The Gulf’s private equity market remains underdeveloped, but is set to blossom following a surge in fundraising in the region and a likely expansion of privatization efforts, according to
The Gulf’s private equity market remains underdeveloped, but is set to blossom following a surge in fundraising in the region and a likely expansion of privatization efforts, according to a new report on the impact of private equity on the Gulf Co-operation Council countries commissioned by private equity firm Ithmar Capital and Dow Jones.
The report, The Impact of Private Equity on the GCC, is intended as the first in a twice-yearly series. It notes: ‘The private equity market in the GCC is currently underdeveloped compared to other geographies and accounts for only a small proportion of the region’s overall economic activity.
‘Fundraising in the GCC area reached USD10bn in 2006, accounting for just under a third of the total USD33.2bn raised across the emerging markets of Asia, eastern Europe, Latin America, the Middle East and North Africa.’
However, the report predicts that private equity in the GCC will grow as a result of rapid economic growth and restructuring, high liquidity from record energy prices, significant fiscal and trade surpluses, and heightened interest in the region from international firms looking to hedge investment risks and compete globally.
‘In consequence, fundraising is exhibiting strong growth, with 41 per cent of the funds raised between 1994 and 2005 raised in the final year of this period, and this USD5.8bn total then almost doubling in 2006,’ the report says. ‘Estimates for private equity fundraising in the Middle East converge on a total of USD25bn in the near future.’
The report points to some specific benefits from the growth of private equity in the Gulf region, including improved economic diversification and support for the existing positive liquidity climate as well as for growth of a viable private sector.
‘GCC states have identified assets valued at more than USD1trn for privatisation, and public infrastructure accounted for more than 60 per cent of new funds raised by regional private equity firms in 2006,’ the report says.
‘Governments in the region are also likely to look to external capital sources to address shortfalls in infrastructure financing and growing pressure on public resources attendant on the GCC’s rapid population growth.’
The report examines the effects of private equity on regional economies and the future outlook, taking into account the lessons learned from mature markets such as Europe and the US. The study draws on interviews with regional decision-makers including chief executives, family business owners and industry leaders.
‘The input of this select focus group delivers tremendous value and expertise, and brings a multi-dimensional approach to assess where precisely the private equity industry in the GCC is heading,’ says Ithmar co-founder and managing partner Faisal Belhoul.
‘The report constitutes a landmark in the understanding of the impact of a specialised asset class on a rapidly developing region, and the informed views and expertise it contains afford a real insight into future regional industry direction.’
The series of reports plans to chart the growth of private investment and fundraising in the Middle East, identify economic driving factors, quantify liquidity levels and fundraising, assess sectors of interest and outline investment challenges.
‘As the private equity sector is still in the early stages of development in the GCC, there are tremendous opportunities in areas such as industry consolidation, cross-border expansion and buy-and-build scenarios, but there needs to be a greater understanding of the possibilities to bring these to fruition,’ says Ithmar director Ranjit Bhonsle. ‘This report will go some way to addressing the knowledge gap and empowering solid business decision going forward.’
Over recent years private equity has gained increasing acceptance as a means of financing growth, adding value and aiding the transformation of family-owned businesses to more corporate concerns.
‘This unprecedented growth requires greater understanding of the industry, and a lack of discernable information in the market makes it increasingly difficult for investors and other stakeholders to make educated decisions,’ says Jessica Canning, director of global research at Dow Jones.
‘The report from Ithmar Capital and Dow Jones addresses this palpable lack of quality information by examining the trends in this growing market through consultation and analysis and endeavours to carve out a logical path and consensus.’
