Cross-border trades and deal activities between MENA and the UK surged in 2022, driven by two-way capital flows as multinationals and funds sought access and investments in the region, according to a report by Lumina Capital Advisers.
2023 is predicted to mark another record for cross-border transactions in light of a resilient regional-led global M&A environment and strong activity in traditional industries like manufacturing, oil & gas and industrials.
Middle East represents a rare global ‘bright spot’ for UK companies
The largest UK-listed PLC revenue contribution was from the MENA region, up 15 percent as compared to 12 percent four years ago. The Middle East promises a ‘bright spot’ or UK firms seeking global growth. Revenues from the region for UK PLC’s in 2021 amounted to GBP11.1 billion, increasingly from non-oil sectors.
Lumina projects that UK PLC contributions to the Middle East would increase to 17 percent in 2023, contributing an additional GDP1.6 billion to UK PLC companies. The upward trend is also expected to be accelerated by $900bn opportunity in KSA, particularly in green energy and industrials.
Diversifying revenues away from oil & gas sectors
FTSE-listed oil and gas companies contributed significantly less to the economy in 2021 due to higher oil prices and regional government efforts to diversify revenues and grow income from the non-oil and gas sectors.
“Countries in the MENA region continue to adopt a ‘post-oil’ mindset, creating opportunities for major global market players to expand their operations. This has been complemented with an emphasis on large-scale digital transformation aligned with national visions and goals. Several sectors, including fintech, automotive, infrastructure, and engineering, are pushing to develop innovative technologies to stay competitive,” said Andrew Nichol, Partner at Lumina Capital Advisers.
UK companies established in the region grew their operations in 2022
The region witnessed a continued trend of new companies expanding into the region, in 2021, six of the top 10 FTSE 250 companies with Middle Eastern revenues expanded regionally, bringing the total to 30 FTSE-listed companies active in the region.
The region will continue to be attractive to new companies setting up and top talent as individuals seek career growth and development opportunities.
FDI into the UAE and KSA reached record levels in 2022
It is anticipated that KSA FDI is to exceed the UAE’s for the first time since 2012. FDI into the UAE and Saudi in 2022 reached record levels, with $40bn invested, representing a YoY increase of 58 percent.
The top Saudi projects NEOM, ROSHN, Diriyah Gate, Jeddah Central, Red Sea Project, AlUla and Qiddiya will cost $690 billion to build. These are some of the key MENA projects driving FDI and UK-to-Middle East investment in 2023.
Dramatic changes to the capital raising environment
Over the last 18 months, a significant decrease in investment rounds due to the worldwide recession in the IT industry has caused change in the capital-raising environment.
“Venture capital investments and transaction activity peaked in 2021, and we expect 2023 activity to return to 2019-2020 levels. However, it is expected that some bright spots will be seen in deep technology, artificial intelligence, digital transformations, cybersecurity, and other technology creators,” said Nichol.
“A $7.6 billion investment in regional venture capital over the past five years points in the direction of a resurgence in regional private equity investments, both direct and secondaries, being the fastest-growing alternative asset class in 2023.” Lumina predicts dealmaking will remain resilient despite global headwinds in 2023,” he added.
Predictions for 2023:
“2023 will be a tale of two halves, with H1 seeing highly active Middle East corporates and funds continuing to invest into European companies, as domestic markets continue to face varying levels of economic turbulence. This will create a myriad of investment opportunities to diversify globally and gain access to best-in-class skills and talents. In H2 we anticipate improving sentiment across developed markets, which will drive global demand for natural resources, oil included. The region is extremely well positioned for yet another strong year ahead,” said Nichol.
2023 dealmaking to remain resilient despite global headwinds
A hugely resilient regional-led global M&A environment was observed in 2022. With significant infrastructure spending announced regionally, consolidation in the construction and contracting sectors is gathering pace to build regional champions. Family-owned conglomerates and private equity continue to utilise the IPO boom in the regional public markets to facilitate exits and raise capital.
Two-way investment will drive record FDI levels
A continuation of two-way capital flow between the Middle East and Europe is expected. As global corporates and funds set up roots in the region, with talent continuing to move in, 2023 is expected to be an FDI record year in the Middle East.
Ongoing JV and corporate restructurings
A significant shift in partnerships that exist in the region with UK companies reassessing Middle East JVs to assess their relevance considering the fact that they were set up decades ago. Dividend policies, governance structures, minority protection rights and appropriate treatment of technical services cost are key areas. Many international firms will seek to ensure existing contractual arrangements to see if they are fit for purpose in an era of growth amidst global challenges.
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