At the recent annual gathering of the Gulf Venture Capital Association in March - a who’s who of investors with interests in finding the next stellar start-up and leading entrepreneurs from the GCC gathered to network and discuss the growing prominence of Venture Capital and Private Equity in the region.
Venture Capital seems to be the likely buzz word in prominent business circles and is occupying center stage despite sub-prime concerns leading to financial turmoil worldwide. Where financial institutions are reluctant in lending transactions on a peer-to-peer basis, central banks/governments are skeptical in investments and the western economic scenario looks sluggish, the outlook for private equity in the Middle East and North Africa region (MENA) still seems lustrous. 
Image source: www.gvca2008.com Gulf Venture Capital Association (GVCA) – The Mission behind the Name
The Gulf Venture Capital Association (GVCA), a non-profit organization, was created in 2004, to foster the growth of Venture Capital and Private Equity Industry in the GCC/MENA region. It has established a platform for this less-comprehended industry in the MENA region, where professionals are invited, dialogue is exchanged, common initiatives are pursued and useful insights are disseminated, yielding a prominent network of venture capital/private equity professionals based in the Gulf region. The GVCA has come a long way since its inception. At the junction of their first meeting in 2004, according to GVCA figures, the ceiling of individual private equity investments touched a mere $50 million annually while the total funds under management were $3 billion. By 2006 however, this figure sprang to $13 billion with individual investments tipping $1 billion. However, off the $4.8 billion private equity raised in 2006, only 9% went to venture capital.
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" Off the $4.8 billion private equity raised in 2006, only 9% went to venture capital. |
Gulf Venture Capital 2008 – 2nd Annual Forum
"Empowering Entrepreneurship & Innovation"
The GVCA is regularly covered by Reuters for its efforts in creating workshops, conferences, training programs and forums to disseminate the knowledge gleaned from professionals worldwide. The annual event which stole the spotlight in March 2008 was the 2nd Gulf Venture Capital Association Forum, jointly organized by the Centennial Funds, a non-profit organization based in Saudi Arabia and Gulf Venture Capital Association. This event was further promoted/ sponsored by top market players such as Saudi Aramco, Saudi Research & Marketing Group, Arab Business Angel Network (ABAN), Malaz Capital, Zawya and others. With the World Bank's "Doing business 2008" report touting Saudi Arabia as #1 nation in the Middle East, with respect to ease of doing business, there could be no better place than Riyadh, the heart of the region's largest growing market to conduct the prestigious annual forum.
Following are some of the keyinsights gleaned from exclusive presentations made by internationally and regionally acclaimed professionals and capital specialists at the event. Trends in Private Equity and Venture Capital Industry – MENA Region Focus was paid largely to the trends of the private equity sector in the MENA Region. In a presentation by the CEO of Zawya, Ihsan Jawad and Imad Ghandour, Executive Director, Gulf Capital, numerous major trends were highlighted vis-à-vis private equity investments made in the region.
They highlighted the fact that more money is being raised but fund-raising conditions were growing adverse whereas a lot of infrastructure funds were available along with some buyout funds while there was a dearth of venture capital funds. Though venture capital funds are a subset of the private equity class, they represent investments of moderate to high risk appetite in start-up and early stage companies whereas private equity funds, covering various nature of investments such as buyouts, hedge funds, mezzanine investments etc, focus more on the secondary and maturity stages of a company's business lifecycle, fostering growth and expansion. Sources at the Gulf Venture Capital Association confirmed the same trend. Venture Capital deals did not materialize in the region with the same propensity as other PE investments. As per GVCA, total private equity raised in 2006 tipped $4.8 billion but only 9% went to venture capital.
Investments in real estate, stock markets and buyouts at later stages of a corporate lifecycle could be possible speculative reasons for this trend.  |
Venture Capital funds are a subset of the private equity class. They represent investments of moderate to high risk appetite in start-up and early stage companies.
Private Equity funds cover investments such as buyouts, hedge funds, mezzanine investments etc, focus more on the secondary and maturity stages of a company's business lifecycle, fostering growth and expansion. Image Source: www.gvca2008.com |
Another noticeable pattern was the recent establishment of major Private Equity firms in the region. The most prominent PE firms warranting a special mention include Abraaj Capital, Global Investment House, Injazat Capital, Anwal Al Khaleej Commercial Investment Company, NBK Capital and HSBC Private Equity Middle East. Also, bigger deals were the norm of the market where as the numbers of deals were dwindling. In 2007, two investments crossed the $ 500 million threshold in the MENA Region, both executed by Abraaj Capital.
Further on, major investments were visibly made in growth capital with capital investment sectors attracting more funds than consumer sectors. Most attractive trend captured lately has been the focus of Private equity investments with respect to a geographical split. Egypt seemed to be leading the MENA region with high PE activity touching $2.3 billion in the last decade, closely followed by UAE and Saudi Arabia. Egypt was also the recipient of the first ever billion dollar deal in 2007. Abraaj Capital administered the $1.4 billion investment in Egyptian Fertilizers Company, making it the biggest PE investment in the MENA region so far.
Historically, the UAE has been the preferred location for Private Equity investments. The country in 2007 surpassed the billion dollar mark in investments, touting it as a lucrative place for international investments and long-term sustainability. Saudi Arabia seems to be picking up the pace as well, with investments touching $568 million in 2007. With an inherent focus being made on the due diligence of investments, increased transparency of the funds and administration of corporate governance models, PE investments in the MENA region are gaining momentum, structure and growth. Rami Bazzi, Principal – Private Equity, Injazat Capital, commented, "Private Equity is booming in MENA. It is developing at a faster pace than anywhere in the world. While the industry progresses from fund raising to deployment and investment stages, investment managers will experience a new set of challenges."
