Despite a contraction in regional private equity fundraising and deployment, OSAMA AUDI expects to see more expansion in the utilization of Shariah-based structures in challenging/highly regulated sectors such as healthcare and education.
Review of 2016
As a result of continued softness in oil prices, private equity transaction deal flows continued to dip in 2016. The Emerging Market Private Equity Association (EMPEA) reported that private equity fund managers raised US$420 million in the first half of 2016, representing a year-on-year decline of 21% and deployed US$563 million in the MENA region representing a year-on-year decline of 14%. While the methodology for the determination of EMPEA’s figures is not clear, multiple additional sources as well as market participants have also reported an overall dip in MENA fundraising and deal flows.
While EMPEA reported that the consumer goods and services sectors continued to drive private equity investments, other perennial favorites including healthcare, education, real estate and value-priced oil and gas businesses continued to drive significant deal flows.
A number of prominent oil and gas field services companies are reportedly going through sales processes with Carlyle’s transaction with Tunisia-based Mazarine Energy representing one of the largest private equity transactions in the MENA region in 2016.
Transactions structured by utilizing Islamic finance principles (whether through Mudarabah vehicles incorporated in the Dubai International Financial Center or otherwise) continued to feature in restrictive and complex investment sectors (eg healthcare, education, wholesale and retail trade, etc) in the states of the GCC and particularly in Saudi Arabia and the UAE.
Leading MENA private equity firms (including those which are not operated on a strictly Shariah compliant basis) continued to utilize Shariah compliant structures on an opportunistic basis to undertake their investments. Prime examples include Gulf Capital’s acquisition of Multibrands Trading Co, one of the largest food and beverage distributors in Saudi Arabia. Media reports stated that the transaction was structured in a Shariah compliant manner. In addition, Investcorp’s acquisition of a minority interest in Bindawood Holding, the premier grocery chain in Saudi Arabia which operates both the Bindawood and Danube brands of grocery stores, was their largest MENA acquisition to date, with the acquisition financing carried out on a Shariah compliant basis. Arcapita’s acquisition of the first phase of the Saadiyat Beach Residence on Saadiyat Island, Abu Dhabi from Abu Dhabi-based sovereign wealth fund, Mubadala, was also carried out on a Shariah compliant basis.
As with previous years, emerging markets private equity powerhouse Abraaj Capital continued to dominate deal flows with the largest reported number of deals closing across its funds.
Of interest to many regional and global private equity players was the launch on the 6th June 2016 of Saudi Arabia’s National Transformation Program 2020 (the NTP) which is meant to build the Saudi Arabian government’s capabilities in order to achieve the ambitious goals of Saudi Arabia’s Vision 2030. Those goals include, among others: (1) reducing the dependence of Saudi Arabia’s economy on oil; (2) increasing private sector contribution to GDP from 40% to 65%; (3) the planned IPO of the Saudi Arabian Oil Company (Saudi Aramco) with 5% of the company slated to be listed on the Tadawul and the remainder of Saudi Aramco’s ownership to be held by the Saudi Arabian Public Investment Fund (PIF); (4) the transformation of the PIF into a sovereign wealth fund with an anticipated US$3 trillion under management; (5) the privatization of significant public assets from healthcare and education to airports, power and other key infrastructure; and (6) increased investment in the domestic mining and defense sectors as well as renewable energy. The NTP was launched across 24 Saudi governmental bodies and organizations in its first year. The first phase to implement the program was launched in 2016 and will be followed every year by additional phases which will involve additional public bodies. As part of the NTP, some ministries, institutions and government entities underwent or are undergoing a restructuring process (for example the Ministries of Education and Higher Education were combined into a single ministry).
Preview of 2017
Regional private equity players and investors are anticipating that the aforementioned NTP, combined with continued softness in oil prices, will lead to an inevitable privatization of many of the Saudi Arabian Ministry of Education and Ministry of Health’s education and healthcare related functions which will present ample opportunities for investment in the future. In addition, the use of public-private partnerships (PPPs) has come to the fore as a framework that could be utilized to encourage private sector investment in so-called social infrastructure such as healthcare and education. The first PPP tenders were finally launched at the close of 2016 with 2017 anticipated to be the year in which the privatization program in Saudi Arabia will finally drive significant regional investment.
Conclusion
While 2016 saw a dip in overall activity in the private equity sector in the region as a whole, private equity sector participants have shown continued interest in the use of Islamic finance-based structures to execute their most complex transactions. In addition, there has been a significant push by MENA-based private equity players to participate in privatization programs which have drawn significant interest in 2016 and will likely continue to draw interest in 2017 as they are implemented.
Osama Audi is a member of King & Spalding’s Middle East & Islamic Finance and Investments practice group. His practice focuses on advising clients on corporate and M&A transactions (including private equity and venture capital transactions). He can be contacted at [email protected].