MENA region venture capital activity rising in the last three years

20/10/2014 15:55 AST

The 4th Venture Capital in the Middle East & North Africa Report from the MENA Private Equity Association notes that deal activity during the last three years (2011 to 2013) was substantially higher than 2008 to 2010. The medium to long term outlook for MENA’s venture capital (VC) industry remains positive as strong macro-fundamentals continue to drive the region’s economic recovery.

During the last three years 140 VC transactions were completed compared to 77 during the three years 2008 to 2010. This upward trend has not been seen in MENA’s wider private equity industry which, says the report, has demonstrated relatively flat performance, where 260 private equity transactions were completed during the last three years, compared to 267 from 2008 to 2010.

The IT and software sectors continue to be the most popular amongst VC investors. Of the total transactions in the region’s VC industry since 2011, 49 per cent were in the IT and software sectors. There have been 103 completed IT and software transactions since 2006, of which 69 occurred during the period 2011 to 2013.

Based on available data, Lebanon, Egypt and Morocco lead the MENA region in terms of the number of VC investments with 27, 24 and 24 transactions from 2011 to 2013, respectively. While the total number of VC deals in Egypt increased from eight in 2008 to 2010 to 24 in 2011 to 2013, it remains exposed to political volatility and saw a reduction in VC activity from nine in 2012 to six deals in 2013.

The UAE continues to demonstrate resilience to the global financial crisis as the number of VC deals increased from 12 in 2008 to 2010 to 16 in 2011 to 2013. The increase in VC activity is primarily attributable to the Information technology, services and consumer goods sectors which accounted for six out of the UAE’s eight VC deals during 2013.

Following a strong fund raising year in 2012, there were $29 million of VC funds raised in MENA during 2013. Although MENA’s macro-economic fundamentals remain strong, fund raising remains difficult reflective of a general lack of deal flow in the region, lingering effects of the global financial crisis, and the continuing political instability in key regional markets.

However, there has been an increase in the total value of funds announced in MENA’s wider private equity industry (although many are yet to close) during 2013 compared to prior year ($2.6 billion in 2013 compared to $1.8 billion in 2012).

Available data continues to reinforce the market’s shift in focus from large buyout funds to VC and growth capital funds over the last three years. While this shift to growth capital is not VC specific it does impact the VC industry as the growth capital funds in the region remain a key funding source of finance for the VC industry. Funds raised by growth capital focused funds increased from $302 million in 2008 to $922 million in 2013.

The impact of the global financial crisis on liquidity, valuations and investor appetite has resulted in longer than anticipated holding horizons for VC investments. Based on available date, there were no VC exits during 2013. Much like the PE industry, the VC industry has increased its focus in recent years to maximising value from existing investments through strategic and operational performance improvements.

CPI Financial