Private equity firms in Middle East: the state of play.

Share on:

Private equity firms in the Middle East are undergoing a paradigm shift.

The venture capital industry in the region is growing, as governments around the region look to support SMEs. Sovereign funds are making direct investments into venture funds as they search for the next MENA unicorn, following Dubai-based Careem’s $3.1 billion (Dh11.38bn) sale to Uber last year.

Yet in the private equity space, more firms are either consolidating or closing funds due to the difficulty in raising new capital. The trend of private equity firms in the Middle east is one where the top 20 per cent account for 80 per cent of assets under management. 

To put this in perspective, at the height of the industry’s fortunes before the 2008 financial crisis, there were more than 100 private equity firms in the Middle East. Today, there are a dozen, but you have firms that are emerging stronger and the weaker ones are being eased out.

The difficulty now is raising capital for emerging market funds. Private equity firms, not just in the Middle East, but globally run a simple business model. There are three key stages. Fundraising, investing and then exiting. If there is no fund-raising, then eventually there will be no exit in the long term. Today, exits from funds raised are from many years ago and that will continue as these funds wind down. 

According to EY, fund-raising by private equity firms in the Middle East may not be at the highs of 2008, when about $5bn was raised, but the average amount raised in the sector has still averaged about $1bn over the past five years.

Preqin data shows there were 12 Middle East private equity buy-out deals done last year, which was four less than 2018, but the aggregate value rose to $1.5bn, compared to $600m in 2018.  This was largely due to the $1bn buy-out of Dubai-based Gems Education, which saw CVC acquire a 30 per cent stake from Fajr Capital, Blackstone Group Bahrain’s sovereign fund Mumtalakat and Malaysia's sovereign fund Kazanah.

Global investor sentiment has taken a hit as a result of the 2018 collapse of Abraaj Capital, the region’s biggest private equity player, but the difficulties in fund-raising predate this with many fund managers beginning to downsize from 2015. Private equity will never die because there are always opportunities, but to see dry powder in Middle Eastern funds of $22bn again will be a long way off.

Private equity firms in the Middle East have found fund raising increasingly challenging in recent years, however the wave of venture capital coming into the region to back technology start-ups also provides opportunities for growth capital funds. Uber acquiring Careem and Amazon buying is creating an ever-expanding VC space. This trend is cemented with Gulf Capital placing Dh1bn into technology-focused firms, in the form of growth capital, as opposed to late-stage venture funding.

The idea of private equity firms in the Middle East struggling is an overstatement, they are just adapting to a regional shift in capital raising by consolidating and expanding horizons into VC and growth buyout technology as well as strategic buyouts.