UAE. INSEAD, the leading international business school, has partnered with Booz & Company, to issue a report entitled Private Equity in the Middle East: A Rising Contender in Emerging Markets. As private equity has a prominent role in the Middle East the report examines how the industry has evolved over the years deeply impacting the region’s economic development, as well as its current challenges and outlook.

INSEAD and Booz & Company surveyed private equity firms or general partners (GPs), and their investors or limited partners (LPs) in the Middle East to create the report. Respondents were surveyed for their views on the business, current market sentiment, confidence and expectations.  

‘INSEAD is truly driving the research agenda in this important growth area for the Middle East,’ said INSEAD Dean J. Frank Brown, who oversaw the opening of the school’s campus in Abu Dhabi earlier this year. ‘As private equity develops as a sector it will be a key feature in the landscape of economic recovery.  It will continue to be a critical focus for our faculty research and programmes.’ 
 
The private equity industry in the Middle East has grown remarkably quickly for an industry that barely existed a decade ago.  Today, there are some 150 funds in the region with a further 10 announced and an additional four in various stages of planning. However, PE as an asset class in the Middle East is relatively new and, on a global scale, still very small.

Beyond the occasional mention in larger global PE surveys or specific case studies, little research or literature exists on PE in the region.  Criticisms frequently raised include limited information, lack of transparency and the general opacity of the industry.

As in the rest of the world, much of the regional PE activity is driven by closed networks, resulting in restricted information flow, yet in this region this is particularly acute given the predominance of family businesses, and traditional ways, this has the effect of making available data in PE in the region a scarce commodity. The lack of reliable information has been a source of frustration for analysts.

‘The results of our survey have provided unique insights into the private equity market in this region on which little formal research has previously been done,’ said Dr. Deborah Schlichting,  Research Fellow at INSEAD. ‘The findings will open up future avenues for inquiry in what we hope will become a focal study point for the benefit of the region.’

“We produced this report because we believe we have the expertise to bring light to a crucial emerging industry that is of great interest to players in the Middle East and beyond” said Ahmed Youssef, Booz & Company.

The survey revealed a positive response as the industry leveraged off the global financial crisis.  GPs are reacting swiftly and are transitioning to stronger business models. Respondents cited several key takeaways from the downturn, including stricter and more disciplined acquisition and due diligence processes, tighter contracts and stricter enforcement, and stronger control, management and governance. The findings suggest that the region’s GPs generally expect growth to be moderate but imminent in the near to medium term.

The report takes a close look at the role of family-run enterprises in the Middle East and the associated investment challenges for the private equity industry. INSEAD and Booz & Company’s research shows that while the recent crisis may have affected the investment capital of family businesses, they are still important investors. Moreover,  as they re-evaluate their existing portfolios and divest non-strategic companies, family businesses may present new opportunities for local well-connected private equity firms.

“Private equity in the Middle East has evolved to play a critical role in the region by injecting cash, human and logistic resources, and managerial and technical assets into local businesses. Private Equity is also closely tied with the transition of family businesses to corporate structures and the development of regional regulation”, added Laura Morales, INSEAD’s Global Private Equity Initiative Director.

Regional macroeconomic indicators in early 2010 suggest that a recovery has begun.GDP is expected to grow 3.5% in 2010 as the region's economy emerges from the downturn. By historical standards, oil prices are still high enough to bring liquidity and wealth to the region. Furthermore, there is an estimated US$11 billion of investable funds mostly raised before 2008 which are expected to be deployed over the coming months.  Yet, the true value of these funds will likely be lower, as some GPS indicated in the 2010 INSEAD Booz & Company survey that Some GP’s may have struggled enforcing LP commitments. 

In spite of such optimism, survey respondents noted that in order for private equity firms in the Middle East to succeed several fundamental strategies are important. These include specialisation, investment rigor and discipline (including majority control), value creation focus, active risk management, strict corporate governance, and the development of top leadership and management. 

”In in order to take advantage of ME opportunities in 2010 and beyond, PE firms must act as active owners.  They have to provide more support to their portfolio companies, helping with strategic and market positioning, financial discipline, and filling the management gap”  concluded Ahmed Youssef, Booz & Company.

INSEAD launched its Global Private Equity Initiative (GPEI) in 2009 to combine the energies and talents of the school's research and educational capabilities with INSEAD alumni and global professionals in the private equity industry. INSEAD’s GPEI is focused on delivering original research and insight for the GPs and LPs that channel growth capital to privately-held enterprises.

With INSEAD’s global presence through its three campuses in Asia, Europe and the Middle East, the GPEI is uniquely positioned to provide targeted studies and perspectives to assist the private equity community with investing in different regions.

Note. The full report can be accessed here.

For Booz & Company’s management magazine strategy+business visit www.strategy-business.com.

For the Ideation Center, leading think tank in the Middle East, visit www.ideationcenter.com
Also visit www.booz.com and www.booz.com/me to learn more about Booz & Company.

More information about INSEAD can be found at www.insead.edu.

MIDDLE EAST BUSINESS COMMENT & ANALYSIS

• Top news
• Business News
• Company News