With falling crude oil prices, the slowing Chinese economy, and a struggling eurozone, it is no surprise that private equity (PE) activity in the Middle East has been challenging, although PE activity overall looked respectable with a strong showing of US$2.7 billion in deal value by the end of September 2015. However, total deals fell by over 50% compared to last year. Perhaps, SUHAIL AHMAD believes, the decline in crude oil prices may have a silver lining for Islamic PE as countries reliant on oil revenue may finally see the benefits of a diversified economy and support regional PE growth to help diversify the region’s economic base.
Review of 2015
According to Al Masah Capital, a total of 24 PE deals worth US$2.7 billion were reported as of September 2015 compared to a total of 58 deals worth US$285.3 million during the same period in 2014. On the other hand, there were just five PE exit deals reported until September 2015 worth US$36.21 million, compared to 16 PE exits during the same period in 2014 worth US$167.43 million.
If we were to exclude the US$2.64 billion deal in Algeria, the total values of deals in the MENA region were only US$34.25 million. The slowdown can directly be attributed to the decline in oil prices and increasing geopolitical uncertainty with civil wars in Syria and Yemen.
Al Masah Capital founder and CEO Shailesh Dash said: “Our experience in market research suggests a pick-up in private equity activity during the second half of 2015 with stabilization in oil prices especially in consumption-led sectors such as health care, education, retail and food and beverage. The UAE, Saudi Arabia, Lebanon and Egypt are expected to be frontrunners in private equity activity during the second half of 2015.”
Sectors like IT, retail and health care followed by telecom, financial services, industrial, manufacturing, food and agriculture, oil and gas and media observed dynamic movements in private equity during 2015.
Some of the key PE transactions this year include the one by Dubai International Capital, the private equity arm of Dubai Holding, which announced the completion of the sale of Almatis, the world’s leading supplier of premium alumina for the refractory, ceramic and polishing industries to OYAK, Turkey’s largest private pension fund. The completion of the sale was after receiving all relevant regulatory approvals.
The Abraaj Group was particularly active in the year with its announced acquisition of Yu-Ce Medical, a leading disposable medical supplies manufacturer in Turkey and the acquisition of a majority stake in Urbano Express, a leading courier and light logistics solutions company in Latin America with operations in Peru, Ecuador and El Salvador. Abraaj Group also announced the final close of its second dedicated North Africa private equity fund at US$375 million and brings the total amount raised by Abraaj for the African continent in 2015 to a solid US$1.37 billion. The funds will target the well-managed, mid-market businesses in the core geographies of Algeria, Egypt, Morocco and Tunisia. Its primary aim is to develop investments within local industries, thereby accelerating growth and economic diversification in Qatar through support for the private sector.
Preview of 2016
With a strong showing in 2015, Islamic PE growth looks promising next year. The key for Islamic PE to continue growing is the emphasis of the close relationship it has with conventional PE, particularly the concept of equity ownership, risk-sharing and mutual benefit compared to risk transfer which is still often the case in Islamic banking.
With a focus on development capital rather than a leveraged buy-out (LBO) and distressed buy-out transactions, Islamic PE firms can build an attractive risk profile and differentiate themselves better from the conventional PE firms.
A good example is the new private equity offering announced by Qatar Development Bank (QDB) worth almost US$100 million and designed to support Qatari SMEs. The goal of the fund is to actively contribute to the country’s economic diversification. The term of the SME Equity Fund is expected to be up to ten years, with five years for deployment and a holding period of three to five years. QDB was established in 1997 as the Qatar Industrial Development Bank, a 100% government-owned developmental organization.
Islamic PE no doubt has its growth challenges but considering the increasing awareness of the benefits of PE as a source for economic growth and diversification, the industry needs to capitalize on this aspect to continue charging forward. Only then can Islamic PE be considered a formidable force for job creation and economic development in the Islamic economies of the Middle East and Far East Asia and attract significant capital from Islamic institutional investors (Islamic banks and sovereign wealth funds) to become a vibrant segment of the Islamic finance industry.