ceo, zawya & director, gvcamec.biz/term/uploads/midle_633728984439763603.pdf · 2009. 7. 25. ·...

Fred SicreExecutive Director, Abraaj

Hossam ShobokshiManaging Director, Principal Finance - Private Equity, Standard Chartered

Ihsan JawadCEO, Zawya & Director, GVCA

Imad GhandourExecutive Director, Gulf Capital & Chairman of Information & Statistic Committee, GVCA

Dr. Pablo FetterDirector, Istithmar World Ventures & Member, GVCA

Vikas PapriwalPartner, Private Equity and Sovereign Wealth Funds, KPMG

Report Steering Committee

Special thanks go to all those who contributed their time and effort to make this report possible, and include:

KPMG Team: Dale Gregory, Liam Barry, Cynthia Chee, Mehmet Sait Gunes and Nauman Merchant

Zawya Team: Jeanette Lepper and Ali Arab

We would also like to thank all the sponsors for their support and all the survey participants.

Special Thanks

TABLE OF CONTENTS

1.1 Basis of preparation 1.2 Definitions and assumptions 1.3 Data filtering

4.1 Summary 4.2 Funds4.3 Investments4.4 Deployment of funds4.5 Regional focus4.6 Sector focus4.7 Exits and IRR

7.1 Summary 7.2 Highlights 7.3 Survey results

8.1 GVCA Overview8.2 Board Members8.3 Members’ directory

1. Important notice

2. GVCA introductory message

3. KPMG introductory message

4. Private equity in the MENA region

5. The future of private equity in MENA and the impact of the financial crisis

6. Sovereign Wealth Funds in the MENA region

7. Survey of GPs of the MENA region

8. GVCA – Gulf Venture Capital Association

9. Directory of private equity firms in MENA

10. Sponsors’ Profiles

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6.1 Summary6.2 SWF profile6.3 SWF investments6.4 Sector focus6.5 Regional focus6.6 Exits6.7 Development in regulatory framework6.8 What’s next for SWFs

8

9

1011152530333641

51

575961626467686970

73757576

89919293

99

109

By Hareb El Darmaki

The outlook for the global economy in general and the GCC economies in particular has changed dramatically in the past few months. The Gulf region continues to be influenced by the turmoil in many developed economies and, as a result, weaknesses in our local economies, financial institutions and commercial enterprises have been exposed.

As the current financial crisis continues to unfold, the next few months will be difficult for all financial players – including private equity. Commercial banks, investment banks, financing companies, and other financial players forming the backbone of the modern financial system will continue to uncover the impact of bad investments and impairment of assets, and will seek to redefine their business model to survive the flux of change.

Private equity is no exception and 2008 data reveals a drop in activity within the region. Private equity is facing major challenges, and is invited to rethink its business model. Diminishing leverage, compounded by adverse economic conditions and more challenging exit strategies will put downward pressure on private equity houses as they seek to replicate previous years’ returns.

However, private equity is not a short term play, and our investment horizon should extend beyond the current crisis. Particularly for the GCC, the economic fundamentals 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. Although the increased attention that the region had witnessed in 2007 may be disrupted, we expect the disruption to be temporary. As a matter of fact, we expect the robust economic performance of the region to attract additional allocation from international institutional investors over the medium term.

February 15th, 2009Abu Dhabi, UAE

FOREWORD

1. Important Notice1.1 Basis of preparation 1.2 Definitions and assumptions 1.3 Data filtering

9

1. Important Notice

5

This report has been prepared based on data provided by GVCA, sourced from the Zawya Private Equity Monitor. Historical data has been updated from that used in the 2007 GVCA report to include full year results for 2007 and to reflect increased disclosure of information in the market. KPMG has not initiated any primary research in relation to this draft report and has not sought to establish or confirm the reliability of the data provided by GVCA and Zawya.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

In analysing and determining the parameters of available data, it has been necessary to apply certain criteria, the most significant of which is as follows:

1.1 Basis of preparation

Private equity has been defined to include houses that have a General Partner / Limited Partner structure, investment companies and quasi-governmental entities that are run by, and operate in the same way as, a private equity house.

Sovereign Wealth Funds (“SWFs”) have been defined to include official SWFs as well as entities that act as SWFs (particularly regarding their sources of funds) such as Mubadala, Istithmar and Dubai International Capital.

Funds managed from MENA but whose focus is to invest solely outside the region are excluded from the fundraising and investment totals.

MENA includes Algeria, Bahrain, Egypt, Iran, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, UAE, and Yemen.

Investment size represents the total investment (both the debt and equity portions). However fund size only considers equity invested, as we have no visibility on debt exposure by funds.

The fund raising totals are the amounts closed/committed for fund raising funds, closed funds, investing funds, fully vested funds and liquidated funds.

Vintage year is the year of the first official close. If no close information is provided, the announcement year is taken. In prior years only closes made to date and the date of the most recent close was available, whereas for 2008 we have been able to specifically identify vintage year for each fund.

Given the relative infant state of the industry in MENA, exits have been defined to include partial exits, although simple dilutions have not been included.

6

1.2 Definitions and assumptions

Announced: Official launch of funds which have yet to commence fund raising.

Rumoured: Funds expected to announce their intention to commence fund raising.

Fund raising: Funds which have been announced and which are in the process of raising capital.

Investing: Funds which have closed (raised funds) and are actively seeking and/or making investments.

Fully vested: Funds that have invested all capital raised. Some of the investments may have divested in this stage but not all.

Liquidation: Funds which have divested all investments and have fulfilled all obligations to shareholders

For analytical purposes, we have considered the following types of funds, as defined by Zawya’s Private Equity monitor:

The primary data sourced from Zawya has been filtered according to the definitions used in the Emerging Markets Private Equity Association (EMPEA) research methodology.

In particular we have used the following definitions:

Fund Size: In the case of funds yet to make a first close, or where no close information is available, fund size is equivalent to the target amount, and is noted as such. For funds achieving at least one official close, fund size is reported as the capital raised to date, while for funds that have made a final close, the fund size is the total capital raised. All amounts are reported in USD millions. Rumoured funds are excluded.

Currency: Where funds data has been provided in a currency other than USD, exchange rates applied are from the last day of the month in which each close is reported, e.g. first close reported in € on 15 April 2006 would be calculated using the exchange rate for 30 April 2006, taken from published rates available from www.oanda.com, www.xe.com, www.x-rates.com, or similar sources.

Funds of funds or secondaries are excluded.

1.3 Data filtering

7

Region: Statistics are based on the ‘market’ approach and funds are categorised based on the intended destination for investments (as defined in a fund’s announced mandate) as opposed to where the private equity firm is located. With regard to multi-region funds, we have included these to the extent that there is a focus on the MENA region. EMPEA methodology is to include only those multi-region funds whose primary intention is to invest in emerging markets. However, the source data does not provide visibility on primary geographic intention.

Funds established with a specific mandate to invest in real estate are excluded from the fundraising, investment and exit totals. The remaining real estate investments relate to funds with mixed investment mandates.

Conventional infrastructure funds, or funds investing directly in greenfield infrastructure projects (e.g. bridges, roads) are excluded from fundraising totals. However, funds that make private equity investments (determined based on target returns) in companies operating in the infrastructure sector are included.

EMPEA does not track or report other alternative asset classes, including hedge funds, real estate funds and conventional infrastructure funds. In our analysis we have excluded data from investment-type companies and real estate firms, while also separating SWFs from the private equity funds. SWF transactions have been analysed separately.

1. Important Notice


As the financial crisis continues to unfold, both globally and in the region, the private equity business model is being challenged. The deleveraging process of the economy continues, with less and less debt available to finance private equity transactions. Adverse macroeconomic conditions are impacting previous investments, and are making new ones more challenging. Many IPOs have to be postponed and both trade and financial buyers opt to preserve cash for a rainy day. Many private equity houses are finding it more difficult to raise new funds.

The illnesses that are today plaguing the economies in developed countries emerged in the region after a few months of delay. Commercial banks, largely spared from the first wave of CDO and CMO defaults, were faced with liquidity shortages and our own flavour of the real-estate bust. Investment banks and companies that banked on years of continuous growth and cheap debt were caught off guard by the reversal of economic fortunes. Many sectors in the real economy, like construction and real estate, are also facing challenging times as the economic tide recedes.

