MIDDLE EAST MOLE: From the ashes emerges a new form of GCC private equity
For all the talk of the turnaround in the Gulf financial market, private equity remains in the doldrums. The almost non-existent fund raises have been extremely disappointing and deal pick up lags way behind recovery in corporate M&A. New PE ventures, months in the planning, are being shelved before they are officially launched.
While there are several reasons for this, this biggest of them all is a lack of exits. The fact is that limited partnerships have not seen any meaningful returns in the past couple of years, and if managers are not able to deliver what they promised, investors will are not willing to back them further.
The truth of it is that as an industry, private equity barely has a 10-year track record in the GCC, of which the majority has been in an environment in which everyone could make money regardless of competency or experience.
Now that the tides have turned, most of the so-called private equity managers have been unable to ensure their portfolios continue to perform (though there have been some notable exceptions). Coupled with almost non-existent liquidity, underperforming portfolios have sunk several managers, with only the best managing to survive on limited cash distributions from their asset bases.
How and when will things change
Despite this gloomy prognosis, there are some reasons for slight optimism. Like everywhere else in financial services, private equity moves in cycles, the only difference is that the region is about to complete its first one, but this could still take another year.
Things are changing - underperforming managers have been purged, bloated funds have been trimmed down to core staff with overpaid and completely under-qualified "wannabes" side-lined a long time ago.
The emerging industry, though massively smaller than two years ago, is much more resilient, realistic and has learned what the West has known for several decades - private equity is a long-term game and that fortunes, while definitely there to be made, require patience and long-term commitment.
Straight from the boards of several surviving private equity managers, the message is clear - slowly portfolios are being reviewed, assets cleaned and trimmed, advisors being consulted and general partner teams being prepared. The fire-fighting is almost over and we should now be thinking about exits.
Expect the next couple of years to mark the time when, for the first time ever, the GCC's private equity industry is able to honestly claim it has moved from birth into infancy.
The firms that are able to return money to investors over the next two years on the back of exits in 2011-12 will be in the envious position of being large, successful, have a through-the-cycle track record and, most importantly, face little competition.
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.
