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Islamic Private Equity in GCC

P. Wouters
P. Wouters

This document discusses Islamic private equity opportunities in the Middle East region. It provides statistics on the geographical distribution of Shariah-compliant assets globally and within the region. The top countries for Shariah assets are Iran, Saudi Arabia, and Malaysia. Real estate and private equity are attractive sectors for Islamic investments. The document outlines tips for private equity market entry in the Gulf Cooperation Council countries, including developing corporate governance standards and providing value-added services. Fundraising by Middle Eastern private equity funds reached a record $6.4 billion in 2008, driven by large fund sizes. Popular investment sectors include transport, healthcare, oil and gas, and construction.

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Islamic Private Equity Opportunities in the Middle East Paul Wouters Lawyer Antwerp Bar Association, Belgium Counsel, Bener Law Office, Istanbul-Turkey
Next to the pure financial merits, in Islamic finance the PE is an understanding and agreement between the financiers and the entrepreneurs on : (1) how the money is put to work (contracts / structures used for the financing itself AND the going concern of the target company) and (2) where it is used (financial screenings and sectors excluded) and fits in the Islamic P/L sharing model and the way money should be used. PARTNERSHIPS are considered to be the natural habitat of Islamic Finance Half of the respondents of the Deloitte MENA Private Equity Confidence Survey (Jan 2009) did expect an increase in Shariah compliant funds due to a general growing awareness of Islamic finance in the region. 8 of the 12 OPEC nations are within the MENA region: Algeria, Iran, Iraq, Kuwait, Libya, Qatar, K. Saudi Arabia, United Arab Emirates.
What does that mean on global scale with the benchmark on 1.500 US$ Geographical distribution reported Shariah assets % Global GCC Non GCC - Mena Asia Austra - Euro - USA Sub Saharan Africa Source : FT - The Banker 2007/08 GCC 35,59 Asia 23,85 Non GCC Mena 35,33 Australia Europe - 5,4 Sub Saharan Africa 0,94 USA
Distribution within the GCC Geographical distribution reported Shariah assets % - GCC Saudi Arabia Kuwait UAE Bahrain Qatar Source : FT - The Banker 2007/08 Saudi Arabia 38,95 Bahrain 14,74 Kuwait 21,16 Qatar 5,31 UAE 19,85
Distribution rest of MENA Geographical distribution reported Shariah assets % Non GCC Mena Iran Egypt Jordan Yemen Tunisia Algeria Lebanon Palestine Territories Source : FT - The Banker 2007/08 Iran 87,44 Tunesia 0,16 Egypt 2,18 Algeria 0,32 Jordan 1,49 Lebanon 7.78 Yemen 0,19 Palestine Territories 0,12
Distribution rest of the world Geographical distribution reported Shariah assets - Rest Malaysia Brunei Pakistan UK Turkey Sudan Bangladesh Indonesia Switzerland Rest Source : FT - The Banker 2007/08 Malaysia 40,72 Sudan 2,80 Brunei 19,73 Bangladesh 2,71 Pakistan 9,96 Indonesia 1,39 UK 6,52 Switzerland 0,51 Turkey 6,30 Rest 0,27
Country listing Shariah compliant assets 1, Iran 6, Brunei 2, KSA 7, Bahrain 3, Malaysia 8, Pakistan 4,Kuwait 9, Qatar 5, UAE 10, UK Source : FT - The Banker 2007/08
How does the GCC live the financial crisis ? In the GCC, the K. Saudi Arabia financial market was due to regulatory standards more balanced (and therefore less infected by the credit crunch) then the other regional players. Most hit are the UAE and Kuwait with large asset exposure to real estate (bankers, constructors and real estate promotors) Is the GCC an easy market for Islamic Finance ? The Saudi investors also appear to be more sensitive to demand Islamic investments (prefer over accepted Kuwait, Bahrain, Qatar to neutral - UAE) (note: Malaysia is accepted Indonesia is neutral).
Ernst & Young The Islamic Funds & Investments Report - 2008 Statistic global Islamic asset allocation: Allocations to real estate and private equity are considerably higher in Islamic investment compared to conventional Mutual Funds because the asset classes fit nice in Shariah compliant investment. The Middle East knew a significant over allocation on real estate.
Where is the GCC now - development The Middle East has traditionally been viewed as a source, rather than a target, of investment capital. Historically funds got raised before investment opportunities were found. Local economies tended to comprise out of government based employment together with a strong emphasis on agency-based business models, in which companies represent international brands at a local level rather than producing products themselves. Growing population together with the need for diversification creates different needs and opportunities. Privatization and re-engineering of family business made the number of investment possibilities further grow considerably. Together with the present credit crunch, the usual capital overhang begins to narrow.