However, the economic fundamentals for the region remain sound – at least on a relative basis. Despite the decrease in oil prices, governments in the region are using their massive accumulated reserves to stimulate the economy and sustain economic growth. Despite instances of individual failures, the financial system remains largely open for business: banks are back lending after a short pause. Profitability of many enterprises increased despite the gloomy expectations, and consumers are still spending, albeit more prudently.

The statistics and commentary in this report reflects what we have all experienced in 2008 - a taxing, yet enriching, experience for the youthful private equity industry and its practitioners in the MENA region.

A note of thanks to our sponsors – many of which are repeating sponsors from last year. Double thanks for those institutions that were affected by the crisis yet continued with the tradition of supporting this report.

More importantly, this report is the fruit of many days of hard work from the teams of KPMG and Zawya.

Thank you all.


8

Imad Ghandour Chairman Information & Statistics Committee Gulf Venture Capital Association

Ihsan JawadDirector Information & Statistics Committee Gulf Venture Capital Association

Dr. Pablo FetterMember Gulf Venture Capital Association


KPMG is pleased to continue its association with the GVCA’s annual report on private equity in the Middle East and North Africa region for this, the third year.

Whereas 2007 will be remembered for the region’s stellar growth in fundraising and the announcement of landmark deals, 2008 was distinguishable by a notable shift in concentration within the industry.

Only the more established fund managers were able to leverage their reputations and track record to secure successful closure of larger funds. As a result, even though fewer funds closed in 2008, the total funds raised during the year increased to more than $6.4 billion (compared to $5.8 billion in 2007).

We expect this trend to continue, with a smaller number of larger General Partners leading the industry through its next phase of evolution. Private equity firms are taking the opportunity presented by the current economic conditions to become more efficient and focused operations.

With attractive exit options scarce at present, the focus for many private equity firms is now the enhancement of performance of their existing portfolio – with operational improvements, debt restructuring and working capital management at the core. Discretionary spending is being restricted (including expansionary capex) and business plan timelines being reassessed, as entities look to weather the storm. No-one doubts that opportunities will exist once we are over the worst, but few agree on when the worst will come, or whether it has already passed by.

This change in focus is a welcome one. It should bring with it not just short term cash and operational benefits, but also more successful exits when the opportunities present themselves in the future.

This report would not have been possible without the efforts of Zawya, the GVCA and members of the Report Steering Committee. We are grateful to them for sharing primary data and their industry insights, both of which provide the backbone of our findings.

Vikas PapriwalPartner, Private Equity and Sovereign Wealth FundsTel: +971 4 403 0350; email: [email protected]

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 145 countries and have 123,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG’s presence in the Lower Gulf dates from 1973. With more than 700 professional staff and 26 partners, we operate from offices in Dubai, Abu Dhabi, Sharjah and Muscat. We also work closely with our colleagues in offices throughout the region and across the world.


9

4.1 Summary 4.2 Funds4.3 Investments 4.4 Deployment of funds4.5 Regional focus4.6 Sector focus4.7 Exits and IRR


11


Note: The graph above has the following limitations: - Funds raised represents committed capital and does not distinguish amounts called - It does not take into consideration any level of debt financing which, one can only assume, would widen the gap further - It does not account for management fees which can be in the range of 10-20% of committed capital over the life of the fund. - Investment analysis is based on information made available and is not conclusiveSource: Zawya Private Equity Monitor

The current financial crisis has cast its shadow on this report. Most of the 2008 findings and analysis hereunder are consequences of this crisis, directly or indirectly. As the crisis marches on into 2009, it will be interesting to see what we will write on these pages next year. The decrease in oil prices will no doubt affect the stellar growth the region has previously experienced. However, economic and demographic trends indicate that the region will continue to grow, albeit at a slower rate. A greater share of petrodollars is being invested locally as a result of the commitments of local governments to social and economic development as well as the increasing liberalisation, privatisation and regional integration.

The momentum of private equity activity has slowed down in 2008. The MENA region has been fertile ground in terms of fundraising activity, but it has proven less so for acquisitions. Investors and analysts alike have voiced concerns over the private equity industry’s ability to mitigate and manage its exposure to the global credit crisis as well as its ability to sustain the high returns to which investors have become accustomed.

Funds raised in 2008 increased to $6.4 billion from $5.8 billion in 2007. When compared to funds raised in 2005 ($2.9 billion), 2008 reflects a compound annual growth rate (“CAGR”) of 30 percent. 76 percent of the $19.6 billion under management has been raised in the past three years. Furthermore, there is an increasing trend towards larger raisings with the average fund size in 2008 being $258 million compared to $213 million in 2007 (2006: $177 million). Investments, however, saw a significant turnaround from the bullish activity in 2007 with both the number and total size of investments decreasing by 22 percent and 31 percent respectively.

The result of an increase in fundraising and a decrease in investing activity is a significant accumulation of ‘dry powder’ (capital called or committed that is yet to be deployed). This capital overhang renders the private equity industry strategically placed to capitalise on lower valuation dynamics in a time when other forms of funding are scarce and growth anticipated.

4.1 Summary

Cum ulative fun ds ra ised an d in vestm en ts m ade s in ce 2000 - Ex cludin g l iquidated fun ds

-

5,000

10,000

15,000

20,000

25,000

2000 2001 2002 2003 2004 2005 2006 2007 2008Funds raised Investments made

USD

mill

ions

The majority of MENA funds are focused on opportunities across the GCC and North African countries, although fund managers are increasingly launching funds with an expanded mandate that includes South or Southeast Asia (i.e. MENASA funds) and Turkey. Funds with a specific country limited focus are becoming less attractive.

Investments over the last four years have focused primarily in Egypt, Saudi Arabia and the UAE, representing 33 percent, 15 percent and 14 percent respectively of total investments since 2005. In 2008 investments in each of these countries accounted for 19 percent, 17 percent and 14 percent of all investments for the year respectively. The $361 million acquisition of KES Power by Abraaj’s Infrastructure and Growth Capital Fund resulted in Pakistan accounting for 21 percent of total investments in 2008.

The most dominant sectors for investments in 2008 were Healthcare, Transport, and Power and Utilities. The expected GDP growth and the increasing consumer base from an increasing population are expected to sustain investment opportunities, particularly from defensive sectors such as social infrastructure, healthcare, education and food, as well as energy-related industries, and transportation/logistics.

Private equity will have a major role to play in financing domestic growth as other financing options dry up. "Much of oil liquidity is outside the region... that needs to be mobilized and pumped back into the region," Abraaj Capital's Executive Director Omar Lodhi, said. "It is important that small and medium size businesses are not starved of credit as they are today, which only exacerbates the problem1 ."

Local businesses also stand to benefit from private equity investments, not only financially, but from the wealth of experience fund managers can bring in generating sustainable growth for industries as well as implementation of proper corporate governance frameworks, synergies from restructuring and access to management talent that has historically been relatively scarce in the region.

Despite the positive long term outlook, private equity will continue to face major challenges in 2009. Exit options will be limited, as values have plummeted, forcing firms to rethink many investment strategies and focus on harbouring growth of existing portfolios. Deployment of funds will need to be more selective; existing investments may face operational challenges as the economy slows down; and raising new funds will be fundamentally difficult in an environment with dry liquidity.

1 Tahani Karrar, “UAE Must Mobilize Capital Abroad Back Into Region – Abraaj Cap”, Zawya Dow Jones, 4 February 2009

12

Dr Nasser SaidiFounder and Director of Hawkamah, the Institute for Corporate Governance

Thought Leadership

Governance Matters in MENA Private Equity

13

Sustainable value creation and corporate governance go hand-in-hand. Corporate governance refers to the monitoring and control over how the firm’s resources are allocated, and how relations within the firm are structured and managed. It promotes efficiency, transparency and accountability within firms, thereby ensuring sustainable economic development and financial stability. Transparency enables early detection of poor performance and accountability requires that shortcomings be addressed by management; while the adoption of best practices enhances the management’s focus on the company’s objectives.

