Abu Dhabi Action Learning Module MBA Programme

Private Equity in the Middle East

Jaideep Dhanoa Nawaz Isaji

Frederico Teixeira
Nico Vivaldi Christian Weniger

Team composition
Jaideep Dhanoa Jaideep is a TMT specialist with substantial commercial management and VC experience in bringing to market and scaling consumer web products. He has led the market-entry and monetization strategies for Indian Crickets global internet & mobile rights, and ESPNs online business in APAC. Nawaz Isaji Nawaz started his career as a lawyer in Sydney, advising on foreign investments, and then moved into strategy consulting with PricewaterhouseCoopers. He has worked across a number of sectors including energy, oil and gas, telecoms, financial services and FMCG. Christian Weniger Christian previously work in the Private Equity industry. He led the European Secondary investment activity of Auda Private Equity, a family-office backed PE investment firm with $4.6 billion AUM. He specialized in Islamic Finance through his masters degree. Nicola Vivaldi Worked in investment banking in London advising companies on capital structure and financing strategies in event driven situations. During INSEAD he has been involved in principal investing with a private capital fund in London. Nicola is a CFA and Chartered Accountant. Frederico Teixeira Worked for McKinsey & Company across banking, energy, telecom, public affairs and public sector, with extensive experience in Africa. Performed corporate finance analysis for banking units in asset management, insurance, trade finance and wholesale banking.

The PE industry is composed of three main groups of players

Types of firms Middle East-based firms with investments focused on the region (e.g. Abraaj Capital, Gulf Capital, Amwal al Khaleej, Citadel Capital) Key strengths / characteristics Strong local roots, business network and market knowledge

Regional pure players

Global PE firms

Firms headquartered elsewhere, but investing in the region, like Carlyle Group and Colony Capital

Strong global brands, raising funds relatively easily Fewer local connections when compared to regional players Largest group of different players Small share of private equity for each player (not very important for the industry as a whole)

PE firms with government links

PE Firms linked to other entities such as governments or banks Also includes SWF previously investing in PE funds as LPs that are becoming increasingly active in direct investments

Source: MENA PE Association, Booz & Company.

GCC PE industry started in early 2000s, followed by a 2008 credit bubble

Birth of PE Small to mid-sized PE funds, very few players in the market (2000s) USD 120mn raised by Abraaj Capital and HSBC Establishment of USD 1bn infrastructure fund sponsored by Islamic Development Bank and a group of sovereign wealth entities Significant number of start-up firms start coming into the region to exploit IT opportunities The PE Asset Bubble (2008) Too many players start to chase too few deals with asset overpricing flooding liquidity short term-flips of assets weak corporate governance

2000

2002

2004

2006

2008

2010

2012

2014

Explosive growth International large size Funds start locating into the region (2004-2007) First notable success registered when Aramex got listed on the Dubai Financial Market Significant number of new first time funds and asset management companies emerge Institutional investors also backed PE funds, and international PE fund managers relocate in the region

The 2008 crash and the future perspectives The shakeout closed many firms and depressed the market, but AUM were kept at a constant level Slowly beginning of new venture capital and private equity firms to support SME growth (2010-present)

Source: MENA PE Association, Qatar Financial Centre.

The 2008 bubble provoked a major decline in fundraising and investment Funds raising money (#)
Funds investing (#) Total amount raised (USD bn)

Amount raised (USD bn) 6

Funds (#)

18

20

5
4 3 2 1 0

17 14
15

10 6 4 2

11
10

5 2

6
5

0 2002 2003 2004 2005 2006 2007 2001 share of emerging market PE was less than 2% 2008 2009 2010

By 2008, PE as an asset class remained small, but showed significant growth, accounting for 10% of emerging PE, with a total of 150 funds

Source: Booz & Company, Zawya Private Equity Monitor.

but total AUM remained stable, despite a decline in the number of transactions
Key characteristics Trusted networks, relationships and connections as a key driver for doing business in the ME Active role played by LPs in deal sourcing, with the industry relying heavily on their network Number of transactions Transaction value (USD mn) 7.8 Evolution of total AUM invested in the region (USD bn) 19.9 13.4 21.0 22.4 23.2

2006

2007

2008

2009

2010

2011

90 2,100

117 7,500

110 3,250

77 850

70 850

72 220

Source: Zawya Private Equity Monitor, Markaz Report, Booz & Company.

Characterized mainly by minority stakes and conservative multiples

Minority stakes negotiated mainly to growth / venture capital investments The majority of private equity activity in MENA focuses on minority stakes in companies Private equity typically used for companies looking to either raise growth capital and/or cash out some value for shareholders Typical 25% IRR threshold and 2.0x exit multiple are set as the minimum to enter a deal with growth capital companies Family businesses are particularly sensitive about giving up majority control; exceptions occur for subsidiaries which are underperforming and contracts usually including specific guarantees to protect exit failures Put options generally required by PE houses to guarantee a liquidity event Difficult IPO environment outside Saudi Arabia (strict regulation) Minority stakes are hard to sell to nonfinancial buyers PE companies set customary minority protection rights to hedge the fact they own a minority stake in the companies Drag / Tag-along rights Board seats proportional to percentage owned List of reserved matters

