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Upswing seen in Mena’s PE investment activity
DUBAI — New private equity investment activity is expected to significantly increase in the Middle East North Africa region, or Mena, in the coming 12 months with investors increasingly seeking fresh opportunities, a leading business and professional services company said on Tuesday.
The surge in investment activity is expected as a result of lower valuations, an increasing number of distressed opportunities, and a long-hoped for improvement in overall economic conditions, Deloitte’s latest Mena Private Equity Confidence Survey said.
“With the regional political situation starting to settle down, the investment environment is now more attractive than it has been since the beginning of the uprisings of the Arab Spring and moreover the global crisis,” said Richard Clarke, managing director of Transaction and Restructuring Services at Deloitte Middle East.
“While in the past, general partners, or GPs, may have been hoping for increased deal activity and a bounce back in returns, today’s optimism is supported by our own experiences — there really has been and continues to be an increase in private equity, or PE, backed deals.”
“The air of uncertainty hanging over IPO markets gives the PE industry reason to believe that companies needing funds to expand or to refinance bank debt will turn to private equity in increasing numbers in the coming year,” said Chris Ward, chief executive officer of Deloitte Corporate Finance in the Middle East.
“However, with our third Mena Private Equity Confidence Survey coming at a time when the region is still feeling the impact of the global economic downturn, it is not surprising to find that the bullish outlook of previous years has been replaced by a more cautious approach.”
The survey seeks to provide a barometer of market perception and confidence amongst private equity professionals focused upon investments within the Mena region.
The survey examines how sentiment reflects the current market situation; identifying trends and providing commentary and insight into how professionals regard this region as evolving in the short to medium term.
Some 78 per cent of the general partners that participated in the survey said they expected investment activity to increase in Mena in the coming 12 months. However, with regard to average deal sizes, 49 per cent said they expected them to stay the same in the coming year while 32 per cent expected them to decrease. In addition, 78 per cent of respondents anticipated that exit activity would decrease in the coming year as well as returns on these deals.
“While the industry believes it is a good time to buy, it is less convinced of the merits of selling in this climate and, as a result, exit activity is expected to decline in the coming year,” added Ward. “In turn, this will lead to hold periods lengthening and a negative impact on returns.”
The survey also reveals predictions for future activity by industry sector, appraisals of challenges facing the PE industry and competitive differentiators between players in the market.
In July, Deloitte observed that private equity investors in the region are increasingly seeking opportunities in defence sectors, education, healthcare, oil and gas services and basic consumer necessities.
“The PE market in the Middle East makes up only a small part of the overall Merger and Acquisition marketplace. However, it is in a very healthy state with deal volumes and values significantly increasing in 2012, as compared to previous years,” said Clarke. “The financial crisis has impacted the number of active PE funds in the region, resulting in a reduction in total active firms. Yet, the positive side for PE firms is that there is reduced competition for assets,” he added.
Many PE firms in region are still in the fund deployment mode, and have not yet entered the harvest phase of their fund cycles. Deloitte experts believe that early fund investments in the Middle East are entering the market either by way of secondaries, IPO’s or trade sales. In addition, findings point to the successful practices of strong PE firms in the region that have spent the past few years preparing their portfolio companies for sale.
Exit activity is also expected to see a pick-up, after a lull in the last few years, according to the Deloitte survey.
“Now more than ever, GPs are focusing on leveraging off intermediaries to help them find the right route to market whilst also assisting them to prepare portfolio companies for exit,” said Raj Mehta, director of Transaction and Restructuring Services at Deloitte Middle East.
“Despite the challenges with exiting, GPs still expect to focus the bulk of their time on sourcing new investment opportunities. This says two things — that deals are still there to be done, and that fund managers are very much in deployment mode,” he said.
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