When Dubai World said it was in talks to sell a stake in its port unit in May, hopes were high that this could represent a turning point for the Gulf’s subdued private equity industry.
Three months later, the deal between the Government-owned DP World and Dubai-based Abraaj Capital has not happened. It has become symbolic for the inertia that has replaced the fundraising frenzy of recent years. That period helped lift the international profile of the Gulf’s private equity industry on the global stage. Now players are grappling with the uncomfortable new realities of a world that is de-leveraging and where funds are scarce.
The uncertain outlook for regional stock markets has also made it difficult for private equity firms to exit their investments through the once lucrative initial public offerings (IPO). “With attractive exit options scarce at present, the focus for many private equity firms is now the enhancement of performance of their existing portfolio,” says Vikas Papriwal, a partner at KPMG, in the firm’s annual report on private equity. “Entities now look to weather the storm.”
The number of regional buyout deals fell by almost a quarter between 2007 and last year, with the volume of transactions down by a third, according to Gulf Venture Capital Association. So far this year, the number of deals has fallen by 60 per cent, according to estimates. At the same time, many private equity firms have amassed significant sums of so called “dry powder”, or capital under management that has yet to be deployed.
Regional buyout companies hold about US$11 billion (Dh40.4bn) in such funds, according to the Gulf Venture Capital Association. Overall, the nearly 100 funds focused on the region have raised $19.5bn in capital, according to Preqin, a private equity data provider. Abraaj, the biggest private equity firm in the Middle East, has raised about $7bn, about half of which has not been invested.
On a global scale the picture is far more exaggerated, with the industry sitting on some $1 trillion in dry powder. Smaller players are finding it easier to adapt to the changing realities of the industry and say it makes for a more even playing field because it forces larger rivals to return to the basics of private equity deal making: buying a company, improving its operational performance and selling it on.
“It is time for the industry to return to the basics of adding operational value,” says Sabah al Binali, the chief investment officer at Saffar Capital, a small private equity firm that mostly invests in the region’s early-stage firms.
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