Alternative Finance Sources to Fund Arab Growth

When weighed against the available investment opportunities in different geographies and industries across the Arab World, successful private equity firms are now able to scout for highly interesting growth stories at a more compelling risk/reward profile than in the past.

An increasing number of quality firms are now available at more reasonable valuations in the aftermath of the global financial crisis and Arab spring, thus offering significant opportunities for PE firms.

Private equity firms can now generate higher returns compared to non-PE backed companies, as they now contribute more than ever in creating value at their portfolio company level.

Strategies such as buy-and-build have become a major aspect of building a sustainable track record for the regional PE firms. This is particularly right in an industry ripe for substantial but healthy consolidation during the coming years, with fewer but stronger and bigger players set to emerge.

Credit financing
In addition to private equity financing, another means of funding emerging in the marketplace is credit financing. In many cases where regional corporate houses are not willing to open-up their equity base to external investors, this debt alternative is frequently sought.

Corporate debt issuances in the Arab region have grown at a fast pace over the past decade, largely outperforming the equity issuances on public markets during the recent years. With around $345 billion issued since 2005 and averaging three per cent of GDP per annum, the corporate debt market has grown to become a major source of financing.

Looking forward, more room for growth is available if compared to similar performance in mature markets such as Western Europe which actually averages a ratio of debt issuance to GDP of around 19 per cent per year.

As companies increasingly acknowledge that a major opportunity exists within debt, structured finance companies are adopting instruments combining a mixture of equity and debt.

The emergence of mezzanine financing as an attractive financing instrument thanks to its hybrid nature is a prime example. This structuring of mezzanine finance is highly flexible and is not typically found in senior debt or asset-based bank loans.

The structured finance industry is increasingly being seen as a viable alternative source of financing to the traditional bank loans and capital market funding, with current trends in the finance industry also strongly favouring the emergence of structured financing. The businesses are financing the entire capital structure of large organisations from debt to equity, encompassing a wide array of hybrid instruments.