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The insider's guide to private equity in the Middle East

6 influential GPs share their outlook for private equity in 2013 and beyond

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What's inside?
In the run-up to our Private Equity World Middle East conference in 2013, I spoke to some of the most influential GPs working in the MENA region, to find out where they see the biggest opportunities over the next 12 months. Here you'll find interviews with 6 industry experts and learn how they see the changing geo-political landscape affecting the Middle East and North Africa's private equity industry. You'll discover their hottest sectors and geographies for 2013 and beyond and find out why evolving regulatory processes are making MENA investment more attractive. This is the first collection of a number of interviews that we'll be conducting across hedge funds, private equity and asset allocation, in the run up to the conferences in March 2013. Keep up-to-date with the Total Asset blog to make sure you don't miss out on any of the upcoming interviews. There are some interesting responses and I hope you find the content informative and useful!
Skye Ferguson Conference Manager Private Equity World Middle East 2013

+971 4 440 2544 skye.ferguson@terrapinn.com

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We asked...
Matteo Stefanel Abraaj Capital Jens Yahya Zimmermann New Silk Route Growth Capital Matteo Stefanel is a Senior Partner at Abraaj Capital and Co-Head of Large Cap Private Equity. The Abraaj Capital Group has raised over US$ 8 billion and distributed circa US$ 3.5 billion to investors. The group currently manages approximately US$ 7.5 billion across 25 sector and country-specific funds. Fadi Abrid Amwal Al Khaleej As Partner and Managing Director of New Silk Route Growth Capital, Jens has more than 2 decades of private equity experience and a track record of building successful businesses internationally. New Silk Route is a leading growth capital firm founded with $1.4 billion under management Kees F.W. Bruggen Ritz Banc

Fadi Arbid is the Chief Executive Officer of Amwal AlKhaleej, based in the firms headquarter in Riyadh. Amwal AlKhaleej is a leading private equity firm in the Middle East & North Africa region.

Kees Bruggen is Co-Founder of Ritz Banc and a member of the Investment Committee responsible for Acquisitions. Headquartered in Washington DC, the private equity firm has more than $300 million in assets under management and focuses on international capital. Nasr El Hage Jnr Ritz Banc

Shailesh Dash Al Masah Capital

Under the leadership of CEO and Founder Shailesh Dash, the private equity team at Global Investment House reached more than US$3 billion in assets under management in less than 5 years.

Nasr El Hage is Ritz Bancs Co-Founder and Managing Director. Headquartered in Washington DC, the private equity firm has more than $300 million in assets under management and focuses on international capital.

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Turkey in my opinion is an all round phenomenal performer

Matteo Stefanel Senior Partner and Co-Head of Large Cap Private Equity The Abraaj Capital Group Which sectors will offer the best returns in 2013? Its our firm belief that one of the main factors driving growth in the Middle East and also Asia and Africa is demographics. You have a young growing population, many of them under the age of 25, and consumer behavior and needs are increasingly going to shape growth and sectoral choice. In particular, we see growth in sectors like education, healthcare and FMCG. Consumer spending is on the rise, there is a greater velocity of money in the economy, a greater number of credit cards, for example, and that spending manifests itself in sectors like education and healthcare. However, this is a trend that is not limited to the Middle East but is also evident in the pattern of consumer behavior in markets such as Africa as well trends that we have capitalized on and continue to do so. A sector that will continue to have dominance in the Middle East is the hydrocarbon sector. We continue to see exciting opportunities in oil and gas services and in fact have made 2 investments in the sector this year. The advent of new technologies and greater emphasis on R&D is characterizing the opportunities in this sector, which has been made viable in part by the rise in oil prices. Which geographies are set to offer potential in 2013? This is rather difficult to predict because the Middle East for example has undergone volatility that is not only high but also unpredictable. However, if we assume the current situation stays the same, I think Morocco is going to be extremely interesting given the role that it plays as a large country, with advanced institutions and with a very good regulatory system. The second role Morocco plays is as a gate-way to sub-Saharan Africa, especially the French speaking part. In many ways it is a translation device and I dont mean that linguistically, but rather cultural translation from the Middle East and North Africa into the Sub-Saharan African space and way of doing business. Egypt is another country that is impossible to ignore. We think that within Egypt those sectors which are mostly export and US dollar based, will continue to benefit greatly. As you know we are invested in fertilizers and construction within Egypt which has proven to be a very good investment. But we are also present in the healthcare sector which continues to be very attractive within Egypt, largely due to the sheer size of the population which is almost 80 million people. The Abraaj Group has the largest network of diagnostic laboratories in Egypt, which have performed really well throughout the times of recent volatility and it is easy to understand why. Ultimately if a service is a basic service that people need, they will spend money on it regardless of the volatility. And the same thing goes for FMCG. So in Egypt, I would emphasize that the focus on US dollar denominated and/ or macro or demographic dependent sectors will continue to enjoy high levels of growth. Turkey in my opinion is an all round phenomenal performer today. There is a tiny danger of overheating, but all in all we are very bullish about Turkey and we see a lot of opportunity. However, it is important to remember that up until today Turkey has meant Istanbul to investors, but the focus is now shifting to Anatolia which has a population that is five times the size of Istanbul. Saudi Arabia continues to remain an extremely interesting investment destination. It is one that we have historically focused, and not just for oil and gas services, but also for demographically dependent sectors. The UAE remains the business hub for the Middle East. The UAE is such a phenomenally successful business destination, it is truly a hub for the region and beyond. So the UAE will remain very interesting but I would say when you buy a business base in UAE, it usually has the potential to grow into a dominant regional player. What are your expectations for Private Equity fund performance over the next 12 months? Compared to the rest of growth markets and again I stress this contextualization of the Middle East within overall growth markets. If you take Middle East and North Africa, I think especially the Gulf and Turkey, are significantly more sophisticated and mature private equity markets. You have business families and a business culture that spans decades and sometimes centuries, and private equity players especially in Turkey and Dubai, that have invested for a length of time. I would say that the private equity market has gone through a period of reorganization. Some of the weaker players have disappeared, some of the start ups have been either absorbed or re-built, so you have quite a narrow market, 2-3 players in the Middle East, maybe more in Turkey, but thats about it.

