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Sun 4 Dec 2011 06:19 PM

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Middle East private equity feels the chill

Companies face a grim outlook as Arab Spring upheaval slashes deal counts

Middle East private equity feels the chill
Only eight private equity and venture capital deals were closed in the Middle East to July

Private equity firms in the Middle East, grappling with
regional political turmoil and investor unease about the global economy, face a
grim immediate outlook but are making preparations for a hoped-for recovery in
deal flow next year.

Billions of dollars collected in previous years by regional
funds sit untouched as firms nibble for deals, with many sellers still
reluctant to offload assets at bargain prices.

"We have to prepare for a long winter," said Karim
El Solh, chief executive of Abu Dhabi-based Gulf Capital. "You have to
keep star managers while shedding unproductive staff. Help portfolio companies
secure sufficient liquidity to survive."

The Middle East and North Africa have been wracked by
political upheaval and economic dislocation in 2011 as regimes fall or teeter
in several states, including Tunisia, Egypt, Libya and Syria.

The region is home to private equity players such as the
United Arab Emirates' Abraaj Capital, the region's largest local firm,
Bahrain's Investcorp, and Egypt's Citadel Capital.

Only eight private equity and venture capital deals were
closed in the Middle East during the first seven months of this year, according
to a report by Al Masah Capital, compared to 24 deals in all of 2010.

Among this year's deals, Standard Chartered's private equity
arm bought a minority stake in a unit of Saudi Binladin Group for $75m in
August, while Abraaj acquired the North African private equity platform of
Amundi, a French asset manager jointly owned by Societe Generale and Credit
Agricole.

US-based private equity giant Carlyle is close to taking a
42 percent stake in
a family-owned Saudi Arabian food products firm, according
to two sources familiar with the potential deal.

Even before this year's slump, private equity activity in
the Middle East was hit hard by the global credit crisis of 2008-2009. New
private equity investments in the region dropped from 97 deals worth $7.5bn in
2007 to 24 deals worth just $148m in 2010, according to a Gulf Capital report.

Regional private equity managers have raised $23.13bn over the
past decade but only $14.75bn has been deployed, the report said. Excluding
withdrawals and cancellations, some $5bn remains unused, Gulf Capital calculated.

"The most visible impact of the political upheaval is
the ability to raise funds," said Imad Ghandour, managing partner at fund
manager Cedar Bridge Partners.

"Local LPs (limited private equity partnerships) are
not interested in a blind pool of capital and the international investors are
very risk averse when it comes to the region."

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The flip side to the market gloom, which has made banks
reluctant to lend and left initial public offer activity stagnant, is limited
competition for investments, creating a relatively clear playing field for the
private equity firms.

"Now is the time to look for opportunities and the
right time to get good valuations," said James Tanner, head of private
equity at Investcorp. "We're seeing better deal flow at lower valuations,
better businesses and no competition."

Carlyle, which has put Egypt investment plans on hold
because of the turmoil there, is set to close two private equity deals in Saudi
Arabia and Turkey before the end of this year and hopes to close as many as
three Middle East deals in 2012, according to its regional head.

Carlyle managing director Walid Musallam said solid economic
performances in Turkey and the Gulf Arab region, Saudi Arabia in particular,
offered attractive investment opportunities.

Other private equity players are also on the prowl.
Investcorp is looking to spend more than $400m on stakes in companies in
Turkey and the Gulf in the next two years, while Gulf Capital is in the final
stages of acquiring majority stakes in four regional firms, with closing
targeted for the first quarter of next year.

Another sign of deep-pocketed interest in the region is a
business licence given to US private equity firm KKR & Co LP by Saudi
regulator Capital Markets Authority in June.

"Despite a gloomy big picture, the situation is good on
a micro-level," Tanner said. "I'm pretty positive about the outlook
but yet, it is going to be a long winter."

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