Private equity managers in the Middle East raised a record $6.4 billion (?4.9 billion) last year, according to the Gulf Venture Capital Association (GVCA).
The total for the year came in 11 percent above the $5.8 billion raised in 2007. The GVCA attributed the increase to larger fund sizes – the average fund size in 2008 was $258 million, compared to $213 million in 2007.
However, the report also pointed to an increasingly difficult fundraising environment in 2008. Leaving aside the first close of Abraaj Capital's Abraaj Buyout Fund IV on $2.6 billion, only 16 percent of the total amount of funds announced in 2008 was actually raised in the same year – compared to 29 percent, 39 percent and 65 percent in 2007, 2006 and 2005 respectively.
Similarly, some $11.7 billion of funds announced between 2006 and 2008 have yet to hold a close.
“This delay calls into question both the ability of funds to actually raise the amounts announced as well as their ability to call on all amounts raised/committed to date, especially in the context of the current market,” the GVCA said. “As the industry matures and consolidates, some of the funds announced, mainly by new fund managers, will never reach successful closure. Industry experts doubt that some of the mega fund announcements in 2007 and 2008 will ever come to fruition.”
Overall, however, the increased fundraising coupled with a reduction in both number of transactions and size of transactions between 2007 and 2008 meant there was “tremendous liquidity” among the region's “cash rich” private equity firms, which have $11 billion in dry powder to deploy in a climate where other sources of funding are limited.
In terms of geographical remit, the report noted the MENASA trend continued, that is, adding South Asia, Southeast Asia and Africa to the traditional MENA (Middle East and North Africa) remit. Sector-wise, healthcare was likely to remain a “top recipient of private equity funds in the next few years”.
While the GVCA acknowledged the difficulties brought to bear by the ongoing economic downturn, it remained upbeat that the long-term nature of private equity would allow it to come through the crisis.
“The economic fundamentals of the region remain strong and are supported by aggressive fiscal policies. Governments' reserves will continue to trickle down to the rest of the economy – sustaining corporate profits and public investments. A sober market will offer better valuations, and hence better returns for private equity,” said Imad Ghandour, chairman of the GVCA information and statistics committee.
Nonetheless, it was noted that in order to build a good enough reputation to sustain its long-term aims, the private equity industry needed to focus more attention on increasing transparency.
“Transparency remains a major barrier that hinders this mode of investment from becoming a strong component in the GCC financial system. More research efforts and collaboration is needed by all practitioners to elevate the current opacity of the private equity market,” stated Ihsan Jawad, CEO of Zawya, which provided the data for the GVCA survey, and board member of GVCA.