Amid the vigorous growth of the global private equity industry over the past few years, one of the most striking developments is the emergence of private equity as a significant asset class in the Middle East. It is a trend that has already left its mark on the Channel Islands Stock Exchange, which has listed a number of Egyptian funds and has as a major issuer the USD2.1bn Concord Group, the leading manager of Egyptian securities worldwide.
Rising oil prices since the turn of the century and the growth of public and private wealth in the region has focused the attention of international investors on the Middle East and prompted capital inflows via direct investment, mutual funds, private equity and hedge funds, while institutions based in the region have been expanding their range of products to meet demand from domestic and regional investors.
Until recently the growth of private equity investment in the Middle East has been relatively low-key because many managers focusing on the region, both those based within it and international private equity houses, have been in the process of raising and investing their first dedicated funds. The true potential of the region to outperform investments elsewhere in the world will only become apparent as general partners start to exit their earliest investments over the next few years.
International private equity firms active in the Middle East face a host of challenges, including lack of transparency in some markets and cultural barriers to private equity investment on the part of business owners and employees that to a large extent have been overcome in Europe and North America. In addition, the recent focus on highly leveraged investments and financial engineering prevalent in the private equity industry elsewhere is less common in the Middle East - which may preserve the industry there from much of the impact of the current credit crunch.
Various changes in the way private equity funds approach the region are likely as the market matures and develops. Whereas in the past a generalist investment focus across the Levant, the Gulf region and North Africa has been common, managers are set to respond to the growth of investment opportunities by offering funds that target particular economic sectors or focused geographical regions.
Meanwhile Middle East private equity specialists expect portfolio company exits to be driven by less stock market IPOs and more by sales to regional or international strategic investors. At the same time, they forecast that investment horizons will grow and general partners will be expected to play a greater role in generating returns through managerial and operational improvements in underlying portfolio companies.
These developments are likely to bring new opportunities to the CISX as an institution with extensive experience of working with the private equity industry in the Middle East, and that can offer the full listing required by many institutional investors. The exchange offers issuers the ability to raise capital and offers secondary market liquidity for a number of funds, thanks to an infrastructure that includes market-makers, an order book and an electronic settlement system.
Today the CISX has more than 2,600 listed securities including a wide range of alternative funds and has built up particular expertise in the listing of private equity debt. It also benefits from its positioning in a time zone offering overlap with the Middle East and North America, and its proximity to Europe while remaining outside the constraints of the European Union's legal framework.
Tamara Menteshvili is chief executive of the Channel Islands Stock Exchange