October 9, 2009 / 7:59 PM / 10 years ago

PE bigwigs meeting in Dubai, raising money a focus

NEW YORK (Reuters) - As the top dogs of private equity gather in Dubai next week for one of the industry’s biggest events, the priority will be raising and retaining money from investors in the Middle East rather than spending it in the region.

Just three investments have been made in the Middle East by private equity firms from outside the region so far this year, according to data from Thomson Reuters, and the aggregate value of those is negligible.

That’s a stark contrast from the previous four years when there was a total $4.8 billion invested.

Still, the amount invested by Middle East sovereign wealth funds in private equity funds remains high, with 69 percent of SWFs in Middle East and North Africa invested in the asset class in October, according to a report from London-based research firm Preqin, up from a 63 percent estimate in April.

On Monday, private equity chiefs from the world’s biggest firms, such as Blackstone Group’s (BX.N) Stephen Schwarzman, Carlyle Group’s CYL.UL David Rubenstein and Providence Equity Partners’ Jonathan Nelson, convene in Dubai for one of the major industry conferences of the year, Super Return Middle East.

They’ll join leaders of funds and banks such as Cairo-based private equity firm Citadel Capital; Saudi-based private equity firm Swicorp and Dubai-based Abraaj Capital.

Looking for new investments in a region hard hit by the global economic downturn after a boom fueled by higher oil prices isn’t a priority. Much more time will likely be spent appealing for new funds and trying to keep existing investors happy.

“The primary focus of most of the U.S. groups in the Middle East has been on the region as a source of capital,” said Josh Lerner, a Harvard Business School professor specializing in private equity. “It may change, but I don’t think it will change overnight.”

Still, promising high returns on new buyout funds has become a tougher sell for U.S. and European private equity shops, which have taken writedowns on their portfolios and seen some failures of companies they own. Attracting money for new funds may not be as easy as it once was.

“The last year has not been a pretty one for many of the sovereign funds,” said Lerner, who is speaking at the conference. “My guess is that we’ll probably see more focus on more emerging economies as opposed to necessarily investing in the U.S. or Western Europe — driven partially by anticipation of where the most attractive opportunities are likely to be.”

As well as having sovereign wealth funds as investors in their funds, some private equity firms have them as stakeholders. Abu Dhabi bought a $1.35 billion stake in Carlyle Group in September 2007, and Blackstone has China Investment Corp as an investor.

STILL CASH RICH

But despite continued strong interest caution reigns, and the types of investments are changing.

One U.S. investor, who declined to be named, said very few SWFs in the Gulf emirates are making commitments to private equity funds currently.

That investor, however, said the attitude is more positive for making direct private equity investments and co-investing alongside PE funds, which gives them the ability to conduct due diligence on assets.

They also have the ability to buy buyout fund assets at a discount on the secondary market — where investors sell their stakes in private equity funds.

Part of the reason for less investment is that there’s less fundraising by the major private equity funds. If private equity firms can hold off launching a new fund in this environment, they will.

Still, SWFs have been deploying cash into deals, with $22.5 billion invested worldwide this year so far, according to Thomson Reuters data. That includes large deals such as Qatar buying a 10 percent voting stake in Porsche plus most of the German sports car maker’s cash-settled options for a stake in Volkswagen (VOWG.DE).

And the Middle East as a possible target for private equity investment is expected to pick up again by the year-end, as banks become more willing to lend and local governments pour money into transport, infrastructure and healthcare projects.

A recent survey by Deloitte and Arbor Square showed that more than 47 percent of Middle Eastern and North African private equity firms surveyed expect activity to increase in the next 12 months.

There is also interest from foreign investors. French bank BNP Paribas (BNPP.PA) said in September it may raise up to $300 million for a private equity fund active in the Gulf Arab region to tap opportunities arising from the financial crisis.

Lerner said the big lesson for the region is that it isn’t insulated from the rest of the world.

“If you think about the Super Return conference a year ago, there was still a sense of confidence that the Mideast was decoupled from the rest of the world — that the downturn wouldn’t affect them — and we all learnt a hard lesson about the extent to which things are coupled,” he said.

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