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How are macroeconomic trends set to shape the regional private equity industry in 2013? This goes back to what I was saying about how we select sectors. The selection of sectors must be based on macroeconomic and demographic trends. As a result, sectors that benefit from the young population that is becoming wealthier and employed, are the sectors of the future. 50% of the population of the Middle East is currently below the age of 25. Thats astounding; these young people are starting to get jobs and become increasingly aspirational. This enables you to see how the choice of sectors is not really a choice at all, its obvious. You have to invest in those sectors which will benefit from providing this increasing population. What they want is infrastructure, schools, education, healthcare and consumption and ultimately, this is what you need to provide.

How is the changing geo-political landscape in the MENA region affecting the regional private equity industry now? I think we have observed these changes from a very privileged observatory. As private equity we are mid to long term investors and what we are seeing today are really trends that were bound to happen, but the only uncertainty we had was when they were going to happen. That uncertainty has been removed and we are now moving into the transformational stage for the region. As a long-term investor we are quite unfazed by the short term volatility that is a consequence of these events.

Key Takeaways
Top MENA picks: Morocco, Egypt, Turkey and the UAE Hot sectors: Education, healthcare, FMCG and oil and gas services Outlook: Uncertainty has been removed and we are now moving into the transformational stage for the region.

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"You have to focus on the deep economies"

Fadi Abrid CEO Amwal Al Khaleej It is important to note however, that you cannot consider geography in isolation, without also looking at the sectors you are targeting. Whats your outlook for private equity performance in the MENA region in 2013? Generally, my outlook is positive, although I am slightly skeptical about the volatility of the public markets in Europe and the West which will in turn affect the MENA region. Eventually, if these markets are hit strongly, the private equity market will freeze, as it did in 2008. Until now we have still been suffering the consequences of 2008 and to an extent the Arab Spring. Weve only seen 3 or 4 deals happening in private equity in past 2 years. If the markets remain as volatile as they are today - if the European bond crisis remains unsettled, China continues to go through slowdown and US GDP doesnt pick up as fast as people want it to - then this will create unsettled ground for private equity. It will affect MENA public markets, as well as private equity investors sentiment. How is the changing geo-political landscape in the MENA region affecting the regional private equity industry? You can expect the future to be brighter; from a mid-long term perspective we are much better off. The changing geo-political landscape is rewarding in the long term for the investment environment and economic stability, both of which are cardinal for private equity. The Arab spring has been a changing paradigm for everyone, but in the midterm it will be very rewarding. How are evolving regulatory processes making MENA investment more attractive? You cannot look at the regulatory environment in the Middle East as being homogeneous. For example, a number of countries processes are particularly rudimentary and primitive, whilst countries such as KSA and Egypt have extremely sophisticated regulatory environments. In Saudi Arabia for example, regulatory changes have stimulated investment in the public market, opening up sectors and increasing foreign ownership. There is greater regulation of IPO markets, which means greater clarity; the guidelines in place leave less room for grey areas. In the UAE, offshore regulation is comprehensive and very positive. It fosters foreign investment, through to ownership and legal protection, whereas the DFM and ADFM onshore capital market rules and regulations are slightly more challenging. Each country has its ups and downs with regard to legal regulatory flows. The speed is twofold and country dependent. Saudi capital markets are extremely advanced, but the countrys legal sophistication is relatively poor. Will that change? Yes. On the capital markets side there is very little to improve, Saudi has done a great job, on the legal side theres still a lot to improve. Conversely, in the UAE the legal side is good, but capital markets are relatively poor.

