MIDDLE EAST MOLE: Is it time to fire off all that dry powder?
Buy-side prospects, especially those of the private equity industry, are considered critical harbingers of the future for the financial services industry and several sectors of the wider economy. Understandably, after two years treading water, people in the Gulf are eagerly anticipating what 2011 holds for the industry.
Globally, so far it's been predominantly good news: some big deals have been announced, European and US funds launched multi-billion dollar capital raises and a few jumbo deals are being attempted.
Within emerging markets, India is hot: 2010 PE deal values hit $9bn (mostly though due to frothy valuations) and KKR announced a $1.5bn India fund raise. Closer still to home, Standard Chartered PE has (finally) closed its first deal after a long dry spell for $75m into Bahrain-based JBG, albeit not as equity but as debt. Nonetheless, this sets a positive tone for the Gulf.
So what does all this mean? Several factors may just make 2011 GCC PE better than last year, and certainly kicks the dog of 2009 firmly into touch. The Fed's second bout of quantitative easing (QE2) - while ultimately destroying the greenback and several Western economies - in the short term will increase global liquidity, which will gravitate towards emerging markets, including the Middle East.
Coupled with a stabilising regional macro environment and large amounts of dry powder at PE funds, lack of capital will not be so much of an issue for the region this year.
Still, most regional PE professionals feel that the real problem is a lack of quality deals. Even with muted fund raising over the past two years, local PE leaders acknowledge that the amount of dry powder available to them dwarfs the value of decent investments available.
Some will have to return unspent capital to LP investors in the next 24 months, but my experience suggests that a considerable amount will invariably go toward bad or overpriced deals (the GCC is not typically known for making wise investments).
We have found that sellers' valuation expectations are becoming unrealistic and this is expected to continue in 2011. Additionally, most of us expect activity to focus on the SME space and not fully blown buyouts, instead opting for the continued involvement from vendors in a partnership approach with buyers - so large mega-fee generating deals will be rare.
None of this really bodes well for recruitment. While hiring will pick up slightly (I myself will be recruiting soon) and from very low levels, the focus will be on individuals with experience in Egypt, Turkey or India, or Westerners of excellent calibre with regional track record.
In short, there is plenty of money on the side-lines and plenty of professionals too wet behind the ears to spend it wisely, but there's just not the critical mass of deals to support significant growth in the industry, be it in headcount, deal volume or otherwise. Expect some interesting deals, but nothing close to a revival.
Jamal Bahir (a pseudonym) is seasoned senior private equity and investment management industry veteran based in the Middle East and Europe. He is an advisor to several ruling and trading families from the Middle East, as well as select European governments and private equity funds, advising on their investment, financial and regional political strategy. The author may be reached on jamal.bahir@gmail.com.
