’t just see us as Amwal AlKhaleej, they see us as Amwal AlKhaleej and the partners. And that has allowed us to consolidate deals that others who don’t have the same profile were not able to consolidate.”

Moreover, Amwal is currently in the process of raising its second fund, Amwal II, which will be of a similar size and “will involve other prominent business people from the Gulf,” adds Al-Khudairy.

And according to Al-Khudairy, Amwal AlKhaleej has had no problem in attracting funding as “institutional investors are giving more and more attention to this asset class.” He points to the examples of global private equity firms — the New York-based Blackstone Group that recently raised US$22bn, and the Washington DC-based Carlyle Group that raised in excess of US$10bn.

“One of the primary reasons is because private equity has been consistently outperforming other asset classes. Although the stock markets have done well in the past 18 months or so, they haven’t done very well over the last five years while private equity has always been doing consistently well.

So a lot more money is being poured into this asset class and because a lot more money is being poured into it, the private equity managers are getting bolder and bolder.

“Only two years ago, nobody would have dreamed a private equity firm would go after a US$10bn or US$15bn acquisition,” says Al-Khudairy.

And the reason private equity investments are suddenly rocketing is because “the current amount of global liquidity is unprecedented,” explains Al-Khudairy. In fact, US$10-US$15bn pales when compared to Blackstone Group’s recent buyout of a Chicago real estate company for US$35bn, which has truly set a new benchmark in the private equity arena.

And of course, it’s not only the size of the funds that is increasing. The number of private equity firms is growing at a remarkable pace, both on a global and regional scale. “MENA basically went from having three big players around four years ago to something like 30 players today. So very soon the firms will start to compete and it will be a challenging environment in terms of the number of funds chasing quality deals,” predicts Al-Khudairy, before observing: “Obviously when you have so much private equity money chasing deals, the number and size of deals taking place is increasing geometrically.”

Aside from its headquarters in Riyadh, Amwal AlKhaleej also has offices in Cairo and Dubai, where investment teams have significantly contributed to Amwal AlKhaleej’s growth strategy through leveraging their regional business experience. To date, Amwal AlKhaleej have made investments in Saudi Arabia, the UAE, Kuwait, Bahrain, Egypt, Lebanon and Jordan.

However, Al-Khudairy is keen to stress that Amwal AlKhaleej is not going to create separate funds for each country: “We don’t allocate funds per country but that hasn’t stopped us from making significant investments throughout MENA. For example, we’ve invested almost US$103.42m in the UAE so far.”

In June 2005, Amwal AlKhaleej made its first UAE acquisition in buying a US$82.5m stake in Damas LLC, the largest jewellery retailer in the UAE, which led to a partnership to operate many Damas stores throughout Saudi Arabia. Other UAE investments total just over US$20m in Dana Gas, RAK Petroleum and Maritime Industrial Services Company (MIS). The firm has invested US$23.9m in private Saudi companies the Al Tayyar Travel Group and Arabian Company for Water and Power Development (ACWAPower). It has also acquired a US$14.7m stake in Bahrain’s Nass Group, and invested US$2.6m in Kuwait’s Universal Payment Services.

Outside the GCC, Amwal AlKhaleej has invested over US$130m.

Al-Khudairy estimates that out of 100 companies that Amwal AlKhaleej looks at: “We probably end up doing a serious investigation on ten and end up buying two or three.”

In order to refine its selection process, the firm identifies the region’s industries and sectors presenting high growth potential driven by favourable macro and/or micro economic factors. And of course the partnership is all-important. “As I mentioned earlier, we buy a significant minority, not a controlling majority, and therefore we bank on the company’s existing management and ownership. In my opinion, the value of any proven business lies in the know-how and experience of its founding shareholders, and we typically invest in companies in which the managers are equity holders, as we have the firm belief that the best performing businesses are managed by those people who founded them,” says Al-Khudairy resolutely.

Consequently, once Amwal have identified opportunities in a company, the firm prefers to leave the management to that company. “These people know how to operate their business better than we could ever hope to and so for us to come in and say ‘why don’t you open six more shops here rather than here’, well that’s really presumptuous.”

Although Al-Khudairy is quick to add: “I’m not saying that we don’t support these businesses’ management — we actively participate on the board but primarily through the operational and financial expertise of our investment professionals. Our job is to provide the growth capital and a financial perspective so for example, we’ll say ‘how about we borrow from the bank instead of investing equity’, or ’how about we IPO in this market rather than that market’. So it’s our knowledge of the capital markets and financial structure combined with their knowledge of their own business that creates value for both sides,” he concludes, before adding as an afterthought: “Probably the best way to describe it is as a synergetic partnership.”

The second criteria is believing that a company is going to significantly grow “either vertically or horizontally”, while Al-Khudairy says the third criteria is believing that ‘significant growth’ will occur in four or five years. And while the life of Amwal AlKhaleej’s funds is seven years, the holding period of the investments is flexible and the firm will wait as long as required for a company to realise its value creation.

Even in post-IPO companies, the firm has committed to long holding periods for many of their portfolio companies. However, typically Amwal AlKhaleej exits the investments over a two to five-year time frame upon the value materialisation, either through public market exits or trade sales.

Amwal AlKhaleej’s reputation, in fact the global standing of the firm, can be illustrated by the fact that it was recently chosen by Wharton, the world’s leading business school, to speak at a global private equity conference the school hosted on January 19 in Philadelphia. Amwal AlKhaleej was asked to speak about the current trends and buoyancy in the Middle East’s private equity market, in particular the Middle Eastern carve-out trend and the unique opportunities offered to family-owned conglomerates with regards to selling their non-core businesses. Corporate carve-outs (in which Amwal AlKhaleej are specialists), involve the acquisition of a business unit from a parent company and have become an increasingly appealing type of private equity transaction, especially in a region where over 90% of businesses are family-owned.

The conference also highlighted the growing trends regarding mega funds, mega deals and venture capital trends, an area which Amwal AlKhaleej is not interested in at present: “Venture capital is an earlier state of investment than private equity and the main reason we don’t do that type of investment yet is because although the markets have matured tremendously in terms of regulation, in terms of inter-trade and cross-border investment, the markets have not matured enough into moving into true R&D type companies. Consequently, I have not seen enough R&D companies being a smashing success in the region,” explains Al-Khudairy.

And yet while historically infrastructure funds have not been very profitable, Al-Khudairy says: “From the outside it looks like a sector that doesn’t generate the same healthy, attractive returns as pure private equity but if you do a bit of innovative financing and the right kind of leveraging, then you can actually gear up to achieving quite attractive returns. The trick is knowing that the timeframe under which private equity firms enter and exit a project is on a totally different timeframe to that which would be used for developing an infrastructure project. Sometimes it takes three years of negotiations to sign a contract for an infrastructure project — let alone build it. Therefore, if a private equity fund were to do infrastructure projects, they really need to acquire expertise that understands infrastructure.”

Al-Khudairy is clearly excited about the imminent launch of the firm’s second fund, as well as the year ahead: “Whereas 2006 was all about fund accumulation, this year will test whether regional private equity firms can deploy their funds in a rewarding fashion. 2007 will be the moment of truth.”

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.