MENA private equity should play a critical role in diffusing good corporate governance practices across portfolio companies in terms of board structures, administrative procedures, disclosure requirements and minority interest protection. These facilitate the conversion from family firms into institutions and from non-listed to listed companies, from which all parties and stakeholders benefit: surveys show that investors are willing to pay a premium for companies practicing good corporate governance.

In addition to higher value generation for the PE industry, regional economic development largely depends on the engagement of the private sector to drive the modernisation process. The private sector in MENA is dominated by SMEs and family-owned enterprises, whose governance needs can be met by the PE houses.

The promotion of good corporate governance at the level of PE firms themselves is an integral part of this process. This is not only because practices adopted at PE firms are often reflected in their portfolio companies, but to attract a wider range of investors. The credit crunch has brought into focus the purposes of financial reporting and investment decisions are increasingly based on understanding the business model, key risks and relationships, and the culture and behaviour of an organisation. Furthermore, good corporate governance fosters confidence and credibility, which help alleviate potential stakeholder concerns.

It is for these reasons that Hawkamah has launched a Task Force to develop guidelines for PE firms and portfolio companies. The Task Force will work on a consensual basis and seek input from a wide range of interested parties. Parties interested in becoming involved in the project are encouraged to contact Hawkamah at [email protected].

Paul HarterPartner, Gibson, Dunn & Crutcher LLP

Thought Leadership

Legal Tools for Private Equity in the Current Economic Environment

14

Increased use of vendor financing and earn outs. Financial sponsors need to bridge value gaps and deal with very tight debt markets. Larger equity cheques and the use of mezzanine finance may be part of the answer, though more costly and necessarily impacting leveraged returns. Vendor financing and earn outs can be employed to bridge gaps and, to a certain extent, as a form of financing. It is critical to write legally unambiguous definitions of ill-defined accounting concepts (such as IRR and even EBITDA) and to define mechanics for measuring future financial performance that are at the same time accurate, inexpensive, quick to achieve and not prone to disputes.

Improved corporate governance. Partnering with family owners requires careful attention to corporate governance, meaningful minority protections, enhanced risk management systems and timely and reliable information flows. Today more than ever, private equity needs to manage working capital and cash flows and worry about the operating results of portfolio companies. Financial sponsors will therefore focus greater attention on contractual rights to facilitate stewardship and oversight and ensure prompt and accurate financial reporting.

Addressing the downside. Insolvency laws in the Middle East are poorly understood and, until now, rarely tested. 2009 may very well prove to be a year in which a large amount of new learning will emerge. Sponsors will increasingly seek guidance on "what if" scenarios, some of which can impact the structuring and documentation of deals. Careful attention will increasingly be paid to contract rights relating to exits, deadlocks, dispute resolution and rescue funding.

Increasing the legal value add. While some sponsors have viewed legal services as an afterthought, to be purchased on a commodity basis, increasingly many firms are realising the added value of more thorough documentation and advice from experienced private equity lawyers. Although worsening economic conditions will inevitably put more pressure on cutting expenses, if there was ever a time to seek value added advisory services, that time would be now.

Over the past several years, the legal profession has advanced in the Middle East in response to a growing and increasingly sophisticated private equity client base. International best practices and standards have been adapted to a region characterised by family ownership, minority investments, greenfields, carve outs and foreign ownership restrictions.

2009 presents a new set of legal challenges for private equity. While deal pipelines and investment appetite may be weak, private equity should emerge gradually, particularly in sectors that are relatively recession resistant (such as healthcare and education), as well as in depressed sectors where bargains may be available (such as hospitality and property). Yet, for so long as price volatility and dry debt markets persist, private equity should consider certain legal tools to address real challenges.

15

Despite the turbulence of financial markets in 2008, total funds raised increased to $6.4 billion, compared to $5.8 billion in 2007 (an increase of 11 percent). This increase can be primarily attributed to large funds raised such as the $2.6 billion Abraaj Buyout Fund IV and several funds of $500 million or more.

Fund activity in the MENA region has ballooned in recent years, as regional and international LPs aim to capitalise on the significant growth opportunities from the emerging markets in general and the MENA region in particular. Since 2005, fund raising activity has more than doubled, reflecting a CAGR of 30 percent.

Of the $6.4 billion closed in 2008, $5.4 billion were first closing (84 percent of the total), up from $3.9 billion (68 percent of the total) for first closing in 2007.

4.2 Funds

4.2.1 Funds raised to date

Source: Zawya Private Equity Monitor

Fun ds ra ised by y ear

5

3 3

5

2

17

19

28

18

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008Year the funds were raised

-

5

10

15

20

25

30

First close Second close Third close No. of funds with closes in each year

$ m

illio

n

No. of funds


16

Note: The above graph excludes liquidated fundsSource: Zawya Private Equity Monitor

As a result of the stellar growth in fundraising activity over the last four years, cumulative funds under management increased from $4.8 billion in 2005 to $19.6 billion in 2008.

Additionally, the average fund size has increased significantly over the period to $258 million in 2008 due to larger sized funds becoming more common as the region matures. This reflects a tendency from investors to back experienced teams with proven track records with larger sums, as is the case with Abraaj, Investcorp and others. Hence, whereas the established private equity houses were able to raise larger funds, new entrants aiming to raise their first fund – even modest sizes – faced an increasing challenge in attracting investors.

Cum ulative fun ds un der m an agem en t

4,768

7,413

13,195

19,629

191

177

213

258

-

5,000

10,000

15,000

20,000

25,000

2005 2006 2007 2008-

30

60

90

120

150

180

210

240

270

Cumulative funds Average fund si e

$ m

illio

n

Average fund size ($m

illion)


17

Note: Total fund size after 2008 close represents the total fund size for all funds making a close in 2008Source: Zawya Private Equity Monitor

The most prominent fundraising in 2008 was the $2.6 billion closed for the Abraaj Buyout Fund IV, focused on the MENASA region. Also focused on the high growth MENASA region (and Turkey) is Global Investments House’s Global MENA Financial Assets fund which raised $500 million in 2008. This fund is reported to have an average investment size of about $30 million to $50 million across 10 to 15 companies. Furthermore, this fund is the first permanent capital vehicle from the MENA region to be listed on the London Stock Exchange which invests in private equity assets. According to reports, the IPO was subscribed more than 100 percent, with interest from both the European and Middle Eastern investors.

The NBD Sana Capital Fund also raised $500 million in 2008 and has a secondary focus (after MENA) on Turkey.

M ajor fun ds ra ised in 2008

Fund N ame Fund ManagerI nves tment Focus

G eograp hi c Focus Cl os e

$ mi l l i on

Abraaj B uyout Fund IV Abraaj Capital B uyout ME NAS A Firs t 2,6 00

The Carlyle Group ME NA Fund The Carlyle Group B uyout ME NA Firs t 5 00

NB D S ana Capital S ana Capital B uyout ME NA/ Turkey Firs t 5 00

Global ME NA Financial As s ets Global Inves tm ent Hous e B uyout ME NAS A/ Turkey Firs t 5 00

Gulf O pportunity Fund I Inves tcorp B ank B alanced Fund ME NA S econd 45 0

Growth Gate Keys tone E quity Partners B uyout GCC S econd 29 0 Millennium Private E quity Global E nergy Fund

Millennium Private E quity B alanced Fund ME NA Firs t 200

Millennium Private E quity Telecom s , Media & Technology Fund

Millennium Finance Corporation

B uyout ME NA Firs t 15 0

Maghreb Private E quity Fund II Tuninves t Finance Group B uyout North Africa S econd 127

O thers Various Various Various Various 1,117

T otal 6,43 4 T otal fund s i z e after 2 008 c l os e 7,714

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Analysis by vintage year represents the total funds raised to date allocated to the year in which each fund made its first close and therefore allocates second and third closes to the same year, irrespective of when those closes occurred. As an example, total funds raised to date from 2006 vintage funds is $3.9 billion, although only $2.4 billion of this was actually closed in 2006, with $1.4 billion and $0.1 billion closing in 2007 and 2008 respectively. Actual funds raised in 2006 totalled $2.6 billion.

