Private Equity In The GCC: Who Will Survive?

CHALLENGES GALORE

But although the macro-scenario looks promising, the regional PE industry is still ridden with problems.

“As the industry is still at its nascent stages, it is encountering the normal challenges that would take the region to the next level of development,” explains Solh.

“Also, the GCC region has its own intrinsic challenges. At the deal generation level, for example, the PE industry still lacks quality deals. You also encounter high valuation expectations from sellers. Another challenge is a general lack of acceptance of PE firms as partners.

“One can mitigate such issues by being the most entrenched in your country of operation and to know how business is done. You need to be able to source a large number of leads and screen them in order to generate a healthy pipeline of potential candidates for closure.”

Bank financing is another hindrance, he says. “Post financial crisis, banks are still reluctant to lend and more efforts need to be made in order to channel liquidity to the economy.”

Also, with other emerging markets getting more publicity, especially Africa and pockets of Asia, this region is neglected in terms of PE, further slowing growth of the industry, says Standard Chartered’s Labib.

At the execution level, human capital and corporate governance are amongst the most pressing issues.

“You need to be able to not only invest, but to grow your target company by consistently adding value to it. This is only done by highly skilled manpower and by institutionalising your portfolio companies,” states Solh.

Quilvest’s Abouchalache agrees that skilled manpower is one of the main obstacles obstructing growth.

When you invest in PE you are investing in a great idea and a great economy but you also need a great management team to run that small or midcap company, he says.

“Since the PE fund by definition is a blind pool and you are committing to a team for over four years of investing, four years of harvesting, you really want the managers to be around for the eight years they are going to be looking after your money.

“And history has shown that due the rapid explosion of PE in Middle East from nearly zero to a huge amount of money, followed by few years of inactivity, of people hopping around teams, you tend to feel that as an observer you have to be very careful before you sign the cheque because you can’t see people who can give you confidence.

“Very few names are stable – if you check their track record of exits,” he states.

Many PE firms in region are still in the fund deployment mode, and have not yet entered the harvest phase of their fund cycles, consultancy Deloitte stated in a report last year.

“Experts believe that early fund investments in the Middle East are entering the market either by way of secondaries, IPO’s or trade sales. In addition, findings point to the successful practices of strong PE firms in the region that have spent the past few years preparing their portfolio companies for sale,” it said.