Which geographies and sectors are set to offer potential in 2013? From a country perspective, you have to focus on the deep economies within the Middle East & North Africa. Looking at the MENA region, deep economies are those which have: a) A strong population b) Strong growth c) Regulation & reforms I think that Saudi Arabia ticks all these boxes. There is very strong growth, a huge demographic and a young population which is growing very quickly, plus weve recently seen a lot of reforms. Secondly, Egypt; the country is less reliant on petro chemical resources and more focused on agricultural resources than KSA. Egypt has the advantage of being geographically positioned as a hub between Europe and the Middle East and the country also has a very sizable population, with a lot of skilled labor. Looking back towards the GCC and specifically the UAE, the specific sectors I believe will offer potential in 2013 are retail, oil and gas services, and hospitality and leisure.

Key Takeaways
Top MENA picks: Saudi Arabia and Egypt Hot sectors: Retail, oil and gas services, and hospitality and leisure Outlook: The changing geo-political landscape is rewarding in the long term for the investment environment and economic stability

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"We're bullish about education, healthcare and food"

Shailesh Dash CEO & Founder Al Masah Capital a significant increase in activity. This is both in terms of exits, and in terms of new investments and fund raising. Internationally we have seen the IPO market revive. In the MENA region there have not been so many IPOs, but more trade deals. We have seen many more people exiting investments to different trades. Consequently there has been an increase in activity in the education and healthcare spaces. These 2 sectors in particular have attracted a lot of attention in the Middle East and North Africa, resulting in increased activity. How are macroeconomic trends set to shape the regional private equity industry in 2013? I think on the macro side, primarily because of the Arab spring, governments have been very active in helping to develop SMEs, particularly where there are employment opportunities for local population. As a result there will be a significant boom in funds being invested into SMEs. On the other side, economies have stabilized to some extent in the United States, Asia and Europe. Oil prices have remained high and government spending has remained at a high level. As a result, there has been some stabilization and growth, particularly in the economies of Saudi, the UAE, Qatar and Oman. People have started to invest the capital they have been holding on to over the last 3 or 4 years, when they didnt want to invest into risk capital and were holding out for bank deposits. Now, people are slowly starting to put their money back into real businesses. Healthcare, education and the food industry have always taken priority and as a result, this has kick-started private equity in the Middle East. How are evolving regulatory processes making MENA investment more attractive? The primary reasons for the success of private equity in any region are the laws of the country and the roots of exits, the secondary market, and liquidity in the market. I think both of these things - country law, as people are investing into private enterprises, and also the secondary market - have all been evolving and changing for the better in the MENA region. Its a continuous process, we are not there yet, but a lot of protection has now been introduced for shareholders in this region, such as the arbitration code. Capital markets have also seen a recovery and as a result weve seen a number of private transactions and some listings - in Oman and Saudi Arabia for example. There is a lot of talk about IPOs; I would say the markets are recovering slowly as the exit routes become clearer. As liquidity in the market increases, you will see a greater number of private equity investments. Also, as laws in this part of the world become stricter and give increased protection to the rights of the shareholders, investments will rise. Over the last 12 years, the regulatory environment has become more favorable to investors from other parts of the world. A lot still needs to be done, but it not a process that you would expect to happen overnight.

Which sectors will offer the best returns in 2013? We are bullish about 3 particular sectors in the Middle East and North Africa, as I think is the case in most parts of the world, depending on what stage of development the country is at. I believe education, healthcare and food are particularly attractive. Not specifically in this order, but these are my top 3. Al Masah Capital is particularly focused on developing these sectors in the MENA region. Which geographies are set to offer potential in 2013? At this point of time, the Gulf region offers particular potential, as the margins and the purchasing power are significantly higher than in other regions such as in North Africa and the Levant. However, as time goes by, because of the sheer number and the size, I would expand this to include North African countries. What are your expectations for private equity fund performance over the next 12 months? Firstly, when you look at private equity data from the MENA region, and also internationally, youll see that for the last 4 and a half years there has been