Similarly, funds raised to date for 2007 vintage funds is $5 billion. However, of this amount, $4.1 billion was actually closed in 2007, with the remaining $0.9 billion raised from second close in 2008. Total close from all funds in 2007 was $5.8 billion (after taking into consideration the second and third close of prior year vintage funds).

The above analysis shows that the amount of funds actually closing decreased from 2005 to 2006, despite an increase in vintage funds from those years.

The difference between funds raised to date for 2008 vintage funds ($5.5 billion) and actual funds raised in 2008 ($6.4 billion) relates to second closes made in 2008 for prior year vintage funds.

Of the 18 funds raising capital in 2008, 14 were 2008 vintage funds, three were 2007 and one was 2006. However, first closes represented 84 percent of the total funds raised in 2008, a 16 percent increase from the prior year, mostly attributable to the major Abraaj raising.


V in tage fun ds vs actual fun ds ra ised

116

1,025

481 504275

3,353

3,904

4,957

5,457

113

1,028

481 504

141

2,9442,645

5,782

6,434

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Vintage funds Year fund raised

$ m

illio

n


19


Note: Figures in brackets represent the number of funds per vintage yearSource: Zawya Private Equity Monitor

There has been a growing trend for larger fund raisings, particularly since 2006. Apart from the Abraaj Buyout Fund IV, only two other funds have crossed the $1 billion threshold to date. The Infrastructure and Growth Capital Fund (a 2006 vintage fund managed by Abraaj Capital and co-sponsored by Deutsche Bank and Ithmar Bank) and the Global Opportunity Fund 1 (a 2007 vintage fund managed by Investcorp Bank.)

The total funds raised to date from 2005 to 2008 vintage funds is approximately $17.7 billion, of which 64 percent ($11.4 billion) was from 14 funds each raising $500 million or more (including the three funds detailed above). By number, these 14 funds represented only 21 percent of the total number of funds.

The mid-market funds ($100 million to $499 million) represented a dimishing market share for 2008 vintage funds (36 percent by number and 14 percent by size) and are not expected to remain major players in the region.

V in tage fun ds ra ised by s ize

-

-

112 4296 8406 7285 6

546 4355 3

663 5

374 3

200 1

1,017 4

1,136 4

932 4

2,000 4

2,190 4

1,762 3

2,600 1

1,100 1

1,700 1

-

1,000

2,000

3,000

4,000

5,000

6,000

2005 2006 2007 2008Vintage year

0-99 100-199 200-499 500-999 1000 and above

$ m

illio

n

Note: Figures in brackets represent the number of funds per vintage yearSource: Zawya Private Equity Monitor

2008 vintage funds were dominated by buyout focused funds (92 percent by size and 64 percent by number) due primarily to five major buyout funds that have together raised $4.6 billion.

The trend towards raising more and larger buyout funds is supported by the need for more flexibility in structuring deals and the success of large buyout transactions such as the Egyptian Fertilizer Company (“EFC”) in 2007 for $1.4 billion.”Buyout funds have invested in majority and minority equity stakes and in operating companies and infrastructure-like assets, hence giving them greater flexibility in their investment strategy.

Infrastructure funds, which gained popularity in 2006 and 2007 due to the anticipated demand for infrastructure financing in MENA and their stable returns and predictable cash flows, have fallen out of favour with investors in 2008. The business case for such funds has proven to be slower to materialize (despite the upcoming demand for infrastructure financing) and such funds have had limited success deploying their funds. Limited project finance and higher cost of capital that ensued as a result of the current crisis, will make it tougher to raise new infrastructure funds in MENA.

Venture capital funds remain largely unattractive in the MENA region, with only three venture capital funds raised in 2008. The venture capital model has remained unproven in the region, despite many attempts by individuals and governments to adapt the western model to the Middle East.

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V in tage fun ds by in vestm en t focus

615 5231 3

2,135 5

200 1

1,896 8

1,396 10

1,916 9

5,030 91,700 1

600 2

712 1

250 155 1

107 3

72 3

156 1

200 1

328 275 1

-

1,000

2,000

3,000

4,000

5,000

6,000

2005 2006 2007 2008Vintage year

Balanced Fund Buyout Infrastructure Energy and power Venture capital Others

$ m

illio

n

21

4.2.2 The fundraising cycle

There is an increasing delay in fund raising. When compared to the intended target size (“ITS”), only 16 percent of the total amount announced in 2008 (adjusted) was raised in a first close in the same year, compared to 65 percent in 2005. Roughly half of the funds announced in 2006 have so far been raised and approximately $11.7 billion of announced funds in 2006-8 have yet to make 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.

Note: (1) Adjusted excludes the Abraaj Buyout Fund IV with an ITS of $4 billion (announced in 2008) and $2.6 billion raised in 2008Source: Zawya Private Equity Monitor


Fund ra is ing c yc le

Ye arA nnounce d

IT S ($ m illion)Rais e d in

s am e ye arRais e d in

ye ar 2Rais e d in

ye ar 3Ye t to be

r ais e d2005 4,144 65.4% 12.6% 6.8% 15.2%

2006 11,030 19.3% 21.1% 11.8% 47.8%

2007 10,828 29.3% 11.6% n/a 59.1%

2008 10,532 34.9% n/a n/a 65.1%

2008, adjus ted (1) 6,532 16.4% n/a n/a 83.6%


Fun ds ra ised by an n oun ced y ear

522 282 -

2,123 2,323

1,307 1,338

-

3,177

1,256

5,606

-

-

3,871

4,805

-

2,000

4,000

6,000

8,000

10,000

12,000

2006 2007 2008 Funds to be raised

Announced in 2005 Announced in 2006 Announced in 2007 Announced in 2008

$ m

illio

n

22

4.2.3 Funds yet to be raised

There is an increasing number of funds that are taking a prolonged time to raise their capital. Of the total funds announced in the last three years $11.7 billion is still to reach a first close ($1.3 billion of which relates to 2006 and $5.6 billion to 2007). The delay in making a first close is primarily driven by the following funds:

Fun ds y et to be ra ised by status

994461

2,950344

5,145

1,855

8

9

12

-

1,000

2,000

3,000

4,000

5,000

6,000

2006 2007 2008Announced ear

-

2

4

6

8

10

12

14

Announced Fund Raising No of funds

Note: Total announced in 2007 includes one fund (with an ITS of $0.5 billion) which we understand has made a close, however no close information has been made availableSource: Zawya Private Equity Monitor


$ m

illio

n

No. of funds

23


The region is attempting to raise larger funds than it had previously, which may be a contributing factor to the delay between announcement and first close. This trend is significantly impacted by a handful of major announcements yet to come to fruition. For example, of the $4.8 billion announced in 2008, $3.9 billion relates to six specific funds. Similarly, two funds announced in 2007 account for $4 billion (or 71 percent) of the amount yet to be raised from 2007 vintage funds ($3 billion alone being from DIB/DPW Family of Funds). 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.

Where funds are yet to make a first close, or where no close information is available, fund size is stated as the target amount. For funds achieving at least one official close, fund size is reported as the capital raised to date, while for funds that have made a final close, the fund size is the total capital raised. As such, funds yet to be raised (above) does not account for future closes of funds that have made at least one close. The following is an example of funds for which closes to date are significantly less than their ITS:


24

Note: Fundraising yet to make a close includes $0.5 billion related to a fund which has made a close that was not quantifiableSource: Zawya Private Equity Monitor

The total size of all active funds in the market in 2008 (both raised and yet to be raised) was $31.3 billion, of which $19.6 billion has been raised. Of the 107 active funds in the market, 18 have announced a total of $7.4 billion that they are in the process of raising and 13 are yet to commence raising an ITS of $4.4 billion.

