Law firm Walkers said this week that there has been rapid growth in the Middle East private equity market in both the number and size of funds.
The firm reports that growth in the market is bolstered by the fact that typical private equity fund structures are consistent with Shari'ah principles of sharing in risks and rewards commensurate with capital contributions, making private equity investments particularly attractive to Islamic investors.
"A confluence of factors in the region such as high oil prices, the real estate boom, a marked increase in infrastructure development and privatizations -- as well as the stellar returns for PE from the IPO market over a short history -- could lead to a tripling of the size of the region's private equity industry over the next five years," Rod Palmer, Managing Partner of the Walkers Dubai office, said. "The Gulf Cooperation Council region (GCC) also seems to be ahead of the curve in a major trend of more rapid fundraising, with funds being fully drawn down after 18 months instead of five years. This allows managers to quickly establish follow-up funds, often much larger than the original. In the first half of 2006, 31 funds are already on the road seeking USD 18.2bn, compared to a total of USD 5.8bn raised in the Middle East-North Africa (MENA) countries between 1994 and 2005."
The size of individual funds is also growing. Last year the USD 500m Buy-Out fund by Abraaj Capital, one of the leading private equity firms in the region, was considered large. Abraaj Capital's latest offering tops USD 2bn, allowing the firm to join leaders such as Commercialbank, Dubai Islamic Bank/Dubai Ports World, Gulf One, and Global Investment House in offering billion dollar-plus funds. This trend mirrors recent developments in the U.S., where USD 6bn is no longer considered a very large fund and multi-partner, multi-billion dollar funds are increasingly common.
"We are seeing the use of more sophisticated limited partnership structures and a trend away from single closing corporate fund structures," Robert Varley, a partner in Walkers' Dubai office, said. "In addition, real estate funds -- which were prevalent not so long ago -- are being joined by more and more infrastructure, healthcare, telecommunications and high technology funds. Portfolio diversification has become a driver and local investors are no longer content to stick to the stock markets and real estate sectors."
With the increasing sophistication of local products and the increase in partnering with global as well as local players such as Abraaj Capital's work with Deutsche Bank and Ithmaar Bank to launch their Shari'ah-compliant alternative assets fund Walkers predicts a greater role for the GCC in years to come. The geographical focus is also changing.
"A few years ago the market was dominated by ijara-structured funds -- funds using leasing strategies -- targeting assets in the US and Europe. Political concerns and changing yields saw a period of concentration on the GCC markets, but now we are seeing a new and growing trend for investment in other MENA economies, as those countries embark on the process of deregulation," Mr. Varley continued. "We expect to see a significant growth in the number of funds investing in Pakistan and India. But local institutions play to their strengths. Only a few high-profile funds are going for global deals at present."
There is also great interest in the region from outside investors, suggesting that outside players will continue to partner with local institutions to produce Islamic products, and Islamic banks that enjoy a strong reputation in other sectors will look to redeploy their expertise in private equity, making even more capital available.