Investments have been focused on a limited number of countries and key sectors
Geographic focus concentrated in Morocco, Egypt, UAE and Saudi Arabia Initial majority of opportunities and transactions occurred in Egypt, with recent shift to a broader region Saudi Arabia attracting a lot of interest because of its large and young population, growing economy and a committed government UAE continues to be a popular destination for fund managers, and it is expected to further evolve given its economic and demographic prospects Sector focus on healthcare, real estate and food and agriculture Key players are recently investing in healthcare, real estate, and food and agriculture Healthcare (biotech and pharmaceuticals) is expected to yield the most attractive opportunities Construction: ME economies have a pressing need to develop/upgrade infrastructures Food & Agriculture: the GCC regions are almost entirely food import dependent, which pushes investment upwards
Investment volume since 2006
Others Tech, media and telecom

Investment volume since 2006

Turkey Tunisia Bahrain Jordan 3% Other MENA 4% Morocco Lebanon 29% 5% 5% 4% 0% Kuwait 5% Saudi Arabia 7% 10% Outside MENA 14% UAE 14% Egypt

17%
Healthcare

19%

13% Construction Transport 7% and real estate 8% 11% Food and 8% 11% agriculture Energy Manufacturing Financial services

6%

Source: MENA PE Association, Booz & Company.

but are expected to diversify in the coming years

Geographic focus diversification As MENA countries make concerted efforts to diversify their economies and build regulatory institutions, they are likely to attract further investment Further cash inflows into Saudi Arabia: continuous interest given the size of its population (and economy) and the commitment levels of its government Jordan, Kuwait, Turkey and similar: although non-typical investment locations, these regions are likely to follow, as their legal and regulatory infrastructure has already developed to a sustainable basis UAE: likely to see a big rise in terms of FDI inflows, as they follow on the 2030 plan for the region Sector focus diversification The INSEAD-Booz & Company report indicates that investment is likely to follow demographic and social developments in the GCC Infrastructure: traditionally been provided by the government. However outside of the GCC, PE is increasingly being used as a funding mechanism for infrastructure projects Energy: increasingly being seen a potential investment avenue as oil-rich countries aim to diversify their energy mix. Both Masdars Clean Tech Fund (Abu Dhabi) and Catalyst (Jordan) have started the movement to investing in clean technology technologies in the region

Source: MENA PE Association, Booz & Company.

Exits are yet limited, but regional GPs are optimistic about long-term prospects
Exits / divestments (#) 35 30 25 20
20 30 32 23 30

15
10 5 0 2006 2007 2008 2009 2010 2011
7

Characteristics of deal structures and exit strategies 1 Minimal leverage on deal execution, preference for growth capital, often buying-in rather than buying-out, more operationally involved in the investments to ensure operational improvement given family-offices based customers
2 Number of exits recorded in the region still small, in part due to recent crises and relative young age

of the industry and limited data on private placements

3 Lack of maturity and depth for IPO exits and limited trade buyers restrict the potential exit strategies 4 In the majority of GCC states, foreign ownership restrictions apply to limit the percentage holding

that a non-local can have in the investee company - barrier for overseas PEs

Source: Zawya Private Equity Monitor, AMIC.

GPs believe the market returns will keep moderate but recover quickly
Rebound period Industry returns Imminent rebound 3-5 years Total

Moderate

48% 10%

58%

PE firms are being pushed to specialize into different industries in order to provide more support and expertise GDP growth likely not to be a problem, as oil prices remain at a sustainable high value Positive cash positioning leave PE firms with current USD 11 bn of dry powder

Pre-crisis level

42% 21% 21%

100% Total 69% 31%

Source: Booz & Company, 2010 GVCA Private Equity & Venture Capital Report.

Long term prospects for Private Equity in the GCC look promising
There will be a tremendous need for private equity as a more common tool to unlock value in the coming years Family businesses are becoming more institutionalized and seek world-class corporate governance policies, instilled in their culture (noticeable shift over the past ten years in welcoming third parties to their board) Second and third generation family businesses face transitional challenges Checks and balances by non-involved family members on those involved Certain shareholders need to monetize holdings International banks in the region becoming more conservative with their lending activities (no more name lending and banks taking credit outlook into account) Companies beginning to see value-add of financial buyers Reference valuation pre-IPO; taking the lead of an IPO committee Assisting in financial strategies including optimal debt/equity rations, acquisition analysis and margins analysis

Case Study: The successful exit of Aramex

Established in 1982 and headquartered in Amman, Jordan, Aramex is a global transportation and logistics services company providing a variety of express, logistics, freight forwarding and domestic distribution services. In 1997, it was listed on the NASDAQ and was the first international company in the region to do so. In 2002, the company was acquired in a leveraged management buyout by Aramex CEO and co-Founder Fadi Ghandour and Abraaj Capital for a total consideration of USD65 mn.

Abraaj Capital is now the largest private equity player in the Middle East, with more than USD6.2 bn AUM.
Acquisition structure: Leveraged buyout structure financed by USD25 mn in equity, USD30 mn in a 5-year syndicated senior loan notes led by Export and Finance Bank, Jordan, and USD10 mn in mezzanine debt.

Exit: The company was listed again on the Dubai Financial Market in June 2005 through an IPO for USD190 mn. This record breaking issue was oversubscribed by about 80 times. Abraaj achieved a 3x return, and Aramex now has a market value approaching USD1 bn.