Report predicts $25bn PE industry in the Gulf

A report published by Dubai-based buyout firm Ithmar Capital and media group Dow Jones has highlighted the economic benefits of private equity for the Middle East and North Africa region.

“The Impact of Private Equity on the Gulf Cooperation Council“ says private equity in the region is expected to grow. Revenues from record energy prices have driven liquidity levels to over $1.5 trillion; regional GDP growth is expected to reach 6 percent this year; economic restructuring is increasing, and interest in the region from international firms is booming, the report says.

A total of $5.8 billion was raised in the region by private equity funds between 1994 and 2005, 41 percent of which was raised in 2005 alone. In 2006, the cumulative total passed the $10 billion mark. The report predicts that private equity fundraising in the Middle East could reach $25 billion in the near future if current benign conditions continue.

According to the report there are several macroeconomic reasons why private equity will boost growth in the region. These include the improved economic diversification the asset class can offer, its positive effect on employment, the encouragement of liquidity, internationalisation and the development of the private sector. 

Some of these arguments for the usefulness of private equity in the region also demonstrate significant opportunities for the asset class.  The report points out that although the ratio of non-oil exports to total oil exports has risen in the region – changing from 29.5 percent five years ago to 52.3 percent today – the growth in technology-focused sectors has been limited.

Despite the high profile of Middle Eastern buyout firms in the Middle East and North Africa region, much of the capital raised in the Gulf is spent elsewhere. Abraaj Capital’s record $1.41 billion acquisition of the Egyptian Fertilizers Company, the largest ever inter-regional deal, was notably in North Africa rather than the Middle East. 

“The Middle East has traditionally been viewed as a source, rather than a target, of investment capital,” the report said. Despite private equity’s international activity, the sector has only recently begun to penetrate the region, it added.

The report cites David Rubenstein, co-founder and managing director of US buyout firm The Carlyle Group, who has said: “My proposition is that it will be the fourth private equity centre of the world five to ten years from now.” It argues that the presence of international buyout firms like Carlyle is part of a relatively recent trend for Western based firms to view the Middle East not only as a substantial source of capital, but also an area for investment – as demonstrated by the $20 billion FDI into the Gulf region in 2005.

There is also huge scope for privatisation across the region. The private sector in the GCC is still very much a work in progress. For example in Kuwait, the government employs somewhere between 85% and 95% of the total workforce,” the report said. Given that current budget surpluses in the region are in excess of $400 billion, yet there is still a shortfall in infrastructure financing and the region’s revenues are closely linked with volatile global energy prices, regional governments may be unable to sustain such investment levels in public services, it argues. As a result, the GCC states have identified a handsome $1 trillion of assets for privatisation. 

With plenty of potential acquisitions and huge pools of capital, the Middle East is a highly exciting region for buyout firms, which are well suited to meet – and profit from – the developing needs of the region.