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Sun 21 Jan 2007 12:00 AM

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Power shift

In the wake of increased privatisation within the Middle East’s energy sector, the region’s first energy-focused private equity firm has emerged. Tamara Walid talks to Adil Toubia, CEO of the GCC Energy Fund, about the changing face of the industry.

Despite the region’s governments maintaining a tight grip on the Middle East’s abundant energy supplies, Adil Touba is convinced that things are about to change.

“Typically, power companies have been controlled by the government, but they’ve been going through privatisation,” says Toubia, CEO of the GCC Energy Fund — the region’s first energy-focused private equity firm.

As the Middle East’s energy sector continues to present huge opportunities, Toubia is confident that the GCC Energy Fund is in the best position to take a significant slice of the action. After working with consulting firm Schlumberger for over 20 years, where he filled five different managerial positions, Toubia is convinced that he and his team — of similarly energy-specialised professionals — are in pole position.

“We didn’t want to be another private equity firm that does everything like real estate, telecommunications and energy. We wanted to be very focused,” he says.

The fund was launched in March 2005 and sponsored by Gulf International Bank (GIB) in Bahrain, Standard Bank of South Africa and co-sponsored by Emirates National Oil Company (ENOC). Over the last three months the company has successfully managed to grasp a considerable stake in the Omani Dhofar Power Company, a 33% equity stake in Sharjah-based Gulmar Offshore Group, and most recently took part in the US$80m private placement raised for Maritime Industrial Services (MIS).

Acquiring a controlling stake in Oman’s Dhofar Power Company came after a year of negotiations and planning with PSEG Global, a US energy services company, after it announced plans to sell. Toubia believes that his team “unearthed” an exceptional opportunity.

“Existing power companies don’t come up for sale very often. It’s very rare that you get an opportunity to take control of a power plant that’s already been operating and has customers. We made contact with PSEG, and found out that their strategy was to diversify from international assets, so we started discussions,” he says. “PSEG, for their own strategic reasons, had to exit from the Middle East, and we had the opportunity to come and buy it.”

With plans to grow Dhofar Power with the company’s existing shareholders, Toubia stresses that the Oman deal is only the first of many similar investments in the power sector. He adds that with the real estate sector continuing to witness a relentless rise and the ongoing regional population explosion, opportunities in the energy field are growing as power becomes more fundamental.

Generally, private equity firms tend to maintain a relatively small scale and largely depend on outsourcing. The GCC Energy Fund does not differ, with headquarters in Dubai and people who manage the company’s investments outside. Toubia explains the process: “We identify the opportunities, negotiate the deals and invest the money. We then track the money and get involved with strategy and eventually exit these investments and hopefully make profits for our investors.”

Toubia also adds that the company’s scope involves much more than oil and gas as it includes upstream, midstream and downstream, the oil and gas service sector, petrochemicals and alternative energies.

Although the opportunities are vast, however, they are all constrained within certain boundaries.

“Of course if we’re talking about an oilfield in Saudi Arabia we don’t stand a chance. However, if it’s a small gas field in Oman or an oilfield in Qatar, then of course we have to compete, but we can get our hands on it,” he says.

The company’s growing profile in the GCC and Middle East’s private equity market, Toubia believes, has earned it considerable advantages. He stresses that in addition to the experienced personnel managing the fund, the company’s list of industry contacts has expanded greatly. In Toubia’s view, the best way to secure investment is through testimonials from companies the fund has partnered with or invested in.

“That will give confidence to others to come forward if they need a cash injection or a financial partner to help them with their strategy. Also, with privately-owned companies that want to go public in the next couple of years, bringing us in helps them bring corporate governments into the equation and prepare them for an IPO,” explains the chief executive.

He stresses, however, that companies need to have a “proper system” and procedures in place, in addition to being well organised, before they can go public. The advantages of a private equity firm investing in privately-held companies, he says, is a reflection of the industry know-how such companies bring into the business.

“We talk their language,” says Toubia. “You can look at it positively or negatively. One of the gentlemen whose company we’ve invested in said: ‘I am looking for a partner who understands my business, because when we want to make an investment, you’ll support it and not oppose it. If I have a financial partner on the board with me and we want to make an investment they will always look at it from a very specific perspective, and will not particularly see the vision of what this industry can do a couple of years down the line’.”

Furthermore, the GCC Energy Fund plays an integral role in bringing in ideas and getting involved in setting the company’s strategy, as well as pointing out existing opportunities and preparing it to face future challenges.

“I’ve spent 21 years in the oil and gas industry and 10 of them were in the Middle East. I had contacts and I found what was interesting for us,” says Toubia. We also get some leads from our sponsors — GIB is one of the biggest corporate finance banks in the Middle East and in the Gulf specifically.”

The key to minimising risk in such investments, believes Toubia, is a thorough understanding of the business.

“The risks are geopolitical as are the stability of governments and currencies. We invest mostly in the Gulf and some Middle East countries, so the geopolitical risk is not very high and fairly calculated,” he reveals. “As for currency risk, our fund is in dollars and as long as we invest in the GCC there isn’t any currency risk.”

He adds that the main risks are industry or market or company-specific risks and these require understanding the industry and company, and taking an active role in driving strategy. “You can never have a risk-free investment but you can take certain steps to try and anticipate what the risks are, and get ready to deal with them,” adds Toubia.

Toubia stresses that the private equity industry in the Middle East has come a long way over the last two years, that it will continue to grow, and is going through a logical process of evolution. He is upbeat about the industry’s future, especially with the amount of cash and liquidity in the region. Moreover, he remains confident in the advantages his company has over any potential competition. “We are ahead of the bunch here. If there is another private equity firm focusing on energy, I wish them all the best,” says Toubia, with a wide grin.

"We understand the energy sector very well. We wanted to do what we know."

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