MENA Private Equity confidence survey 2013
On the verge of a new investment cycle
It is approaching five years since the global credit markets seized up and private equity confidence dropped to an all-time low. Since then, the region has experienced a remarkable recovery which saw last year’s investment optimism amongst private equity professionals reaching pre-crisis levels. The results of our sixth MENA Private Equity (PE) confidence survey provide unique insights and confirm a continued optimism for growth in regional investment activity, but a shift in immediate focus for many General Partners (GPs) towards asset monetisation from vintage funds and capital raising for a new round of acquisitions.
As a consequence of the downturn, regional funds have retained a backlog of portfolio companies from pre-crisis investments, many of which have required extended holding periods to revive performance levels and improve Internal Rate of Return (IRRs) towards those originally forecast. Whilst Limited Partners (LPs) have been waiting for performance improvement in these remaining assets, it appears that with exit options now available, they are keen to cash out. Two thirds of respondents expect an increase in exit activity within their fund this year, with 23% confirming it will be their primary focus.
The most common exit route is expected to remain a trade sale to a strategic buyer; however, with global equity markets rallying to new highs, nearly a third of respondents see exit via Initial Public Offering (IPO), either on a regional or international exchange, as both viable and their most likely option within the next 12 months. This represents a significant increase on last year. Some respondents even see potential for secondary investments, an almost unheard of phenomenon in the region, from financial investors who see further upside in PE asset sales.
Whilst GPs have continued to deploy capital, regional fundraising has been limited since 2007. Many funds are now running short of cash reserves, with our survey results suggesting that the majority of traditional PE funds in the region, i.e. those not backed exclusively by High-net-worth individuals (HNWIs) or government money, will be looking to raise new capital within the next 12 months. The ease with which this will be achieved is yet to be seen, but based on recent global fundraising trends, it is likely to vary significantly by PE house. Whilst 41% of respondents did not foresee any significant issues in fundraising, there is caution amongst LPs including family offices who were in some cases disappointed by return from PE funds in recent years, and skepticism remains in committing new capital to those who have little more than unrealised gains to demonstrate a track record.
With LPs demonstrating less appetite for blind pools, and tending towards direct investment, or coinvestment strategies on an ad hoc basis, our survey indicates a potential change in the investment landscape with 43% of respondents now expecting family offices to be the most active investor at the deal table. This shift in investor type, with differing objectives, timeframes and target return rates may yet alter deal dynamics in the region.
Regardless of funding issues or changing competition, a clear appetite is evident from all respondents for continued investment activity, with an expectation that interim financing or warehousing can always be sought for the right opportunity. Now GPs foresee the biggest challenge to growth as a shortage of quality opportunities particularly given the more limited geographical area of focus.
With political instability in countries such as Egypt and Syria, and a general lack of quality investment opportunities coming to market in other North African, Levant and low populous GCC countries, the focus has been limited largely to KSA, UAE and Turkey. Many respondents recognise there are likely to be significant growth opportunities and less competition in countries such as Iraq, Libya or Egypt; however, consensus is that these would not provide any significant deal flow in the next year and there will be no active pursuit of transactions in these locations on a proprietary basis.
From an industry perspective, there remains a general preference towards defensive investments; however, there is also a recognition that the favourites such as education, healthcare and oilfield services are now very competitive. Consumer focused businesses and those complemented by favourable regional demographics and high disposable income are also rapidly becoming hot property, and typically tend to attract significant PE interest.
GPs remain optimistic towards continued long-term growth prospects in the MENA region; however, as the industry enters a new investment cycle, adequate preparation and maximis ation of exit value on vintage assets will be crucial to demonstrate a positive track record and persuade LPs to commit to new fundraisings.