Andy Rosenbaum is a freelance journalist based in the UK.
Governments in the Middle East have recently removed regulatory obstacles to stock exchange investment, creating a crucial opening for private equity in the region. Andy Rosenbaum looks at how family businesses in the region can benefit
For Faisal Bin Juma Belhoul, executive vice-chairman of his family's Dubai-based Belhoul Group Holdings, private equity now has a solid footprint in the Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Saudi Arabia, Qatar, Oman and the UAE, and is rapidly expanding to the rest of the Middle East.
Belhoul Group was started in 1969 by Mr Bin Juma Belhoul's father, Dr Juma Khalfan Belhoul, an internationally educated doctor. Dr Belhoul began his business in healthcare and real estate finance, but diversified rapidly into other industries, including manufacturing, retail and construction. Dr Belhoul's ambition was to create a family business with diversified asset management that was fully adherent to Islamic practices and humanitarian principles.
Gateway to expansion
Seeking to expand internationally with professional asset management, Belhoul Group turned to private equity three years ago when Mr Faisal Bin Juma Belhoul created Ithmar Capital. As Mr Bin Juma Belhoul explains, the move to private equity resolved a number of succession issues for the family, provided capital for expansion and ensured that the level of professional management at the group would remain at the highest level.
The experience of the Belhoul family group is representative of many companies in the Middle East. According to the Gulf Venture Capital Association (GVCA), Gulf-based private equity groups are forecast to lift their assets under management to a record of more than $13 billion by the end of the year as the nascent local industry attracts increased capital flow from wealthy Arab investors.
Outside the Gulf the pace is slower, largely due to regulatory obstacles. These are expected to change soon in countries such as Egypt where the process of liberal reform is well under way.
In the Gulf, local firms are seeking to capitalise on the popularity of private equity at a time when Gulf investors have unprecedented amounts of capital to deploy, the GVCA says. Some Gulf-based investors expect the amount of capital flowing into local private equity funds to treble in the next five years. Since the start of last year close to $5 billion has been raised by 28 Gulf private equity groups, according to research from the GVCA, and there is $2,500 billion of investable wealth in the GCC.
Investment by local firms has been driven by structural changes in the GCC, including more sophisticated legal and capital markets and more developed economies, which have given private equity a greater role. There were 18 investments announced in the first half of the year, and the GVCA estimates up to a further 20 could be completed by the year end.
The GVCA estimates that 2006 total investment will easily exceed the $900 million deployed in 2005. There is a high level of liquidity in the region and, unusually, a significant portion of this capital would prefer to stay there. The development of businesses in the private sector and growth of the capital markets for financing and exit purposes means there is a real opportunity for private equity investors, according to the GVCA. Equally important for private equity in the region is access to an exit strategy: private equity firms like to maintain an investment for five years at the most, and then to recoup their returns. Stock exchanges operating with international standards are required for such exit strategies, and fortunately, since 2004, bourses in the Gulf have undergone considerable development, bringing them up to compliance with exchanges in Europe and Asia. Governments in the Middle East have, in general, removed regulatory and fiscal obstacles to stock exchange investment and this has created a crucial opening for private equity in the region.
How local family business can benefit
One area of opportunity is family business. Family businesses make up about 50% of all companies in the Middle East. But family business in the Middle East is changing, and perhaps that is why the opportunity for private equity is so considerable today.
As Raphael Amit, a professor of entrepreneurship at the Wharton School of Management and an expert on family businesses worldwide, points out, family businesses in the Middle East tend to differ from those of other regions.
First, these businesses are only a few decades old, in general, and so they are often in the hands of the first generation, the founding generation. These families are, however, usually cash-rich, and so they often move into several lines of business. The availability of capital and opportunities encourage investment outside of the family's core specialty.
In addition, the typical Middle Eastern family business is generally not involved in the day-to-day running of the businesses it owns. Middle Eastern family businesses tend to use professional managers on a wider scale than similar businesses in Europe. The family selects the most suitable manager to run their businesses, and acts more as an asset manager.
As the first generation of the family prepares to hand over its businesses to the second one, the need for increased reliance on professional managers becomes clear, and this is where an opportunity arises for private equity. There can be no simpler path to broaden professional management of these family businesses than by allowing a private investment firm a hand in running the business.
Clearly, as Mr Bin Juma Belhoul points out, it is not so much the need for increased capital behind these buyouts, but the fact that allowing private equity into the business helps to ensure its survival. A family business in the Gulf region often behaves more as a family office, an organisation developed to manage and support the financial needs and resources of a family group. The family office would typically cover business management, wealth organisation, investments, asset allocation, trusteeships and family management.
Private equity in the Middle East is at its outset. The GVCA dates only from 2005 and there are still only a handful of private equity firms active in the region, although many international firms, in particular from Asia, are moving in to win a piece of the action.
One issue that will clearly be central to the future of the industry is performance. As these private equity players begin to offer funds, they will also compete with such funds on the global markets. It is very early to tell whether or not returns from the Middle East, despite all the favourable statistics, will justify international trading in these funds.
But with so much potential for growth, it is clear that
private equity in the Middle East is here to stay.