Key Takeaways
Top MENA picks: The gulf region Hot sectors: Education, healthcare and food Outlook: People have started to invest the capital they've been holding onto, this has kick started private equity in the Middle East

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"I'd pick Egypt as a country with good prospects"

Jens Yahya Zimmermann Partner & MD New Silk Route Growth Capital Education specifically is still a very fragmented market and there are very few large scale assets. If somebody wanted to deploy $100 million in one single deal in education, there are very few targets where this would be possible. Theres likely to be meaningful competition around these targets and a reasonably high entry valuation can result. I would refer to these 2 sectors as pure private equity. Infrastructure is also worth mentioning, and I would almost look at it as a sub-category of private equity. Whilst its a different animal, its a popular sector in a volatile environment, due to lower risk and easier-to-predict future cash flows. Infrastructure is another sector that could benefit from this new norm of volatility. Which geographies are set to offer potential in 2013? I think it can be misleading to think about MENA as one region, as the countries within it are so drastically different. They are probably one of the most diverse groups of countries in one region across the world, because of the huge discrepancies across the MENA region on two accounts: One is size of the population, with a mix of very small and very large countries, and the other one is obviously the GDP per capita. If we take a country like Egypt, the GDP per capita is fairly low and qualifies for supranational developmental mandate driven agencies such as the IFC and others that view it as a region that needs urgent support. On the other hand, if you go to countries like Qatar and the UAE or Bahrain or even Saudi Arabia, its a very different story. So thats what makes MENA a very special region and it can be dangerous to talk about it as one entity and generalize. I would say the high growth potential unsurprisingly lies in countries with lower GDP per capita, which, if things go well, are ready to make it to the next level in their economies, partially facilitated by Arab Spring type of movements. I would probably pick Egypt as a country with good prospects for investing in 2013. However, I am by no means saying this is a clear go ahead and that people should invest as much as they can. One needs to tread very carefully, but it is a country with the potential to do well. At the same time, it has the potential to face major difficulties in the future. We may see 5 or 10 years of anarchy with outcomes much worse than weve seen up until now, but there is definitely significant growth potential largely aided by the fairly sizable population and the potential in many sectors. What are you expectations for private equity fund performance over the next 12 months? We can look at this in 3 aspects 1) Fund raising - we will continue to see increased asset allocations to Emerging Markets, globally as well as in the region, simply because that is where the growth is and people obviously want exposure to growth and opportunities for significant returns. In the West, there is very little or zero growth, so that makes the Emerging Markets very attractive. Additionally, there is a time lag. I believe that many institutional investors like pension funds, family offices and high net worth Individuals will take 5 years or more to reach their Emerging Markets allocation which they set now. So if they say, for example, I want to increase my EM allocation from 5% to 10%, it will take a long process to put all the additional capital to work. The trend of increased Emerging Market allocations started some time ago and will continue - I dont see anything in the Western economies that is negatively affecting that. 2) Investment making private equity as an asset class is still at a fairly early stage in MENA as well as in the Emerging Markets in general. Therefore the maturing process will continue. Over the coming years, we should see more money being allocated to and invested in Emerging Markets through private equity every year, especially in markets with immature public markets. 3) Exits exits have been a big issue globally, including in Emerging Markets and MENA, and we are likely to see more over the next 12 months for a number of reasons. The level has been very low in 2012, 2011 and 2010, so its at a low base and all the investments that were made during 2012 and earlier, naturally, need to find an exit. So theres a large pipeline of investments looking for an exit. They will find an exit one way or another. Im not arguing that the IPO markets will be set on fire in 2013 but we will probably see more IPOs and we will see more trade sales, more strategic sales, and more sales from one financial investor to another.

Which sectors will offer the best returns in 2013? To set the backdrop to my answer: we will continue to witness a volatile financial world as we have seen in the last 4 years and this will in turn affect every market. When the financial crisis initially hit, a number of countries and regions believed they would be insulated from it, but I think its become very clear that every single region on this planet has been affected. The increase in volatility that weve seen over the past 4 years is likely to remain, and possibly even become the new normal. Against this background of increased and possibly permanent volatility, I would say that more defensive sectors such as education and healthcare will continue to remain attractive. However, these sectors have been attractive for some time now and entry valuations have risen. In education and healthcare in particularly, weve seen increased investor interest and more dollars going into the sector.

