Private equity companies are expected to plough ahead with deal making this year, but the opportunities will depend on the market’s appetite for such deals and ability to raise funds given the low oil price environment.
Private equity could thrive this year as companies turn to alternative financing while bank liquidity tightens. Many family-owned businesses in the Arabian Gulf region may also sell assets to raise cash as their costs rise from the removal of subsidies and other uncertainties.
“Liquidity is becoming more of a constraint for companies and banks are a bit more cautious in lending,” said Hani Ramadan, the head of private equity at the Abu Dhabi investment company Waha Capital.
“You see receivables for some of the companies growing and that gives us more opportunities to look at because you have lots of good companies that have issues with funding themselves given the macro environment, but they still have a promising future in terms of what will happen to the economy in the next three to five years.”
Deal flow this year is unlikely to exceed last year’s figures, private equity managers said.
Announced private equity and venture capital investments in the Mena region declined by 4 per cent last year to US$1.4 billion from $1.5bn in 2014, according to the Dubai non-profit Mena Private Equity Association.
“You have a lot of second-generation businesses throughout the Mena region that are dealing with questions such as how do we grow, how do we diversify ourselves, how do we prepare ourselves for maybe full monetisation or succession,” said James Tanner, the head of corporate investment for Mena at the Bahraini alternative investment company Investcorp.
Private equity companies expect to conclude a different number of deals, with a wide range of country focus and sector preference.
For example, Waha Capital is looking to deploy $200 million over the next 18 months and expects to conclude two deals in the UAE this year – one in health care and another in the consumer sector, each with a ticket size exceeding $50m. Its preferred sectors include consumer-related businesses, logistics and health care.
“We are looking to have more and more co-investors to come alongside us in deals but the ultimate aim would be to raise a private equity fund. Whether it will be 2016 or 2017 will be highly dependent on the macroeconomic conditions,” said Mr Ramadan.
Investcorp, which has $1.6bn in private equity assets under management, usually concludes two to three deals a year and focuses on the Arabian Gulf and Turkey. Their ticket size is usually $80m to $150m. Investcorp also prefers health care and education.
“There is a lot of work to be done with growing populations and high incidence of chronic diseases in this part of the world,” said Mr Tanner. “In the GCC and Turkey, there is this continued movement from unorganised retail to organised retail, mom and pop shops to malls and high streets, and that is driving a lot of retail.”
Cedarbridge, a private equity firm that focuses on supporting entrepreneurs and SMEs, usually makes two to three deals a year, said Imad Ghandour, its managing director.
Amwal Al Khaleej is sector-agnostic but is looking to make at least one deal this year, said Fadi Arbid, the chief executive of the Riyadh private equity firm. It usually goes for ticket sizes ranging from $30m to $70m.
Amwal sees potential in Saudi Arabia given the recent announcement of the 270bn Saudi riyal (Dh264.4bn) National Transformation Plan, which aims to wean the country off oil.
But Saudi companies will initially face some pain to achieve long-term gain.
“You have to be very careful when you buy companies on high margins today [in Saudi Arabia]. You have to look at what margins are going to be tomorrow from a private equity perspective,” Mr Arbid said, referring to implications of NTP, removal of subsidies and cost of labour.
In terms of exits, PE firms expect to sell several of their portfolio companies, but this will depend on market conditions and strategic and financial companies’ appetites for assets.
“Exits will probably decline this year, because both international and local strategics’ appetite to acquire companies in the region will probably decline slightly – at least, they will wait and see what will happen to the local economies,” said Mr Ghandour, who is also a steering committee member of the Mena Private Equity Association.
Waha Capital is in the process of exiting one company and has ruled out an initial public offering for its portfolio of companies for at least one year because of the lacklustre equity markets.
Investcorp plans to exit three or four companies in the Gulf and Turkey over the next 24 months and believes most stock markets in the Gulf and Turkey remain illiquid, except for Saudi Arabia.
“I am more confident that we will have an environment where strategic investors will be more comfortable entering again in the coming 12 to 18 months,” said Mr Tanner.
But challenges remain. Fund-raising last year declined by about 20 per cent to $992m from $1.2bn in 2014 and it expected to slide again this year.
More and more companies are focusing on deal-by-deal fund-raising rather than a blind pool fund, or a fund created without a stated goal, to deal with the market uncertainties.
“The biggest challenge is definitely fund raising and you have seen lots of companies trying to raise funds and facing difficulties given the liquidity [crunch] and given the business model of the blind pool fund,” said Mr Ramadan. “More and more people are doing co-investments rather than typical blind pool.”
Other challenges facing PE players include the gap between sellers and buyers, who have different price expectations. The general macroeconomic environment continues to be on everyone’s mind.
“The challenges we have are the macro challenges,” said Mr Tanner. “It is liquidity in the market. It is the need for governments to raise money because of budgets and the crowding-out effect that this might have on banks and financing. Interest rates, with the impending rise of US interest rates and what impact that will have on dollarised economies. There are still issues about the geopolitical situation.”
Mr Ghandour recommended that companies expand their remit outside Mena and Turkey to shield themselves from the oil price gyration, one element that holds the region’s economy hostage.
“It’s a tough environment and a new reality, with regards to what has happened to the region geopolitically and macroeconomically speaking,” said Mr Arbid. “It will impact the everyone from SMEs to the largest cap companies.”
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