Liquidity surge spurs PE industry's growth

DUBAI — A surge in Gulf's private liquidity to an estimated $1.5 trillion and the stock market turmoil are fuelling investor interest in diversifying investment holdings, particularly into private equity industry, according to market analysts.

By Isaac John (Chief Business Reporter)

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Published: Fri 14 Jul 2006, 11:57 AM

Last updated: Sat 4 Apr 2015, 3:09 PM

"In the GCC's prevailing high liquidity environment, fiscal and trade surpluses have resulted in a liberal inflow of wealth. Excess private liquidity in the backdrop of a recent stock market crash is rapidly changing investor perception about private equity, while new players, including those of foreign origin, are entering the region to tap the increasing potential," they point out. While in the US, private equity has outperformed stock markets over the past 20 years, in the Gulf, which remains one of the least active regions for private equity, the sector is currently gaining ground, a local investment banker said.

"Newly-developed financial products in this asset class have enabled investors to enhance returns and acquire assets that meet their risk/return objectives. The rapid growth of the PE industry reflects the potential of this method of finance in the Gulf region, in part due to the imperfect match between traditional equity/debt instruments and financing needs of MENA entrepreneur," according to a study conducted by Global Investment House.

The Middle East has one of the lowest incidences of mergers and acquisitions despite its oil wealth. "However, due to the changing economic conditions abroad, investors have been keeping an increasing amount of wealth in local markets, which has been stimulating local merger activity and private equity transactions." According to an analyst with Abraaj Capital, many private equity opportunities are emerging in the Gulf in areas including family groups, who are focusing on rationalising operations; governments undertaking privatisation initiatives or seeking capital partners in infrastructure, energy and water projects; multinational corporations seeking to increase operations, extend their geographies and cement new partnerships.

"Deals in the region are becoming bigger, the scope of targets is getting broader, boundaries and borders are being broken down and governments are actively engaging the sector in privatisations. It will cost more than $750 billion in capital spending in the GCC over the next decade for growing capacity fast enough to match demand for oil. In fact, SAGIA alone announced a $100 billion expansion plan over the next decade," they point out. The size of the institutional private equity market alone reached $2.7 billion dollars in 2005.

"As early investors book their profits on the public markets they will also look for alternatives to the stock and property markets, taking a longer term approach to managing wealth. Increased liquidity and high overall economic growth are the two reasons that new investment opportunities are and will continue to be created in the region.

The question is how private equity provides a reasonable alternative to investing in stock and property markets. The answer is that PE is the best hedge against market volatility," he said. The growth of private family wealth in the MENA (Middle East North Africa) estimated at $2.3 trillion, has been a major boon to the PE funds and managers. "The strong corporate performance has given the financial flexibility to the companies in the region to look for investments outside the region.

Investment funds and private equity players are getting strong support from the investors in terms of increased investment in both Islamic as well as conventional funds to finance the deal flow," the Global Investment study said. "With many privatisation efforts being initiated in the GCC, energy, utilities and infrastructure sectors are increasingly wooing private sector participation. Real estate sector looks promising with relaxation in ownership allowed by many countries. Healthcare sector is likely to witness increased private participation in hospitals, pharmacy chains and speciality care project," the study said.

A Dubai-based investment banker said private equity has historically given investors higher returns than they would receive in other investment classes. It provides long-term, committed share capital, to help private (unlisted) companies grow. Governments in the region also have focused strongly on creating a much bigger role for the private sector through privatisation initiatives.

"This will present excellent opportunities for private equity firms and will become a major source of deal flow. The region has also seen the opening of new sectors for private investment that were previously restricted to the public sector. In particular, Saudi upstream oil and gas. The recent initial public offerings in the market continue to highlight investors' appetite for new companies and investment opportunities even as markets have had a bumpy ride recently."



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