A Game Of Valuation

Tell us about your views on private equity investments globally and within the region.

Investment trends have seen a steady expansion since mid-2016, with global growth forecast to remain at 3.7 per cent. Oil and natural gas prices will continue to rise, which will improve the public finances of producing nations.

The rise that began in the second half of 2017 has gained momentum, with the price of Brent barrel rising to 17 per cent between the end of March and September of 2018, to reach $83 per barrel. Globally, there is a significant increase of investments in the market, with dry powder reaching $1.9 trillion by December of 2018.

As a result, the average size of private equity funds is increasing, having reached about $430 million in 2018 from $240 million in 2010. This also reflects on the pressure of assets valuations (i.e. the average ticket size increased from $360 million in 2010 to $640 million in 2018).

The Middle Eastern private equity (PE) and venture capital (VC) market has slowed down over the last few years, with 14 PE deals in 2015 and only six in 2018. This has been primarily driven by the United Arab Emirates and the Kingdom of Saudi Arabia (based on publicly available data from Preqin).

Given the market situation, the challenges faced for the region are on the fund-raising front and the overall economic slowdown. We do not expect significant changes in the short term. However, a different trend is shaping in VC, with an increasing number of deals, doubling from 88 in 2015 to 166 in 2018, of which about 25 per cent were directed to Middle Eastern based companies.  

We expect this positive trend to continue in the coming years, driven by significant efforts across the board to attract start-ups to the region.

What is the key trend and how will this impact deals across the Middle East and North Africa?

One of the key trends in global PE is the increasing amount of available cash in markets. The result of this is a “chase” for the same number of deals, which in turn pushes prices up and increases the pressure on PE firms to deliver value on exit.

We expect to see a global shift in value creation of PE, from the traditional leveraged-buyout model where value was being created through financial engineering, to one where value is being created by enhancing and optimising the assets operations. This shift is especially relevant, given the liquidity in the market and the resulting high valuations.

PE funds in the Middle East are aligning accordingly and getting more involved in the operational aspects of their assets (which will require them to invest in new capabilities and specialised profiles). PE funds globally are levering digital and technologies ranging from enhancing assets to maximising value creation and the assets’ profitability during the holding period. We expect this trend to become more relevant for PE players in the region in the coming months and years.

What kind of opportunities do you see in the market at the moment?

From a sector perspective, we have observed a continued interest in the region for businesses that is supported by demographic driven trends—such as healthcare, diagnostics and food. Investors are also considering the GCC as the door to the wider North Africa and East Africa.

This is an important point to note, as Africa is likely to become the new frontier of investments with an increased focus from global and local investors alike, having a presence near its shores should prove valuable.

The directive from GCC governments on nurturing start-ups and SMEs, together with the appetite for technology in the region will likely generate a new wave of opportunities for investors with the right risk/return profile.