EMPEA Insight: Middle East and North Africa

Private equity is flourishing in the Middle East and North Africa (MENA). A combination of favorable demographic trends and rising commodities prices have made for strong GDP growth driving a growing array of investment opportunities. GDP growth estimates range from 3% to 14% for individual MENA economies in 2008, according to the International Monetary Fund (IMF). A consumer base in the region is emerging from rapidly growing populations, expected to swell by as much as 10% in the coming ten years. Deal flow has improved as second- and third-generation owners of family businesses increasingly consider external capital as part of succession strategies and as a source of expansion capital. Additionally, many MENA-based investors are opting to diversify their portfolios away from traditional targets in Western countries, keeping more liquidity in their home markets. The amount of locally-generated petrodollar wealth destined for overseas dollar-linked instruments has fallen from 85 % to 75% over the last several years.

Fundraising

The MENA market has witnessed stellar growth in funds raised for private equity investment in the region over the past five years, rising from US$680 million raised in 2003 to US$5 billion in 2007. In the first six months of 2008, MENA funds closed on US$1.14 billion.

Average fund sizes are growing too, rising from US$215 million in 2005 to US$265 million in 2007. In 2007 and 2008, the industry witnessed at least six regional funds launched with target sizes of US$1 billion or more, among them Investcorp’s US$1 billion Gulf Opportunity Fund I and Abraaj Capital’s US$2 billion Infrastructure and Growth Capital Fund—the biggest MENA fund raised to date.

Across the region, a number of funds are seeking pre-IPO, as opposed to the majority of capital, and buyout opportunities; however the majority of vehicles are focused on growth and, to a lesser extent, venture capital. Approximately 50% of funds with vintages between 2006 and 2008 are focused on growth and venture, versus one-third of funds on buyouts. With transaction sizes averaging roughly US$20 million, and given the limited number of sizeable control deals available, funds focused on middle market growth transactions are expected to flourish as family-owned companies seek expansion capital to expand into other MENA markets.

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