Tips for market entry .. Several areas of focus are important in order to compete in the local market: 1. The key qualities in winning deals are reputation and providing value added services. Access to capital and local presence are of rising significance. note: the average deal ticket appears to evolve from 28 upto 35 million US$
Source: Deloitte Mena Private Equity Confidence Survey 2009
Source: Deloitte Mena Private Equity Confidence Survey 2009
Tips for market entry .. Several areas of focus are important in order to compete in the local market: 2. Corporate finance savvyness in order to clean up the balance sheet 3. Corporate governance : strategic thinking and quality of information / transparancy one of the big problems is that many companies have only been accountable to themselves in the past and are not used to have outside shareholders. If a good governance model is not yet in place from the outset, then PE investment could face a difficult time. In terms of fund strategies, more and more funds are seeking controlling stakes. While in 2005, only 3 percent of transactions were control buyouts, by 2008, some 26 percent of transactions volume and half of transactions values were control buyouts. 4. Timeline for due dilligence and regulatory constraints are further exisiting hindrances, next to valuation disputes, disagreement on exit strategies and investors rights and privilages.
Source: Deloitte Mena Private Equity Confidence Survey 2009
Source: Deloitte Mena Private Equity Confidence Survey 2009
How was the fundraising in 2008 ? Middle East private equity fund managers raised a record $6.4 billion in 2008. This is up more than 10 percent over 2007 and more than double the amount raised in 2005. Large size funds are mostly responsible for this growth, with the average fund size in 2008 being US$258 million, compared with US$213 million in 2007 and just US$177 million in 2006. Present liquidity results from (1) an increase in fundraising and (2) a decrease in deals, with the number of private equity investments dropping by 22 percent between 2007 and 2008, as well as the total investment size, which fell by 31 percent. Regional players are experiencing an increasing request for funds with a mandate that includes MENA, to expand and include South Asia, Southeast Asia and/or Africa.
Sectors of focus : Transport Health care Oil & gas Financial Services Construction Consumer Power & Utilities Various Successfull countries over the last four years were : Saudi Arabia, Egypt and UAE. Also Jordanie and Turkey managed to be included in some of the fund strategies (proxemity specialised investments).
The near future The regional funds are cash rich with US$11 billion in capital under management yet to be deployed. This dry powder gives the PE sector a strategic opportunity vis--vis target companies, given the present limited scope of other funding sources available in the current global financial environment. The large funds will have more difficulties for closing. Exits will be more difficult due to tight financial markets (less IPO possibilities ...). The funds will have to sit longer on their investments and grow them further. On the other hand their will be a relative abundance of opportunities. Midsize and family owned business will gain on importance.
The increased attention from international players that the GCC region witnessed in 2007 is expected to be disrupted only temporary. Sustained robust economic performance of the GCC region most propably will attract additional allocation from international institutional investors over the medium term. Note: The population of the MENA region comprises about 6% of the total world population. It is equivalent in number to one third of the population of the People's Republic of China, is almost equivalent to the population of the European Union, and is one and a quarter times larger than the population of the United States.
Paul WOUTERS Lawyer Antwerp Bar Association, Belgium Counsel Bener Law Office, Istanbul Turkey Yapi Kredi Plaza C Blok Kat: 4 34330 Istanbul - Turkey Email : paul.wouters@bener.com.tr

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Islamic Private Equity in GCC

