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Private equity investors plan to increase MENA investment

DUBAI - A global survey shows international private equity investors are planning to increase their capital allocations to Middle East and North Africa (MENA) region in order to capture economic growth and demographic change in the region.

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PEI Media, in cooperation with Al Masah Capital recently released a white paper on global institutional investors’ attitudes towards investing in private equity funds in MENA region.

Entitled The Final Frontier: An Investor Perception Analysis of MENA Private Equity, the white paper was independently researched and written by PEI Media. Al Masah Capital sponsored the project.

The white paper shows that investors investing in private equity funds globally are still cautious about MENA as a destination for their private equity capital: questions remain as to the region’s private equity industry to deliver attractive and long-term sustainable risk-adjusted returns.

However, whilst a majority of investors have not invested in the region before, many also recognise its potential, with strong macroeconomic fundamentals and demographic change driving long-term investor appetite. Accordingly, the average capital allocation of investors to MENA is forecast to increase from currently one per cent to 1.6 per cent over the next two years.

The research also found investors expecting a significant and ultimately transformational shake-out of MENA private equity fund managers. This consolidation is widely seen as a positive trend, as underperforming managers wither , and surviving funds and also new entrants to build a more viable private equity industry in the region, with a new crop of stronger managers beginning to emerge already.

Philip Borel, Editorial Director at PEI Media, comments: “What we found confirms that for MENA private equity, the road ahead is not a straightforward one: the obstacles the industry is facing in terms of making itself relevant to a larger number of international private equity investors are formidable.

“But there is also a consensus that the current, post-crisis chapter of the region’s ongoing private equity evolution is one that globally minded investors will be well-advised to follow and due diligence.”

Shailesh Dash, Chief Executive Officer of Al Masah Capital, adds: “The white paper makes clear that the drastically changed economic environment has prompted what is generally regarded as healthy Darwinism in terms of MENA fund managers.

“The region’s private equity industry is expected to emerge leaner and meaner, with greater ability to address many of the manager-specific investor concerns the white paper has highlighted.”

Key findings

13 per cent of respondents – excluding funds of funds – said they have an existing capital allocation to MENA private equity. Including funds of funds, 32 per cent said such an allocation was in place.

The average capital allocation of investors in private equity funds to MENA private equity is one per cent; the figure is forecast to increase to 1.6 per cent by 2012.

The most frequently cited reasons not to invest in MENA private equity are political risk, weak fund manager track records, poor corporate governance, lack of transparency and a regulatory environment that is still evolving.

Investors believe the global financial crisis in general, and Dubai’s recent difficulties in particular, have accelerated the shake-out of sub-par private equity fund managers in the region.

Investors are finding it difficult to judge the performance of MENA private equity funds they have already invested in.

“Too early to tell” was a frequently made comment, but there is also a view that many existing funds will underperform. Fund manager consolidation is therefore widely seen as a positive trend, as it will enable the surviving funds and also some new entrants to build a more viable private equity industry in the region, with a new crop of stronger managers beginning to emerge already.

Looking ahead, investors consider MENA a region with potential. Strong macroeconomic fundamentals and demographic change are the dominant drivers of long-term investor demand.

Egypt, Turkey and Saudi Arabia are the MENA economies that investors favour most. Institutions believe investing in MENA private equity will remain a strategy that is required to deliver a premium over global benchmarks. There is no consensus on how large the premium needs to be.

Investors also believe that manager selection will be the key to successfully investing in the region. Private equity fund managers should expect rigid due diligence.

business@khaleejtimes.com