Private Equity in the Gulf comes back on track

Since 2014, the Gulf’s private equity (PE) industry has been facing challenges in the wake of macroeconomic slowdown combined with oil price volatility and rising geopolitical risk. To top it off, the collapse of region’s biggest buyout firm (Abraaj) worsened the situation and significantly eroded institutional investor confidence.

As a result, fund raising remained subdued with only 8 Mena – focused PE funds raising 406 million US-Dollar In 2018 compared to 10 funds raising 1.2 billion US-Dollars in 2017 and considerably lower than the 14.3 billion US-Dollar raised in 2015. Prominent PE firms such as Abu Dhabi’s Waha Capital and Kuwait’s Global Investment House either scrapped or delayed their fund raising plans citing negative investor sentiments.

Similarly, the deal activity also lost momentum with only 17 PE – backed buy-out deals in the MENA region in 2018, which was the same as in 2017, but considerably lower than the completion numbers in 2016, 2015, and 2014, when 32, 31, and 46 deals were completed, respectively. Despite these headwinds, the long-term prospects in our opinion remain positive as stabilizing oil prices and anticipated economic recovery will support the urgently needed diversification and development related efforts, combined with the government’s pro-business reforms aimed at strengthen entrepreneurship and small and medium enterprises (SMEs).

Given the stabilization of oil prices, The GCC economies are expected to post strong recovery, supported by rise in investment flows and private consumption. According to the International Monetary Fund (IMF), the UAE economy is expected to achieve an average real GDP growth rate of 2.5% over the next five years, while Saudi Arabia is expected to deliver 2.4% real GDP growth during the same period. With this economic recovery backdrop, the GCC PE activity in our opinion is likely to pick up both on the new investments and exit sides. Moreover, in the past four to five years, GCC governments have undertaken several landmark decisions ranging from expansionary budgets, stimulus packages, pro-business reforms, FDI opportunities, etc. in a bid to develop a sustainable and diversified private sector.

For instance, the United Arab Emirates (UAE) recently approved 122 economic activities across 13 business sectors for up to 100% foreign ownership, offering new opportunities for international investors in lucrative fields such as e-commerce, IT, health care, education and renewable energy.

The Emirates also initiated a “golden cord” permanent residency program, along with long-term residence visas for professionals and retirees, which have encouraged more entrepreneurs and businesses to invest in the country. Similarly, Abu Dhabi’s 50 billion Dirham (14 billion US-Dollar) stimulus (to be provided over three years), and the implementation of structural reforms (lowering fees and easing business licensing and registration) have provided impetus to the emirates private sector.

Alternatively, Saudi Arabia’s pledge to raise the GDP contribution of SMEs to 35% by 2030, along with boosting FDI to 5.7% of GDP by 2030, and its 200 billion US-Dollar privatization program, are measures undertaken to transform the Kingdom into an “open for business” economy. These have shaped conductive investment environment, particularly for start-ups and SMEs enabling them to attract greater investments across the region.

The GCC is already home to several noteworthy and successful companies, from prominent regional unicorns such as Careem and Souq, to FinTech platforms such as Yalla Compare, Souqalmal, and PayTabs; logtech company (Fetchr); and e-commerce players (Mumzworld, AWOK, the Luxury closet) among others, which have attracted significant funding and valuations over the years. Moreover, these companies have witnessed high exit valuations, with some of the largest GCC exits in the past few years. Careem was acquired by over for 3.1 billion US-Dollar while was acquired by Amazon for 580 million US-Dollar.

Notably, Careem’s initial investors are said to have received a 500 times return whereas newer investors such as Saudi’s STV Ventures, saw as much as 2 times return in just 5 months. Such success stories are testament to the region’s global appeal, while also suggesting the opportunities within its secondary private market.

Growing number of tech hubs, accelerators, incubators, and PEIVC firms coupled with government’s favorable policy stance has in our opinion fostered an entrepreneurial culture in the region. SWEs (sovereign wealth funds) and government investors have worked to create regional PE hubs in recent years, such as in Oman with its accelerator/incubator Omen Technology Fund and its first VC firm IDO Investments, as well as Abu Dhabi’s Hub 71, launched this year with 535 million Dirham (147 million US-Dollar).

Several free zones have also emerged in the region, which focus on the development of start-ups and SMEs and encourage new technology and innovation, such as Flat6Labs, FinTech Hive, Astrolabs, Cloud10, and DTEC. As a result, the GCC has seen start-ups emerge in newer tech-enabled segments such as IT, e-commerce, fintech, EdTech, MedTech, healthtech, agritech, logtech, and proptech, which are increasingly garnering investor interest.

These offer in our opinion new economic opportunities and remain crucial for the region’s economic diversification agenda. In 2019, a majority of domestic PE deals were secured b in tech-based sectors, led by e-commerce/online marketplace (14 deals worth 111 million US-Dollar), followed by EdTech (two deals worth 13.6 million US-Dollar), fintech (four deals worth 9.6 million US-Dollar) and IT (six deals worth 5.9 million US-Dollar), highlighting the attractiveness of the region’s technology space.

Moreover, fintech start-ups in the GCC are expected to attract 2 billion US-Dollar in private funding over the next 10 years, compared to 150 million US-Dollar worth of investments over the last decade.

In the current era of heightened global uncertainty driven by volatile capital markets, PE has proven to offer multitude of benefits to investors, enabling them to diversify the portfolio while cherishing higher absolute and risk-adjusted returns. Anticipated economic recovery and the governments’ pro-business stance will in our opinion continue to nurture the SMEs and start-ups in the Gulf, which will present plethora of investment opportunities for both domestic and foreign investors.

While the corporate governance-related concerns might attract higher investor scrutiny going forward, they are unlikely to deter investor confidence in the long term as evident from the recent investments of New York-based KKR & Co. and Blackrock Inc. in Abu Dhabi’s oil pipelines or London-based CVC Capital Partner’s stake purchase in private schools operator – GEMS education.