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Mon 6 Jul 2009 04:00 AM

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Capital gains

Gulf Capital CEO, Dr Karim El Solh on why the crisis is creating opportunities for the private equity industry.

Capital gains
Capital gains
Gulf Capital aims to invest in Saudi’s education sector.

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.

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.

"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.Investing in the Kingdom's education sector is a "no-brainer" explains El Sohl: "We are very excited about education in the Kingdom. Saudi is the biggest country... half of the population in Saudi is under eighteen and it's one of the fastest growing populations in the world, so investing in education in Saudi was a no-brainer for us and we wanted to be the market leader.

"This will be a prime company to take public or sell in Saudi Arabia because its profile, track record, and historically sectors like education are seen as very defensive and prime IPO candidates in other markets," he adds. He expects the rest of the fund's investments will also be in social infrastructure as the region's population increases and countries ramp up investment in healthcare, education and infrastructure. According to the consultancy firm, McKinsey, the GCC's current population of 38 million will double by 2025.

Investment in healthcare, particularly in Saudi Arabia, is only likely to grow as its population does. According to McKinsey, private investment in healthcare is set to triple to $60bn by 2025 while GVCA estimates that healthcare attracted sixteen percent of all private equity investments last year.

In a further indication of an influx of private investment into the sector, in October, the Saudi Arabian General Investment Authority announced plans to privatise or outsource the management of all 218 government-owned hospitals.

"We are investing in a lot of social infrastructure like education, healthcare and the like. We are looking at a third deal, which we are expecting to announce in a month and a half in the healthcare sector," El Sohl says. "The healthcare sector is growing rapidly and it's also a very defensive sector. It doesn't matter what happens to the economy and the stock market, healthcare continues to increase.

"A lot of it is fuelled by government spending so we like the profile very much because it's a low risk investment, but exhibits high growth."

He also sees opportunities in the food sector, an area a number of GCC firms have shown interest in following last year's global food crisis. "Food security is something that is very topical these days," he explains. "The population is growing very fast and investing in that sector makes sense."

Gulf Capital might not have had any trouble securing the cash for its second fund, but El Sohl admits that debt funding is still his firm's biggest challenge amid the downturn. But while the shortage of liquidity might be tough for the time being, he argues it does have its benefits. Most notably that more family-owned owned conglomerates are looking to sell their non-core assets to private equity firms.

"We are dealing with a number of family businesses and local firms and on the contrary we are seeing much more flexibility in terms of selling at least the non-core businesses," he explains. "If you have your typical family business with eighteen units, because of lack of liquidity and lack of bank financing and the virtual shutdown of the capital market, they are forced to focus on the core and diversify the peripheral businesses.

"Two to three years ago they would say everything is sacred, nothing is for sale, now they are saying we would be interested in spinning off this non-core business."

As more of the region's private companies turn to private equity and the global recession continues to restrict liquidity, El Sohl predicts greater consolidation in the industry.

"It's a natural thing; it happened in Europe where you have the top ten players growing bigger and bigger and the others left behind. Smart money inevitably graduates to the firms with the best performance and as more and more of us do investments and exit and deliver on the track record, we will attract a bigger share of the total pool."

Judging from its latest announcements, Gulf Capital looks like one of the lucky ones.

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