UAE is not a mature PE market but technology might help managers’ fundraising efforts
One of the biggest issues facing the global PE industry currently is allocating capital to the right investments without falling into value traps and overpaying for companies, such are the record levels of dry powder in the market.
When it comes to fundraising, roadshows are still important but according to Thomas Erichsen (pictured), Regional Director EMEA, Private Equity & Real Estate, TMF Group, “technology is beginning to play quite a big part, with some managers raising a particular amount and finding new, quicker ways to allocate the capital via technology”.
“This has changed the allocation process to some degree in the private fund marketplace, as managers use technology as well as traditional methods to connect with the right profile of investor,” says Erichsen.
For newer, less mature PE markets, such as the one being developed in the United Arab Emirates, technology tools combined with traditional roadshows are enabling managers to connect with new investors, be it for primary or secondary PE fund products.
Erichsen notes that the UAE has always been an early adopter in technology, in general. He says that the majority of the fund managers in the region are vertically integrated, “meaning they have their own middle and back office”.
“With that said, a fair amount of technology is implemented in order to handle the work load. The usage of technology for fund raising is simply a natural step,” says Erichsen.
Technology platforms like Murano, which aims to help better connect GPs to LPs, and CEPRES, which gives institutional investors a way to effectively benchmark private capital market investments, using technical and fundamental analysis, are reshaping the way that fundraising is conducted.
Abu Dhabi-based Gulf Capital, one of the Middle East’s largest private equity firms, is gearing up to launch its fourth fund in 2020 with chief executive Karim El Solh telling The National that the new fund is likely to be larger than the USD750 million GC Equity Partners Fund III. Reflecting the fact that PE managers need to be patient when putting capital to work in the current economic climate, El Solh said he expected Fund III to make between three and five more investments in 2019, stating: “It’s hard to say exactly when as [deals] can take a long time to bake.”
The number of PE funds being set up locally within the UAE is on the rise, not only within the traditional jurisdiction of the DIFC (Dubai International Financial Centre) in Dubai but also in the Abu Dhabi Global Market (ADGM), a financial free zone established in 2015. According to Preqin data, there were 17 private equity-backed buyout deals in the MENA region in 2018. Although this was the same number as those recorded in 2017, the average aggregate deal value increased from USD350 million to USD743 million year-on-year.
For PE managers considering launching funds within the DIFC, they should be aware that their fund activities are subject to regulation and supervision by the Dubai Financial Services Authority (DFSA). There is a zero rate of personal and corporate tax in the DIFC for a period of 50 years from the date of establishment of the DIFC (Dubai Law No. 9 of 2004).
“In the UAE, investment fund regulation is very clear and straightforward to understand for international businesses and investors. It’s becoming an attractive jurisdiction to set up new fund structures,” states Stephanie Williams, General Manager, TMF Group (UAE). “At present, these local funds are typically making investments globally but going forward there will be a push by the UAE government for more investments to be made locally.”
From a fundraising perspective, many of the private banks in the UAE are well attuned to PE investing but as Williams points out: “The market here is a lot more mature than in years past. We are seeing a drive for fundraising to happen within the country and in the wider region.
“In the past, people went beyond the UAE to do fundraising, doing roadshows in the likes of London, Hong Kong, Singapore. Now, however, those roadshows are taking place within the UAE. That’s one of the biggest changes we are seeing, and it is being born out by the number of requests we are getting for fund administration services.”
Of course, whenever a PE manager is setting up a new fund, one of the key considerations, jurisdictionally, is the amount of tax efficiency that can be achieved. “For that reason,” says Erichsen, “the managers we talk to in the region are keen to launch local funds but at the same time they want to get some sort of European exposure by launching a parallel fund (ie in Luxembourg).
“The developmental signs in the UAE are all positive and hopefully we will be one of the first movers to provide all the necessary fund administration and regulatory requirements for those managers wishing to launch funds at the local level. I think we will see more and more fund launch activity going forward.”
From an investment opportunity perspective, Williams says there is quite a substantial interest among PE managers in fintech businesses. This is a key growth area for the Gulf Region, more broadly. A statement issued by the organising Committee of the First Arab Digital Economy Conference last December, said the digital economy can contribute more than USD3 trillion to Arab GDP growth. Currently, the digital contribution to the economies of the Arab countries is only 4 per cent compared to 22 per cent globally.
“We see a lot of focus on fintech investments here, including deals with a crypto element to them, which has been quite interesting.
“There is a drive from the Mubadala and other government-backed institutions to develop the investment platform in the country, moving forward.
“We do see less focus on ESG and impact investing compared to other markets but I think that will change as we now have the Mena Index. More investors are reviewing it before they make investment decisions. Hopefully, we will start to see more local (ESG-focused) investments and fund products being launched as a result,” comments Williams.
One area of future growth that could propel the size of the UAE’s PE market is that of PE secondaries, which, at a global level, has enjoyed some strong momentum in recent years.
According to the annual Setter Capital Volume Report, the private equity secondary market increased 36.2 per cent to USD70.2 billion in 2018.
“Given that the PE primary marketplace is doing so well, it is creating a spillover effect, which we are seeing in the secondary market. Managers may, over the course of time, want to change direction in terms of what they are investing in to, and will look to liquidate out of certain long-term investments. Selling GP interests on the secondary market is a way to do this,” says Erichsen.
Erichsen is quick to state that PE secondaries is absolutely an important growth area for the UAE. He says that two main types of secondary deals are becoming prominent, not just in the UAE, but globally: GP-led restructurings and single asset deals.
“Due diligence on each deal includes risk and stability in the region to be invested into. The UAE has become an attractive region for numerous reasons; those that are most familiar from an economic and cultural point of view will always lead the way. To that end, TMF Group is reinvesting into its business to be a part of the UAE growth story,” remarks Erichsen.
As Private Equity Wire reported on 18 June, Chicago-based Adams Street Partners, one of the biggest private equity investors, announced it had closed its sixth secondaries fund. The Adams Street Global Secondaries Fund 6 attracted USD1.05billion from LP commitments and is the last example of a continuing maturation of the global PE secondary market.
This follows on the heels of Whitehorse Liquidity Partners, who closed its second private equity secondary fund at a hard cap of USD1 billion, in addition to Commonfund Capital, who raised USD 450 million for Common fund Capital Secondary Partners II.
One appealing aspect of PE secondary funds is the risk-adjusted return profile, which typically tends to be a bit lower because the investor is coming into the fund further along the J curve - that is, further into the investment lifecycle – than if they had committed capital to the fund at inception.
Erichsen says that PE secondary managers (and their investors) have a lot more fundamentals to look at from a data perspective and can analyse portfolio companies in greater detail; i.e. looking at things from a fund NAV perspective rather than an enterprise value perspective.
The level of transparency is a compelling feature of PE secondary investing, compared to committing capital blind to a new fund vehicle, he says.
In his view, technology is touching the PE industry at various levels, not just in terms of analysing secondary investments “but also in the way that managers raise capital, deploy capital, and operate their businesses. They may be able to unlock value quicker because of the transparency that historically the asset class did not have.”