MENA Private Equity poised to pick up many well-managed but cash-strapped firms



DIFC Authority seminar reveals global financial crisis has opened up opportunities but also forced PE Firms to develop portfolio management capabilities

Industry experts indicate that the global financial crisis would present opportunities for private equity and venture capital firms in the region.

Speaking at the fifth edition of the DIFC Knowledge Series, experts were united in their view that private equity and venture capitalists are poised on the threshold of a period of expansion and acquisitions owing to the availability of many well-managed but cash-strapped companies across the Middle East and North Africa (MENA) region.

The workshop entitled 'Private Equity in the MENA Region' was organised by the Dubai International Financial Centre Authority (DIFCA) as part of an on-going effort to generate debate and discussion on issues of major consequence to the regional financial world.

It attracted an impressive list of experts, ; including; Paul Koster, Chief Executive of Dubai Financial Services Authority (DFSA); Tamer Bazzari, Chief Executive Officer of Rasmala Investments; Vikas Papriwal, Partner, Private Equity and Sovereign Wealth Funds, KPMG; Achmed Al Shahrabani, Senior Vice-President, Abraaj Capital; Gavin Steel, Director, Capital Markets Group-Middle East, PricewaterhouseCoopers; Adrian Low, Partner, Finance and Project Group, DLA Piper; Michael Kidd - Executive Director, Swicorp Private Equity and Dr. Pablo Fetter, Member of the Gulf Venture Capital Association.

Abdulla Al Awar, Chief Executive Officer of DIFC Authority opened the seminar. Al Awar said Private Equity firms and Venture Capitalists are poised on the threshold of a period of expansion and acquisitions owing to the availability of many well-managed but cash-strapped companies across the Middle East and North Africa region

"Though the global financial crisis has transformed the Private Equity and Venture Capital landscape - as indeed it has done with the general financial landscape, creating an increasingly challenging environment - it has also thrown up many highly attractive opportunities for those industry players who have been prudent and still have investible surpluses," Al Awar pointed out.

"This is especially true in the MENA region in general and the Gulf area in particular, given that after a dip, new data is now projecting increased mergers and acquisitions (M&A) activity in the GCC led by the United Arab Emirates and the Kingdom of Saudi Arabia," said Al Awar.

"Private equity in MENA has been all about buying companies using lots of debt and making healthy returns as relative valuations in the stock market consistently improve. The involvement of the private equity investor has been limited to board representation with little value add in the underlying business." Said Bazzari. "As the credit market has dried up and the direction of regional stock markets becomes less certain, the approach for the next few years will be all about operational improvements and expansion of the acquired business. Its about Private Equity investors getting down to business and rolling up their sleeves." commented Bazzari.

Vikas Papriwal, Partner, Private Equity and Sovereign Wealth Funds, KPMG stated that a significant amount of dry power exists. However, this is likely to flow into private equity firms that have shown an ability to conduct robust due diligences and understand the operational levers available including developing a solid 100 day plan before acquiring the company and implementing these post acquisition "We are likely to see an increase in bolt on to existing portfolio companies as well as an increase in equity stakes especially in defensive sectors."

"With an increase in investment holding timeframes due to scarcity of attractive exit options at present, the focus for many private equity firms is now on the workout of their existing portfolio companies - with operational improvements, debt restructuring and working capital management at the core. Discretionary spending is being restricted, including expansionary capital expenditure, and business plan timelines are being reassessed as entities look to weather the storm." stated Papriwal.

Globally, private equity has been impacted. The crisis has exposed the dangers of excessive leverage and overly complex structures. Investments by private equity firms hit a new low of US $12.8 billion in the first quarter 2009, down 75 per cent from the first quarter of 2008 and in contrast to the record $177 billion invested in the final quarter of 2007.

Experts at the DIFC Knowledge Series 5 seminar agreed about the less severe impact of the global crisis in MENA. They pointed out that breakdowns by regions suggest that the US will be hardest hit, while the Middle East will remain the most resilient, with an increase in dollar volume.

This is projected to pick up speed in the last quarter of 2009 as with bank funding freezing up, valuations have come down and there are now some rich pickings at very attractive prices available in the MENA region and beyond.

Dr. Pablo Fetter, Member of the Gulf Venture Capital Association, was the Moderator for an interactive panel discussion which featured Michael Kidd, Gavin Steel, Tamer Bazzari and Vikas Papriwal.

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