4.2.4 Total active funds

B reak dow n of private equity fun d by status (2000 - 2008 )

Announced 13 funds

Fund raising yet tomake closes 16 funds

Fund raising with atleast 1 close, investing

6 funds

Final close, investing61 funds

Fully vested 9 funds

7.3 billion23

3.4 billion11

15.2 billion48

4.4 billion14

1billion3

25


Market experts estimate between 10 and 30 per cent of private equity investments remain unannounced. Furthermore, some PE houses have not revealed the size of their investments, casting further limitations on the information available. Approximately 14 per cent of the announced transactions over the last decade have not publicly disclosed their size. In many cases, transaction size has been estimated by experts for analysis purposes only based on available market intelligence.

Further, in the absence of comprehensive information on the financing structures used by the private equity houses for funding transactions, we are unable to analyse and comment on the debt/equity financing strategies used for structuring investments.


After experiencing exponential growth in 2007, private equity activity in the MENA region has declined in 2008, both in total size (31 percent) and in number (22 percent).

The decline seems surprising given the abundance of “dry powder” and the economic prospects of the MENA – at least up to October 2008. One explanation is that company owners may be reluctant to sell at valuation levels that reflect the new economic realities. Christophe de Mahieu, of Investcorp, believes the industry is still waiting for company owners to shift their expectations in line with what has happened on the stock markets2 . However, the current decline does put in question the quality and quantity of deal flow in MENA region.

4.3.2 Investments made to date PE In vestm en ts in the last 10 y ears (1999 - 2008 )

31 0

610

12

4448

64

50

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008-

10

20

30

40

50

60

70

Deal si e no of transactions

$ m

illio

n

No. of transactions

2 “Waiting For Sinking Companies To Start Calling For Help”, The National, 16 February 2009

4.3 Investments

4.3.1 Information limitations

26


The decrease in volumes from 2007 to 2008 is partially distorted by the Infrastructure and Growth Capital Fund’s acquisition of Egyptian Fertilizers Company (“EFC”) for $1.4 billion in 2007. After excluding this investment, the investments volume actually increased by 15 percent. Nevertheless, the tightening credit markets may have contributed to the lack of any similar transaction in 2008.

Despite this recent decrease, total private equity investments in the MENA region (by value) have increased by a CAGR of 48 per cent since 2005. Of the total investments made in the last decade, approximately 86 percent were made in the last three years (2006-2008), with approximately 39 percent and 27 percent made in 2007 and 2008, respectively. Some of the major transactions in 2008 are as follows:

S ize of PE in vestm en t com parison

41

3

21

33

16 1512

18

5

12

7

25 6

1 1 0-

200

400

600

800

1,000

1,200

1,400

1,600

2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008

Less than 1million 1million to 19million

20 million to 49million



Over 500 million

-

5

10

15

20

25

30

35

Deal si e Number of transactions


$ m

illio

n

2008 saw no transactions close for greater than $1 billion, presumably a direct result of limited access to, and increased cost of, debt in the current climate. However, transactions with a value between $100 million and $499 million increased in 2008. The number of transactions between $1 million and $19 million decreased from 2007 to 2008, which may reflect the difficulties experienced by smaller funds in raising money and executing deals. Interestingly though, transactions between $20 million and $49 million increased in size and number in 2008.

27


PE In vestm en ts in the last 10 y ears (1999 - 2008 )

8

126

56

31

15

1 1

-

500

1,000

1,500

2,000

2,500

Less than 1million

1to 19 million 20 to 49million

50 to 99million

100 to 499million

500 to 1billion

M ore than 1billion

-

20

40

60

80

100

120

140

Deal si e no of transactions

Despite representing only 30 percent of total investments by value over the last decade, deals up to the value of $49 million represent approximately 76 percent in terms of number of transactions, with the most common deal size traditionally being between $1 million and $19 million. 21 percent of the total value of investments over the decade can be attributed to Abraaj’s 2006 25 percent investment in EFG Hermes for $501 million and its 2007 acquisition of EFC for $1.4 billion (the region’s first ‘billion dollar’ investment).


$ m

illio

n

No. of transactions

28

P erc entage s tak e ac quired in P E inves tments2005 2006 2007 2008

De al s iz e Num be r De al s iz e Num be r De al s iz e Num be r De al s iz e Num be rLes s than 10% 39% 47% 20% 40% 6% 25% 8% 15%

10% to 24% 37% 30% 15% 30% 13% 25% 7% 30%

25% to 49 % 15% 20% 62% 23% 13% 25% 39% 30%

Greater than 50% 9% 3% 4% 7% 67% 25% 46% 26%

T otal w ith tr ans action s tak e 100% 100% 100% 100% 100% 100% 100% 100%

Average transaction size from 1999 to 2008 was approximately $38 million and in 2008, the average investment size was $49 million. After considering the distortionary impact of the two major investments noted above, the last decade’s average decreases to approximately $30 million, indicating that private equity in the MENA region focuses primarily on middle market size targets.


Traditionally minority investments have been most common in the region as the industry has adopted a growth capital model to many investments. From 2007, it appears that the buyout model has gained some traction in the region, with both the number and size of transactions with a majority/control stake having increased.


A verage Tran saction s ize

10

17

27

34

49

10

17

36

55

49

-

10

20

30

40

50

60

2004 2005 2006 2007 2008Avg transaction si e, adjusted Avg transaction si e, unadjusted

$ m

illio

n

Thought Leadership

Fred SicreExecutive Director, Abraaj Capital

29

Whats been going on with regional PE and what is the outlook?

The last couple of years saw Private Equity in the MENASA region really come to age. The industry shed some of its mystery as an increasing number of funds were raised, transactions consumed, international conferences on the PE Industry were held and media got to learn more about the industry itself. The GVCA report you are holding today is in its third edition and has also made its significant contribution. The last few years have been stellar for private equity players globally, and in our region as well – to the extent that some were calling the Middle East the fourth center of private equity in the world. This trend largely continued throughout the first half of 2008 although little by little liquidity issues were on the increase making the global industry question the feasibility of large buy outs as debt markets became scarcer and more expensive. We know today where all that took us. In the first quarter of 2009 the world has undoubtedly changed. Where we are going still remains unclear at the time of going to print; however a few trends are emerging for private equity investors in the region. Limited Partners are, as can be expected, reassessing their priorities. Uncertainty and confidence bashing events like the Madoff ponzi scheme have made fundraising more difficult. Established GPs with a solid brand equity and track record will be preferred to less experienced private equity teams moving forward. Also, it is becoming apparent that the PE model as some have practiced here is now being held up globally as the model to be followed. Rather than looking at large levels of debt to reach your desired IRRs, focusing on operational enhancements, market expansions and platforming strategies are the real value creating approaches to PE investing. Exits will also be very difficult in the foreseeable future as sellers won’t be encouraged by valuation levels and buyers face the liquidity squeeze. Although the global economic environment will remain very difficult in the foreseeable future, our region has a slightly different story to tell. The outlook for our Middle East, North Africa and South Asia region remains bright, especially looking at the long term. Our economies still have a long way to go before they reach the maturity of the West and industries reach the same penetration levels as the developed world. The combination of population growth and structure, of government policy-changes that increasingly encourage private investment and of abundant natural resources augurs well for recovery. This being said the global crisis is making itself felt in our region but, out of every challenge arises opportunity. For the private equity industry, lower valuations should provide opportunities for those players with dry powder to make significant acquisitions at interesting multiples. We may see an increase in the rate of public to private transactions as resilient companies seek financing to continue their growth plans. In large markets such as India or the Kingdom of Saudi Arabia entrepreneurs are going to need to find alternative routes for raising capital due to the loss of public market liquidity. 2009 will be a defining year for our industry globally and for that reason in our region as well. It’s no longer business as usual for any corporate entity. Business models, strategic plans, structures and products are having to be revised on the backdrop of uncertainty and volatility. It makes for a delicate balance, an act of virtuosity that will determine who is still around 2 years from now.

4.4 Deployment of funds Cum ulative fun ds ra ised an d in vestm en ts m ade - Ex cludin g

l iquidated fun ds

4,768

7,413

13,195

19,629

1,0842,835

6,361

8,807

-

5,000

10,000

15,000

20,000

25,000

2005 2006 2007 2008

Funds raised Investments made

Note: The graph above has the following limitations:- Funds raised represents committed capital and does not distinguish amounts called- It does not take into consideration any level of debt financing which, one can only assume, would widen the gap further - It does not account for management fees which can be in the range of 10-20% of committed capital over the life of the fund. - Investment analysis is based on information made available and is not conclusiveSource: Zawya Private Equity Monitor

When considering deployment analysis, it is important to note that the data available does not take into account any level of debt financing, nor does it consider management fees which can be in the range of 10-20 percent of committed capital over the life of the fund.