Sector Split of PE Investments in the last decade | Sector | Percentage | | Financial Services | 16% | | Basic Materials |
23% | | Transport | 11% | | Oil and Gas | 10% | | Consumer Goods | 7% | | Healthcare | 9% | | Construction | 7% |
Source: GVCA annual report 2007 |
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% of Private Equity Investments in the last decade (Geographical split) | Country | % of Private Equity | | Egypt | 37% | | UAE | 19% | | Saudi Arabia | 15% | | Jordan |
6% | | Bahrain | 2% | | Others | 21% |
Source: GVCA annual report 2007 |
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Sovereign Wealth Funds – What does the future behold? In the 2007 annual report issued by Gulf Venture Capital Association, Sovereign Wealth funds were given a significant mention. These funds, though in existence since the 1970s, have been under veiled controversy lately.
Sovereign wealth funds, byproducts of cumulative current account/trade surpluses and skyrocketing oil prices were historically conservative in nature, investing in low yield/low risk investments such as government bonds, bills, deposits, etc. However today, the focus has changed to investments being made in various sectors, mainly financial, to dwindle reliance on oil and gas and diversify the SWF churning economies. According to a Citigroup report, the total sovereign funds worldwide account for $ 3 trillion with UAE grabbing a major share of $ 1 trillion, inclusive of Abu Dhabi, holding a major chunk of $ 875 billion. According to International Monetary Fund, the sovereign wealth funds would increase to between $ 6 trillion and $ 10 trillion by 2013.
Major investment authorities managing these wealth funds in the Gulf region include Abu Dhabi Investment Authority (ADIA), Abu Dhabi Investment Council (ADIC), Ras Al Khaimah Investment Authority (RAKIA), Qatar Investment Authority (QIA), Kuwait Investment Authority (KIA) and others. The financial sector has leveraged the most from the MENA/GCC based SWFs with major investments made in financial institutions, money management firms & brokers. In 2007, ADIA invested $ 7.5 billion in Citigroup to diffuse the sub-prime mortgage crisis engulfing the bank, QIA held a 20% stake in the London Stock Exchange, KIA injected $ 3 billion in Citibank and $ 2 billion in Merrill Lynch. Besides these sizeable investments, other investment authorities made significant contributions too.
With a promising 2007, SWFs are going strong in 2008. Recently, Abu Dhabi government-owned International Petroleum Investment Company (IPIC) & Qatar Investment Authority (QIA) announced plans to invest $2 billion in a new fund for global acquisitions. IPIC and QIA will each invest $1 billion in the fund. "We plan to invest in all sectors, including oil and petrochemicals. We will look at any opportunities where we can make money and add value. That could be anywhere - the Middle East, Asia, Africa, Europe and the United States," Khadem Al Qubaisi, the Managing Director of IPIC said. In terms of compliance and regulatory footage, what 2008 beholds for SWFs is largely uncertain, owing to the growing global speculation vis-à-vis the usage of these funds and stake of investment authorities in western targets of strategic importance. IMF endorsed the initiative of setting out clear guidelines on the governance, administration, usage & viability of SWFs.
IMF director of Monetary and Capital Markets, Jaime Caruana commented "We think a better understanding of the role and practices of sovereign wealth funds and development of this set of best practices would be mutually beneficial for all the parties." GVCA Survey on Impact of Private Equity and Venture Capital on PE backed Firms The annual report warranted a special note on the 2nd annual regional survey conducted to gauge the impact of Private Equity/Venture Capital investments on the development and growth of PE backed companies. Primary source of information for the 2007 survey was direct questioning of top management officials of 18 companies in the GCC region, which received these investments. A few noticeable trends/highlights identified during the survey were - Major reasons for companies demanding venture capital investment was the need for surplus capital for future growth.
- Most commonly identified hurdles in such investment deals are valuation, controlling stakes of board of directors and time frame for due diligence.
- Majority of the companies feel that Issuance of Initial Public Offerings (IPO) is the preferred strategy for exit.
- All the companies experienced increased net profitability after such investments.
GVCA – 2008 and beyond With the 2nd annual forum conducted successfully, GVCA has a mission of moving ahead in pursuit of a vibrant and booming Venture capital and private equity industry in the GCC and MENA region. Sustained deployment of funds in the region, development of successful exits, realization of modest returns and administration of regulatory and corporate governance are challenges that private equity players may have to face in the coming years.
GVCA, through its relentless efforts is committed in promoting all major stakeholders and players of the emerging MENA region for the success and long-term growth of this industry. | Key Learnings: |  |
Gulf Venture Capital Association (GVCA), operating out of Bahrain, is at the helm of promoting the Venture Capital & Private Equity Industry in the MENA region. With its 2nd regional annual forum underway, it is aggressively aiming at conducting workshops, forums, programs & training sessions in future to disseminate technical knowledge and strategic expertise to the major investors/players of the GCC/MENA region. | | | Private Equity and its subset, Venture Capital investments are fast gaining emergence in the GULF Region, due to its inherent use in entrepreneurship, technology and growth projects. Private Equity has seen phenomenal growth in the MENA region due to sturdy economic fundamentals and surging oil prices, recording raised cumulative funds in 2007 to $13.4 billion. | |
| Sovereign Wealth Funds, totaling $3 trillion worldwide are major source of investments in the international financial scenario of today. With a projected growth trajectory of $6 - $ 10 trillion by 2013 as per IMF, these funds are a result of account surpluses and booming economies of developing nations, thus making such SWF churning countries, key engines of the world economy. |
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