Dealtalk: Middle East PE funds seek strategic buyers, SWFs

DUBAI Mon Oct 3, 2011 7:32am EDT

The sculpture of a falcon is seen in front of the Dubai International Financial Exchange building (2nd L) in Dubai, December 16, 2009. REUTERS/Mosab Omar

The sculpture of a falcon is seen in front of the Dubai International Financial Exchange building (2nd L) in Dubai, December 16, 2009.

Credit: Reuters/Mosab Omar

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DUBAI (Reuters) - Private equity funds in the Middle East and North Africa, under increasing pressure to produce returns for investors, have strategic buyers, including sovereign wealth funds, looming larger on their deal radar.

PE funds have been hurt by a dearth of options to exit their investments. While initial public offerings are a preferred route globally, the market has been all but shut in the region -- bourses like Dubai had not seen an IPO in over three years.

Trade sales and seeking strategic buyers for some of the assets will be the preferred choice for most PE funds in the current market, analysts say.

"Sales to sovereign wealth funds, who are increasingly allocating more to direct investments or to a strategic buyer is the clearest route available. It is, in fact, the only choice PE funds have," said Antoine Drean, chairman of Triago, a company that helps private equity firms raise capital.

Easy leverage and soaring stock markets lured budding PE funds to the region on an investment spree during the boom period but very few have managed to exit profitably.

Funds are now under increasing pressure to generate returns for their limited partners (LPs) -- investors who typically commit capital to such funds -- who have waited much longer than average for their investment to show a return.

"The LPs would definitely be thinking that it is time to get something out of their investments. Most of the PE investments in the region are close to their exit periods but exits are tough for a variety of reasons," Drean said.

Some 218 investments were made by these regional PE funds from 2004-09, out of which only 14 have reached exit, according to a report from the Wharton School of the University of Pennsylvania and Saudi-based PE firm Amwal AlKhaleej, in a sign of the extent of investments awaiting an exit route.

Abu Dhabi-based Gulf Capital plans to exit two more investments in 2012, including its stake in Gulf Marine Services, its chief executive told Reuters early this month.

The company and Amwal AlKhaleej sold their stakes in Maritime Industrial Services to Lamprell (LAM.L) in a $336 million deal in July.

Dubai-based private equity firm Abraaj Capital has been trying to sell its stake in Turkish hospital group Acibadem ACIBD.IS in a deal that could be worth at least $500 million.

LIMITED OPTIONS

"Given the prevailing uncertainty and volatility in the equity capital markets, exits via regional IPOs are looking increasingly more difficult," said Omar Mehanna, head of MENA advisory at HSBC (HSBA.L) in Dubai.

Egyptian group Citadel Capital (CCAP.CA) has postponed plans for an IPO of its electricity and natural gas distributor Taqa Arabia several times on valuation grounds.

Adding to sellers' problems, financing for private equity buyouts has contracted sharply, meaning chances of finding another private equity buyer under current market conditions is pretty bleak.

Dubai International Capital, the private equity arm of investment arm Dubai Holding, sold hotel operator Ishraq Dubai to diversified firm Almulla Group on Sunday, in at least its third such sale to a strategic buyer this year.

Funds are unlikely to resort to fire sales of their assets despite the pressure to generate returns, Drean said.

"While you are unlikely to see fire sales you are likely to see a lot of general partners with mediocre assets sell them off gradually in exchange for poor investor returns. Those GPs will not raise new funds and will disappear."

(Editing by Dan Lalor)

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