It is expected at such an early stage in the development of this market to have some capital overhang as a result of the fund raising cycle running ahead of the deployment cycle. The decrease in investments, despite an increase in fund raising activity, has led to an expansion in the level of capital yet to be deployed in the region, estimated to be approximately $11 billion.

3330

$ m

illio

n

31


Note: The above graph plots funds raised to date by vintage year only for funds for which we have both investment and fundraising informationSource: Zawya Private Equity Monitor

A significant gap becomes apparent for 2007 and 2008 vintage funds which is presumably a function of both the impact of the current economic climate as well as the fact that these funds have had less time to identify and execute investment transactions.


Fun ds ra ised an d in vestm en ts m ade to date by v in tage y ear

3,353

3,904

4,957

5,457

2,369

3,493

1,360

535

-

1,000

2,000

3,000

4,000

5,000

6,000

2005 2006 2007 2008

Funds raised Investments

$ m

illio

n

Ahmed HeikalChairman and Founder, Citadel Capital

Thought Leadership

We are heading into one of the most challenging economic cycles the Middle East and North Africa has ever seen. But while many would sound the death knell for private equity, those among us with truly creative, entrepreneurial spirits will use the year ahead to put together deals that portend serious returns when growth accelerates in the next decade.

In the past four years, the MENA private equity space has been marked by mega-deals, a great many of them leveraged to the hilt. With debt almost impossible to obtain and investors increasingly unwilling to commit new funds to any asset class, let alone private equity, these have ceased to be features of our landscape.

This does not, as some in the global financial press have speculated, herald the beginning of the end for private equity firms — not in our region, at least. Instead, it signals that we must return to our roots as patient builders of investments — and as we do so, we will find that consolidation plays, distressed deals and greenfields are the dominant items on our investment menus.

With that in mind, I am confident that the theme of 2009 and heading into 2010 will be mid-to-large-size deals executed in multiple phases. Call it an “incremental” approach to private equity, if you will: one in which you can lock in large, attractive investment opportunities with very little in the way of up-front capital commitments. In this way, we will be able to conserve our lifeblood in a very difficult operating environment.

Obviously, not every deal is innately flexible enough to lend itself to an incremental execution. But by their very definition, most consolidation plays will allow this. As we review the distressed assets that are now appearing on the horizon, we should look for bite-sized opportunities that can be cobbled together to create a new, larger, healthier asset. Similarly, phased greenfield plays may not work in every case, but savvy investors will appreciate the flexibility in pursuing measured growth opportunities that may otherwise have been beyond their reach in the current climate.

This shift in private equity will undoubtedly favor the well-prepared control investor who is willing to roll up his sleeves and help build the platform companies in which his funds invest. In a sense, then, we are entering a climate in which the most entrepreneurial among us will thrive.

A Return to Our Entrepreneurial Roots

32


4.5 Regional focus

Funds raised with an intended focus on the MENA region generally represent the majority of the total funds raised since 2005. However, a significant portion of the funds raised in 2008 (primarily the Abraaj Infrastructure and Growth Capital Fund), relates to MENASA4), as funds begin to look into other emerging markets. Industry experts believe that the significant infrastructure developments in the region, coupled with an increased acceptance of private equity from both governments and family business, will be the catalyst for growth in the MENASA region5. There has also been an increasing tendency to combine Turkey with the MENA region.

Country specific funds have decreased, possibly due to limitations of investment scope and risks associated with exposures to individual countries. This shift also reflects the general industry trend. Egypt seems to be the only country which still supports single country funds.

The proportion of funds focused on MENA generally has declined as more funds have been raised with a combined focus on MENA and other countries/regions. However, $2.6 billion was announced in 2008 with a MENA focus, for which the funds have not yet made closes.

3 Per the above graph, 'MENA' refers to funds listed as MENA or any subset of MENA, including GCC, Levant or North Africa. 'MENA and Other' includes funds which have a MENA/GCC focus as well as a secondary, more specific focus outside the MENA region (e.g. MENA/Turkey or MENA/US). 'Other specific countries' includes funds with individual country focus.Other specific countries include funds with individual country focus.4 Middle East North Africa South Asia5 Babu Das Augustine, “Private equity deals set for big boom in and around the Mideast”, Gulf News, 4 March 2008


V in tage fun ds by region 3

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2005 2006 2007 2008Vintage year

Egypt M ENA M ENA and other M ENASA Other specific countries

$ m

illio

n

33

In 2008, Egypt and Saudi Arabia led the MENA region in terms of private equity investments with $467 million and $416 million being directed towards each country respectively. The UAE and Kuwait have each experienced a modest level of investment in 2008 with a combined total of approximately $546 million (21 percent) being deployed into these countries during the year. 22 percent of investment in 2008 (by value) were directed towards Pakistan relating to investments in KES Power ($361 million) and Bosicor Group ($156 million) by Abraaj's Infrastructure and Growth Capital Fund.


34

Regi onal s p l i t of PE I nves tments - 2 008

Pakistan22

Egypt19

Saudi Arabia17

UAE14

Kuwait8

Others20


Focus of investments

R egion al con cen tration of PE in vestm en ts 2005 - 2008

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2005 2006 2007 2008

Egypt Saudi Arabia UAE Turkey Kuwait Pakistan Jordan Others

$ m

illio

n


35

Since 2005, there has been a distinct concentration of investments in Egypt with approximately $2.8 billion (33 percent of the total investments) injected into the region. This was mostly due to the two largest transactions of the past decade being based in Egypt - Abraaj’s investment of $1.4 billion in EFC in 2007 and $501 million in EFG Hermes in 2006. Although the investment value in Egypt is dominated by these two specific transactions, there has also been a significant number of smaller investments in the country. Since 2005 there has been a total of 28 transactions in Egypt (13 percent of the total number since 2005).

Of the $9.0 billion invested over the last decade, 32 percent (or $2.8 billion) related to Egypt. After excluding the two significant investments detailed above, the proportion attributable to Egypt is 13 percent, with 20 percent being attributable to both Saudi Arabia and the UAE.

Prior to 2003, there were no known PE investments in Saudi Arabia and up to 2005 only $230 million had been invested there. Since 2006, Saudi Arabia has received $1.2 billion in private equity investments. This was mainly due to the economic liberalisation policies adopted by the Saudi government and reflects the Saudi Arabian General Investment Authority (SAGIA) 2010 plan. Assuming that the Saudi liberal economic policy is maintained and given the size of the Saudi economy relative to the region, it is expected that Saudi Arabia will assume a bigger share of total investments in the future.


R egion al spl i t of PE In vestm en ts in the last 10 y ears (1999 - 2008 )

Others21

UAE15

Eg pt32

Saudi Arabia16

Turke6

Ku ait6

R egion al spl i t of PE In vestm en ts in the last 10 y ears (1999 - 2008 ) A DJ US TED

Eg pt13

Saudi Arabia20

UAE20

Turke8

Ku ait8

Others31



4.6 Sector focus


In 2008, the most dominant sectors for investment were Healthcare, Transport, Power & Utilities and Construction, together accounting for $1.4 billion (or 56 percent) of the total investments for the year.

The significant increase in the Industrial Manufacturing sector in 2007 is related to the $1.4 billion acquisition of EFC.

36

S ector spl i t of PE In vestm en ts - 2008Healthcare

16

Transport15

Power andUtilities

15Construction11

Telecoms9

FinancialServices

8

Oil and Gas8

Others18


S ector con cen tration of PE in vestm en ts 2005 - 2008

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2005 2006 2007 2008Industrial M anufacturing Financial Services Transport Health Care

Construction Oil and Gas Power and Utilities Others

$ m

illio

n

37


Financial Services

Financial services was the most preferred sector in 2006 (approximately 36 percent of total investments). However, since then it has lost attractiveness as only 10 percent and 8 percent of the total investments were made into the sector in 2007 and 2008 respectively.

