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Sun 1 Apr 2007 07:01 PM

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Value across the board

Muhannad Qabbaj, managing director, business development, Gulf Capital, tells ABF how the firm is taking a different approach to sourcing private equity deals.

Do you think Middle East investors are moving away from real estate?

In terms of alternative assets, private equity and real estate play a role hand in hand. In general, people invest in both to diversify their risk and they are not 100% proportional - actually they are to some extent inversely proportional. Real estate is tangible, people see it and feel it. Therefore I think real estate will remain a very attractive asset class, it just depends at what stage you come in and what tenure you expect to hold it.

What sectors do you concentrate on?

Gulf Capital is an investment company that was established last year in May. As an investment company we've decided to focus mainly on PE initially with a focus on eight different sectors which many people have commented is a very broad sector base. We feel with the demographic change and the economic growth in the region, all sectors are attractive in their own way as long as we focus within each sector on the most growth-oriented sub-sector. The areas on which we focus the most however are oil and gas, energy and utilities, financial services, telecommunications and anything that's related to construction. However, we would like to diversify our investments and we are now looking further into financial services as well as real estate, healthcare and education.

What makes you different?

Our competitive advantage which is our shareholder base. We have close to 300 shareholders that comprise leading institutions, government entities, pension funds, family offices, corporations, ultra high net worth individuals from the GCC, and they act as our ambassadors for Gulf Capital. We update them with what's happening with Gulf Capital and we proactively source deals and opportunities from them because they feel that they should offer any opportunities that they see to their own company.

Outside our shareholding base we proactively source proprietary deals from our lateral relationships as a team within the firm on a regional and global basis. Once we deploy a certain amount of capital we invite our shareholders to co-invest with us.

What term are your investments?

Normal private equity investments normally tenure around four, five or six years. We look to exit opportunities in the region of three to four years and we study different exit options such as IPOs, trade sales or financial sales and we target our exit manufacturers or our exit potentials before we go into a deal.

So it doesn't matter to you that markets are low at the moment?

Two years ago if you spoke to a private equity firm in the Middle East they would say more than half of their exits from their portfolio companies are expected to be IPOs. Right now, it is more in line with the global norm where one out of every 10 PE companies is actually floated. For us, we concentrate on identifying exits through trade sales or financial sales to secondary buyers as our focus. If the flotation happens or if the company is suitable to go public in the region then that excites us even more, but that is not exactly what we go in aiming for.

What are the growth sectors in the GCC at the moment?

Healthcare and education. Their growth has become such a necessity that they have been considered by many people, and by Gulf Capital, as infrastructure sectors now. They are no longer a luxury, they are definitely a necessity. In terms of financial services, we think the insurance sector looks very attractive and banking is becoming more sophisticated.

Has the privatisation of Saudi insurance companies helped?

I think Saudi Arabia is changing as a whole. In terms of closed deals by geographical focus between 1998 and 2006, it has accounted for exactly the same amount of private equity investment as Jordan, whereas Jordan has less than a quarter of Saudi's population and significantly less in terms of economic strength. So this disproportionality will probably change in the next five to 10 years in Saudi Arabia as regulations improves, as privatisation in Saudi Arabia starts making way, and as the market there allows for international investors.

Will you offer Islamic investments?

Private equity generally is Shariah compliant in its nature unless the debt ratios are very high or unless there's a very high exposure to financial services, but we plan to offer Shariah compliant offers in the future if our investor base proves that we need that.

What does the future hold in store?

Privatisation is definitely going to make private equity a lot more exciting and what we're seeing more and more is the need for expansion capital because the economy is growing so fast it will probably outstrip the financial means of everybody, including families and conglomerates.

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