Private Equity and Venture Finance in MENA: Back to the Future

Blog Summary

This entry explores the landscape of private equity and venture finance in the Middle East and North Africa (MENA). It highlights the growth potential and challenges faced by investors in these emerging markets. The blog discusses key factors such as political stability, economic diversification, and technological innovation that influence investment decisions. It also addresses the strategic importance of fostering local entrepreneurship and the role of governmental and international partnerships in supporting venture capital ecosystems.

Blog Content

The Middle East has a history of breeding amazing entrepreneurs the world over. One thing though that remains in short supply, in my personal opinion, is the buildout of a Team Spirit. I strongly believe in the fact that there’s still plenty of money and private equity capital available around the globe. Yet currency alone may be inapt to cultivate great entrepreneurs gelling to form great teams. A company’s biggest challenge and biggest advantage is and has indeed always been the team behind it – The right people with the right talent backing opportunities as they emerge, continually win. There is no secret sauce. The “cult of the personality” has clearly taught us all a lesson we are not about to forget anytime soon.

The Birth and Growth of Private Equity in MENA Unlike the United States, where the seeds of a fledging and flourishing PE industry were planted as far back as 1946, the Middle East has a short and tumultuous history. The emergence of PE in the MENA region made its ostentatious debut in the 1990’s.

The asset class was well-received, gaining the attention and interest of local – primarily GCC based – limited partners (LPs) which led to the establishment of many first-time funds successfully raising sizable pools of capital in a relatively short time period. By 2007, the funds raised for regional investments reached $6 billion. They unfortunately fell dramatically after a stable period between 2013-2016 to around $2 billion today according to Bloomberg.

One of the major setbacks to the industry was the recent saga of the Abraaj Group which collapsed in Dubai and left a dry deal landscape for regional-based PE firms. The saga though didn’t keep foreign private equity money away from the United Arab Emirates entirely.

Let’s be honest, the challenges, a bumpy evolution and such scandal is not limited to the region, as the US and Europe have had their fair share of capital chaos. Due to the asset class in the region being fairly nascent with few players, these events tend to be accentuated and overpublicized. In fact, foreign investors are as active as ever in the region.

This year alone, New York-based KKR & Co. and BlackRock Inc. agreed to invest $4 billion in Abu Dhabi’s oil pipelines, while London-based CVC Capital Partners agreed to buy a 3 percent stake in private schools’ operator GEMS Education. Prior, Carlyle Group’s $51.3 million investment in Jordan’s frozen food producer – Al Nabil Food Industries – posted a 40 percent cumulative gain. Not to mention the largest exits in the region’s history – famed acquisitions of Maktoob, Careem and Souq by Yahoo!, Uber and Amazon respectively.

Current State of Affairs Overall though, it is a fact that the downfall of Abraaj Group didn’t just kill the private equity firm Arif Naqvi built in Dubai. It crippled the entire market.

Since Abraaj’s swift and spectacular demise was set in motion almost two years ago, funds went from flourishing to finite in which there was virtually no money raised by private equity firms based in the Gulf Cooperation Council despite strong performance by PE firms almost everywhere else, according to Seattle-based data provider PitchBook and London-based Preqin. Although Jordan, the UAE and Lebanon are still the centers of influence for PE and VC in the MENA region, some drastic policy measures and recommendations are in order with some underway in these countries and others as well to turn the tide and create a MENA powerhouse.

A close look at the private equity industry in MENA shows us indeed that it has faced a succession of setbacks over the last 15 years – which few players are still ready to accept – and some thorny geopolitical issues may be creating new uncertainties despite the fact that the current roster of firms active in the region still consist of seasoned professionals who have negotiated previous waves of political and economic volatility and created value in the process.

Also, despite the industry’s small size, reported deal performance on both a gross IRR and cash multiple basis is good, proving that in spite of all the headwinds, private equity firms focused on the MENA region have been able to both source high-quality investments and generate returns.

One should hence take confidence from the past experience that the region’s fund managers will be able to navigate the next wave of challenges. But there is more to the story.

While the rapidly growing youth population is a potential boon for firms focused on consumer goods, services, healthcare and education, it’s requiring governments to achieve levels of economic growth capable of putting all of these young people to work.

The region still suffers from a dearth of finance available for businesses, particularly small-and medium-sized enterprises, as well as insufficient management expertise to take companies to their next stage of development. Private capital can bridge these gaps by providing expansion capital, by helping businesses grow in line with international standards, by connecting these companies to new markets, and ultimately by creating licit opportunities for the region’s youth to earn a living in the formal economy. Government though has to play its part too. Regional policy and practices unfolding in the region at large to address this gap are promising, particularly among the influential hubs for PE and VC (Jordan, UAE and Lebanon). However, there is still ample room for advancements where acknowledgement and meaningful action prove vital.

As governments across the Middle East and North Africa increasingly appreciate this connection, they should start much more aggressively to actively engage private sector partners. Nearly all regional governments have come to realize that youth employment is critical to stability, and that they alone cannot employ the waves of young people coming into the workforce. Unless leaders get the private sector side of the equation correct-and allow the private sector to develop and drive job growth-a world of turbulence will likely ensue.

Bottom Line: Private equity remains grossly underutilized, with private equity investment as a percentage of GDP weighing in at just 0.2% for the MENA region in 2018. In an environment where newsfeeds carry more headlines of destruction than construction, private capital can be a substantial positive agent of change. By partnering with local entrepreneurs and building better businesses, the private equity industry can also help the region build a much brighter future.

Capital Access Recommendations

Recommendations for policymakers:

1.  Design policies and programs to fit the “reality” of business: It is a fact that government policies at large are not well understood or utilized by businesses and fail to provide the competitive price, accessibility, and certainty that businesses look for when seeking capital. For these policies and programs to achieve their stated goals, policymakers should structure them to meet the specific needs of business or consider enhancing and expanding collaboration with private-sector capital providers to leverage those providers’ expertise and capabilities. This may necessitate agility and better integration to streamline efforts across, often dispersed, programs.
2.  Expand entrepreneurial education of capital options: Even if a source of capital is a good match for the needs of business, it won’t be utilized without substantial awareness among target enterprises. Policymakers should encourage educational programs that help inform businesses, nonprofits, and government agencies of all sizes of the different capital access options, as well as their costs, benefits, and requirements. This could be a direct government effort, but it may be more effective and efficient to partner with nonprofits, global institutions and business organizations focused on improving capital access.

Recommendations for capital providers:

1. Develop a relationship with clients: A positive relationship is a major driver of clients. It behooves one to get to know them and develop a positive relationship. This will not only help make the relationship “sticky” but will also help in understanding the needs and trends in the market, positioning providers to better adjust as the market changes.
2.  Consider strategic partnerships: Leaders may not be able or willing to provide capital to all companies; however, even if it’s not possible to deliver on all the necessary services, through the use of strategic partnerships they can preserve the presence of a company within their respective relationship umbrella. Financial technology alone has little meaning unless there is underlying value. In order to create jobs and real prosperity, financial technology must act on other factors; and none is more important than human capital. Once again, “Human Capital” and the burgeoning of “Team Spirit” is the essence of all.

* Zana Nesheiwat is CEO of BrandZA, Inc., Partner at Blackhawk Partners, Inc.and wealth-curator charged with building valuable brand assets, originating and optimizing strong partnerships, and advancing investment opportunities that benefit all stakeholders.