Transport

Despite the general decrease in total investment in 2008, the size of investments in the Transport sector increased from $162 million in 2007 to $363 million in 2008. This was primarily driven by the majority investment made in TVK Shipyard in Turkey for $100 million by The Carlyle Group MENA Fund and Global Buyout Fund’s $90 million investment in Jassim Transport and Stevedoring Company in Kuwait.

Construction

Of the total investments made in the construction sector since 2004, over 60 percent (by value) were in the UAE. As a result of the current conditions prevalent in the real estate market, this is expected to decrease in the immediate future.

Healthcare

Investments in the healthcare sector increased from approximately 8 percent of the total investments in 2007 to 16 percent in 2008. Although this sector has not performed well historically in terms of attracting private equity investments, it is expected to gain popularity in the coming years due primarily to population growth, increased longevity, unhealthy diets, and less active lifestyles as well as an increasing liberalization of healthcare markets regionally. Given this projection and considering the relatively recession resistant nature of this sector, PE investments within the healthcare realm are destined to pick up. Notable transactions in healthcare are Abraaj’s investments in Tadawi, Al Borg and Acibadem Saglik Hizmetleri and Ticaret for $214 million, $150.5 million and $162.5 million respectively.

38

Total investments by size in the past decade have been led by the Industrial Manufacturing sector with 13 transactions and a totalinvestment size of approximately $1.6 billion. However, $1.4 billion relates to Abraaj’s acquisition of EFC. Furthermore, totalinvestments in the Financial Services sector over the last decade are estimated to be $1.2 billion, of which $501 million relates to Abraaj’s investment in EFG Hermes.

After excluding these two investments, transport appears to be the most preferred sector making up approximately 15 percent of the total investments, followed by financial services, healthcare and construction, with approximately 10 percent each.

S ector spl i t of PE In vestm en ts in the last 10 y ears (1999 - 2008 )

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Hoda Abou-JamraCEO, Boston BioCapital & Founding Partner, TVM MENA

Thought LeadershipThought Leadership

According to our data, total private equity investment in MENA healthcare was $449m in 2007 compared with almost nothing the previous year. Why the sudden interest in healthcare in the Middle East?Firstly, there are three clear factors driving growth in the MENA healthcare market:

Population Growth – The population of the MENA region is growing 50% faster than the global population as a whole.

Disease – Healthcare improvements mean that people in the MENA region are living longer and less likely to die of contagious diseases. However, increasing longevity, unhealthy diets and other lifestyles factors mean that the disease burden attributable to chronic non-communicable diseases is increasing. As such diseases are often more expensive to treat, the value of the market is also increasing.

Robust Economics – GDP per capita, one of the key drivers of healthcare expenditure, is increasing across the MENA region as a whole. At the same time, the Middle East is generating an increasing proportion of global GDP.

Secondly, over and above the intrinsic growth of the MENA private equity industry, 2005-2007 saw a significant increase in fundscommitted to private equity worldwide. A substantial proportion of this has yet to be invested. While there may be some repatriationof international funds from the Middle East, the domestic financial services industry has relatively limited exposure to losses from sub-prime assets and there is no rational reason for domestic funds to be withdrawn.

Many of the opportunities in the healthcare sector will come from structural changes in the industry:

Increasing private sector participation in healthcare provision as governments seek to manage the costs of greater demand for healthcare.

A need for expansion and consolidation of healthcare provision across the region, combined with an increase in the quality of the infrastructure and services.

Consolidation in healthcare services and vertical integration in the pharmaceutical industry as businesses are seeking economies of scale. This may be encouraged by the liberalisation of restrictions on foreign ownership and investment.

The growth of private health insurance schemes following the introduction of shari’a compliant health insurance products.

MENA healthcare faces a number of challenges though. A shortage of well trained medical professionals and a pharmaceutical industry that is essentially dominated by contract manufacturing under foreign licenses, combined with relatively poor IP protection.Notwithstanding the obvious challenges, we believe however that the opportunities outweigh the problems and that the region is oneof the most attractive regions for healthcare investment in the world.

Private Equity Investment in Healthcare

39

Rapidly falling hydrocarbon prices and freeze in the credit markets have put the Gulf boom on hold. Economic growth is set to slowsharply and 2009 may feel like recession in much of Gulf but the economic deceleration is not likely to lead to derailment. We believe the region is well placed to weather the impact of this abrupt downturn due to the massive surplus the region has generatedover the last five years.

The impact of the current downturn will be felt on many sectors but a few sectors will emerge stronger once the market conditionsnormalize. Even in the current environment, investment in certain sectors can provide significant return over the next three to five year horizon.

We see value in defensive sectors the fundamentals of which are backed by an attractive demographic profile, increasing per capitaspending, high growth, entry-barriers, and low business cyclicality. Healthcare, education and logistics remain on the top of ourpriority list. We remain optimistic on broader services and consumer sectors and maintain an opportunistic stance on the commodity sector.

Private sector penetration is low in the region with only around 25% of the total healthcare spend contributed by the private sector.This is expected to increase with the development focus of GCC Governments, who are promoting private sector participation in healthcare. We estimate healthcare spending in the region to increase at a CAGR of 8-12% up to 2025.

The transportation and logistics services sector is a logical play on the increasing trade activity in the region, which has grown at a CAGR of 20% between 2002 and 2007. Our region enjoys a geographical advantage by being situated between Europe and Asia.

There is demand out there for quality education and private sector penetration in the education sector will increase in the comingdecade. For example, today less than 10% of the schools in Saudi Arabia are under the private sector.

Although the petrochemicals, steel, fertilizers, and aluminium sectors are likely to face margin pressures in the near term, theseindustries enjoy international competitive advantage as a result of the regional gas price economics and we remain opportunistic.

We believe 2009 presents a lifetime opportunity to acquire solid businesses at compelling valuations which could provide significantreturn potential by 2012 – 2013.

Likely sector focus for 2009


Shailesh DashSenior Vice President of Asset Management and Alternative Investments

40


41

4.7 Exits and IRR

The increase in the value of sale activity from 2007 to 2008 is due to one major exit made for $2.5 billion. Excluding this one-offtransaction, sale size has decreased by approximately 60 percent. Given the current economic downturn, fewer private equity fundshave been willing to make exits as multiples have shrunk in size. It is widely felt by industry experts that exiting in the current climate will not provide the returns the industry has traditionally targeted. IPOs are losing popularity as an exit strategy due to depressedstock markets.

Note: n/a: Not availableSource: Zawya Private Equity Monitor

PE ex i ts in the last 5 y ears 2004 - 2008

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Note: Sales consideration represents exit price and is not comprehensive. Source: Zawya Private Equity Monitor

P E ex it ac tivity in 2008

Fund Nam e T ar ge t C om pany S e ctorBuy

Ye arBuy S iz e

'$ m illionS e ll

Ye arS e ll S iz e

'$ m illionExpe cte d

fund r e tur nIRR achie ve d

on e xitInfras tructure and Grow th Capital Fund

Egyptian Fertiliz ers CompanyIndus trial Manufacturing

2007 1,400 2008 2,500 20% n/a

A braaj Buyout Fund II National A ir S ervices Trans port 2006 177 2008 313 30% 52%

S HUA A Partners Fund I, L.P. Damas Jew ellery Retail 2005 33 2008 70 n/a n/a

NBK Capital Equity Partners Y udum Foods Food and beverage 2007 18 2008 53 n/a n/a

Global Opportunis tic Fund II Reliance Petroleum Limited Oil and Gas 2006 33 2008 49 20% 82%

Unicorn Global Private Equity Fund I

Ormix Cons truction 2006 17 2008 45 20% 98%

The Pre-IPO Fund Depa Cons truction 2005 3 2008 15 20% 111%

The Pre-IPO Fund Gulf Navigation Holding Oil and Gas 2005 6 2008 12 20% n/a

The Pre-IPO Fund Ithmaar Bank Financial S ervices 2006 8 2008 11 20% 24%

Private Equity Fund A l Farabi Inves tment Company Financial S ervices 2004 5 2008 10 10% 21%

The Pre-IPO Fund A lumco- UA EIndus trial Manufacturing

2005 1 2008 3 20% 89%

T otal e xits in 2008 1,701 3,080 n/a n/a

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After excluding the major $2.5 billion sale in 2008, the proportion attributable to Egypt decreases to 46 percent, followed by SaudiArabia at 25 percent.