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How are macroeconomic trends set to shape the regional private equity industry in 2013? The outlook in economic growth between emerging and developed markets will continue to favor Emerging Markets. What that means for MENA is that the emerging economies within the region should benefit from that, subject to them being politically stable. The high GDP per capita economies within the GCC should also benefit from it because they are surrounded by Emerging Markets. As we all know, a place like Dubai is a huge benefactor of what goes on in the region, including being a benefactor from the Arab spring. People value a safe and secure place more than they did before the chaos broke out, so Dubai and the UAE in general have witnessed a meaningful influx of investment just off the back of that. Another thing that is important as part of the volatile environment is currencies. The respective currencies of the Emerging Markets in the region are going to fluctuate. Most private equity funds will continue to be raised is US dollars in the region. If you take US dollars and convert them into Egyptian pounds to invest in a company that generates business in Egypt, and you then sell that company in Egyptian pounds and convert it back to dollars, obviously the exchange rate is important. If the Egyptian pound halved against the dollar, you need to double the value of your company in local currency, just to get your money back. In a volatile environment, currencies tend to fluctuate more, so currency fluctuation is often a very significant economic contributor to the ultimate absolute return in US dollar.

Thirdly, highlighting the importance of the interdependence of the global economies, how the EU and the US, as separate zones, manage their domestic problems, is important. The US has been printing billions of dollars without the dollar depreciating, which is not what you would expect. What it would have depreciated against are currencies that have been in trouble themselves. As investors became very risk adverse, and as the dollar is the only world currency with a long standing record, people fled into the dollar, strengthening it, when it should have been otherwise depreciating. So thats an issue that hasnt been reflected in markets and obviously the fiscal deficit in the US also hasnt been reflected in the dollar exchange rate either. The EU crisis still isnt over and due to the global interdependence between the markets this will affect MENA as well. The EU and the US are still, in absolute dollar and euro terms, the largest economic blocks, and a lot of investors and a lot of companies have exposure to these markets. Traditionally your MENA investors, your deep pockets of money, have invested in Europe and the US. They are now gradually shifting to other markets, be they MENA, Asia or Latin America etc. The exposure that they have in the US and Europe is still very significant. So if these zones do poorly, that creates a lot of stress for their overall portfolio. If they need to pump more money into ailing assets in North America or the EU just to save existing exposures, then they cant invest that money into emerging markets or their own region. This is a key reason why what happens in the US and the Euro zone is important in relation to what is happening in the MENA region.

Key Takeaways
Top MENA picks: Egypt Hot sectors: Education, healthcare and infrastructure Outlook: What happens in the US and Euro zone is of critical importance to what happens in the MENA region

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"The best strategy to mitigate macroeconomic risk is portfolio diversification"

Kees F.W. Bruggen Co-Founder Ritz Banc US real estate sector. Historic low leverage rates make it very attractive to acquire core and value add assets in major US cities like Washington D.C., New York, San Francisco and Boston. How are macroeconomic trends set to shape the MENA private equity industry in 2013? In my view, the Euro zone crisis and the political unrest in the Middle East region are keeping investors on alert in 2013. As we have been successfully advising our LPs, the best strategy to mitigate the macroeconomic risk facing the region in 2013 is Portfolio Diversification by increasing allocations to more stable markets where you can deploy capital in yielding assets and generate favorable risk adjusted returns. Ritz Banc platform created a perfect gateway to achieve economic and political risk hedging for our LPs. How is the changing geo-political landscape in the MENA region affecting the regional private equity industry now? As eluded to earlier, the MENA region has been experiencing political unrest that directly affects investment decisions. We believe portfolio diversification will be a vital investment strategy in 2013 and frankly in the short run. Most LPs we talk to have plans to increase their asset allocation internationally moving forward and chase yields in stable markets like the United States. Ritz Banc is proactively helping Middle East LPs achieving their 2013 assets allocation goals by successfully assuming the role of the local experienced sponsor and coinvesting with its LPs which provides a strong alignment of interests.

Nasr El Hage Jnr Co-Founder & MD Ritz Banc

Which geographies and sectors will offer potential in 2013? We believe the United States is still the best market to invest globally in 2013, especially in the real estate sector given the attractive market conditions in terms of undervalued assets, cheap debt and solid rental growth in major US markets. On the other hand, Latin America in particular Brazil has seen steady growth recently in the leverage buyout space in major industries. Will your private equity allocations increase or decrease in the next year? Ritz Banc added around $150 million in assets to its portfolio in 2012; we expect to increase our acquisition volume by 20% in 2013 as we continue take advantage of the favorable investment climate surrounding the

Key Takeaways
Top global picks: The United States and Brazil Hot sectors: Real estate Outlook: We believe portfolio diversification will be a vital investment strategy in 2013

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