42

From a sector point of view, after excluding this major sale, activity in the Industrial Manufacturing sector is minimal and the majority of exits relate to Financial Services, Transport and Oil and Gas.

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Public market offerings appear to be the most desired exit option for private equity players, representing approximately 30% (or 13 transactions) of the total exits in the past four years. Trade sales have also been relatively common, representing 23% or (10 exittransactions) over the period. Both these options are expected to be increasingly difficult in 2009.


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Steve NovikHead of MENA Financial Sponsors and Sovereign Wealth Funds Coverage, Credit Suisse


Exit options in 2009 will remain limited to businesses in the Middle East that:- continue to grow on both the top and bottom line; just cutting costs to grow EBITDA will not attract the most desirable suitors- operate in highly desirable, mostly defensive sectors such as oil field services, healthcare, education, telecoms, insurance- have been well managed from an operational and value creation perspective- have not been overly levered, although it’s a known fact that substantial debt packages have not been readily available to the vast majority of buyout firms in the GCC

International buyers, and to a lesser extent, local investors, flush with cash and the skill and vision to capitalize on the lack of confidence of others will be the main victors in sell side processes. The processes will tend to be negotiated rather than broad based auctions. Such cash rich corporates will be able to take advantage of the current market dislocations to expand their strategic and geographic footprint in the Middle East. Buyers will also have the benefit of less competition for most assets and sellers will have more realistic expectations.

Recovery of the IPO marketThe IPO window for portfolio companies based in MENA is likely to remain shut for most, if not all, of 2009. This is despite the strong nominal GDP growth estimates for the region at close to 4%, vis-à-vis 8% for China and 5.5% for India - the only three areas in the world expecting substantial growth.

At present, global emerging markets investors are still coming to terms with the significant losses experienced last year and manyremain in cash, in some cases up to 40%. They lack confidence, not only in the markets, but also in their own ability to selectwinners. Regional investors, who have been especially hard hit, will likely remain cautious for the medium term.

However, private equity firms should keep a lookout for one or more of the following signs that the IPO market is recovering: i) a stabilization in global and local equity markets; some in the Middle East were down as much as 70% in 2008 ii) a general reboundin share prices; slow and steady appreciation is preferable and more sustainable iii) improved inflows into MENA funds iv) a pick up and general improvement in the corporate bond (investment grade) market.

Tougher times Markets will remain extremely challenging this year, and most likely the next as well. The crisis will continue until further hardchoices are made. Measured decisions will have to be taken with a keen eye on the future. Balance sheet restructurings of both businesses and governments will need to be the primary focus to address past errors. Even with leaner businesses, each private equity firm will have to change the way they think and operate. Monthly financials will need to give way to weekly rolling cash flow statements - in 10-week increments. This will help to provide each investor a much clearer picture of the real cash position of each and every company in their portfolio, including those that appear to be healthy, thereby helping to determine a strategic paymentplan, in order to give them the best chance to survive in a potentially long, drawn out recession.

What are the likely exit options, if any, for MENA-based private-equity backed businesses in 2009?

44

Yahya JalilHead of Private Equity, The National Investor


Over the past 4 years, IPOs in the MENA region have represented a meaningful and highly lucrative source of exits for private equity firms. In 2008 for example, the IPO of Depa Ltd provided an exit with a value of nearly 5 times the original capital investedby private equity firms (including TNI, Gulf Capital & Global) in 2006.

In 2008, 6 of the 20 largest IPOs worldwide were based in the MENA region, led by the $2.8 billion IPO of Bank Alinma in Saudi Arabia. This all changed in the last quarter of 2008, which saw IPO volumes diminish meaningfully, driven by greatly reduced liquidity of and widening losses on the existing investment portfolio of financial investors. Today, as many as 100 GCC companieshave delayed their IPOs, which were targeted to raise $20 billion in capital during 2009.

There is little doubt therefore that 2009 will be a difficult year for MENA private equity firms to achieve exits through IPOs, with the earliest recovery likely to be in the first half of 2010. The price of hydrocarbons is always a major driver of liquidity in the region, and if oil prices climb back to $70 – 80 a barrel, this recovery may come a quarter or two sooner.

So how might regional private equity firms achieve liquidity in 2009? The reality is that there are likely to be few exits at all in 2009. GPs will need to focus their attention on preserving value in their portfolio companies, i.e. making sure these companies (a) improvecollections of receivables and manage working capital more efficiently; (b) can refinance any indebtedness coming due; (c) sell any non-core assets to keep cash at hand; and (d) create operational efficiencies.

Sales to strategic buyers are also unlikely to provide many exits because corporates and strategic buyers themselves don’t havemuch liquidity, and are equally keen to preserve cash for the core businesses. There is however, one silver lining on the cloud:Secondaries, i.e. sales of portfolio companies to (a) other private equity funds / firms, and (b) to specialist funds, such as CollerCapital, that specialize in buying portfolio companies of private equity funds which need to create exits. However, it is very much a buyer’s market, so the valuations of such exits are likely to be modest.

The Viability of IPOs & Other Exits In The Coming 12 Months

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5. The future of Private Equity in MENA and the impact of the financial crisis

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5. The future of private equity in MENA

After three years of stellar growth, the nascent regional private equity industry is facing its first major predicament. This is not unexpected in the regional industry’s journey to maturity – Asian private equity had their own crisis in the late 90s and Americanprivate equity faced their own in the 80s. Hopefully, the industry will emerge stronger and more resilient as it consolidates andaccumulates experience.

It is as difficult to predict the path that the industry will follow as it was difficult to predict the dramatic events since September 2008. Nevertheless, we will attempt below to tie together some of the facts and trends that emerge from Chapters 4 and 7.

Liquidity is high in the industry as a whole: The industry enters this crisis with more than 60% of the funds raised not deployed -- or around $11 to $13 billion out of $20 billion raised. So it is likely that the industry will have enough cash to outlive a dry two years of fund raising – that is assuming that the funds’ limited partners fulfil their commitment when capital calls come in. Forexample, from the $4.9 billion raised in 2007 vintage, only around 25% has already been deployed, and 2008 vintage has deployedless than 10%.

Fund raising will be difficult, and some fund managers will struggle: As liquidity recedes, fund raising will become increasingly difficult. Those private equity houses relying on 2009 to raise a new fund will be facing strategic challenges. With empty coffers and some portfolio companies likely to underperform, such fund managers may merge or close shop. It is likely that the number of players will shrink in the coming two years.

Many international fund managers will retrench closer to home base: In 2007, Dubai was declared as the fourth capital of private equity. Since then, two international players – Carlyle and Investcorp – raised dedicated regional funds, and many othersstarted crafting their regional strategy. Two years later, many global private equity players have started to retrench as a result of the crisis. Carlyle’s closing its East European operation and Cerberus’ closing its Hong Kong office are two examples of many instances. Consequently, it is expected that global players will reduce their interest in the region. Will this retrenchment betemporary if the region fares better than others?

The crisis may not induce a significant decline in valuations or an increase in deal flow: A drop by a third in value and number of investments in 2008, despite the record size of funds under management, may be a signal of a structural weakness in the regionalprivate equity model. With limited exceptions, valuations may not decline to match expectations. Furthermore, with the dearth of leverage finance, single digit growth and no arbitration with public markets, private equity houses may struggle to formulate aninvestment case for many of the opportunities they will encounter. Sensing these limitations, many funds have extended their territories beyond MENA into Turkey, Southeast Asia, and most recently Africa. In the GVCA survey, GPs are evenly split whetherthe crisis will yield

ceo, zawya & director, gvcamec.biz/term/uploads/midle_633728984439763603.pdf · 2009. 7. 25. ·...

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