  • 1. Islamic Private Equity Opportunities in the Middle East Paul Wouters Lawyer Antwerp Bar Association, Belgium Counsel, Bener Law Office, Istanbul-Turkey
  • 2. Next to the pure financial merits, in Islamic finance the PE is an understanding and agreement between the financiers and the entrepreneurs on : (1) how the money is put to work (contracts / structures used for the financing itself AND the going concern of the target company) and (2) where it is used (financial screenings and sectors excluded) and fits in the Islamic P/L sharing model and the way money should be used. PARTNERSHIPS are considered to be the natural habitat of Islamic Finance Half of the respondents of the Deloitte MENA Private Equity Confidence Survey (Jan 2009) did expect an increase in Shariah compliant funds due to a general growing awareness of Islamic finance in the region. 8 of the 12 OPEC nations are within the MENA region: Algeria, Iran, Iraq, Kuwait, Libya, Qatar, K. Saudi Arabia, United Arab Emirates.
  • 3. What does that mean on global scale with the benchmark on 1.500 US$ Geographical distribution reported Shariah assets % Global GCC Non GCC - Mena Asia Austra - Euro - USA Sub Saharan Africa Source : FT - The Banker 2007/08 GCC 35,59 Asia 23,85 Non GCC Mena 35,33 Australia Europe - 5,4 Sub Saharan Africa 0,94 USA
  • 4. Distribution within the GCC Geographical distribution reported Shariah assets % - GCC Saudi Arabia Kuwait UAE Bahrain Qatar Source : FT - The Banker 2007/08 Saudi Arabia 38,95 Bahrain 14,74 Kuwait 21,16 Qatar 5,31 UAE 19,85
  • 5. Distribution rest of MENA Geographical distribution reported Shariah assets % Non GCC Mena Iran Egypt Jordan Yemen Tunisia Algeria Lebanon Palestine Territories Source : FT - The Banker 2007/08 Iran 87,44 Tunesia 0,16 Egypt 2,18 Algeria 0,32 Jordan 1,49 Lebanon 7.78 Yemen 0,19 Palestine Territories 0,12
  • 6. Distribution rest of the world Geographical distribution reported Shariah assets - Rest Malaysia Brunei Pakistan UK Turkey Sudan Bangladesh Indonesia Switzerland Rest Source : FT - The Banker 2007/08 Malaysia 40,72 Sudan 2,80 Brunei 19,73 Bangladesh 2,71 Pakistan 9,96 Indonesia 1,39 UK 6,52 Switzerland 0,51 Turkey 6,30 Rest 0,27
  • 7. Country listing Shariah compliant assets 1, Iran 6, Brunei 2, KSA 7, Bahrain 3, Malaysia 8, Pakistan 4,Kuwait 9, Qatar 5, UAE 10, UK Source : FT - The Banker 2007/08
  • 8. How does the GCC live the financial crisis ? In the GCC, the K. Saudi Arabia financial market was due to regulatory standards more balanced (and therefore less infected by the credit crunch) then the other regional players. Most hit are the UAE and Kuwait with large asset exposure to real estate (bankers, constructors and real estate promotors) Is the GCC an easy market for Islamic Finance ? The Saudi investors also appear to be more sensitive to demand Islamic investments (prefer over accepted Kuwait, Bahrain, Qatar to neutral - UAE) (note: Malaysia is accepted Indonesia is neutral).
  • 9. Ernst & Young The Islamic Funds & Investments Report - 2008 Statistic global Islamic asset allocation: Allocations to real estate and private equity are considerably higher in Islamic investment compared to conventional Mutual Funds because the asset classes fit nice in Shariah compliant investment. The Middle East knew a significant over allocation on real estate.
  • 10. Where is the GCC now - development The Middle East has traditionally been viewed as a source, rather than a target, of investment capital. Historically funds got raised before investment opportunities were found. Local economies tended to comprise out of government based employment together with a strong emphasis on agency-based business models, in which companies represent international brands at a local level rather than producing products themselves. Growing population together with the need for diversification creates different needs and opportunities. Privatization and re-engineering of family business made the number of investment possibilities further grow considerably. Together with the present credit crunch, the usual capital overhang begins to narrow.
  • 11. Tips for market entry .. Several areas of focus are important in order to compete in the local market: 1. The key qualities in winning deals are reputation and providing value added services. Access to capital and local presence are of rising significance. note: the average deal ticket appears to evolve from 28 upto 35 million US$
  • 12. Source: Deloitte Mena Private Equity Confidence Survey 2009
  • 13. Source: Deloitte Mena Private Equity Confidence Survey 2009
  • 14. Tips for market entry .. Several areas of focus are important in order to compete in the local market: 2. Corporate finance savvyness in order to clean up the balance sheet 3. Corporate governance : strategic thinking and quality of information / transparancy one of the big problems is that many companies have only been accountable to themselves in the past and are not used to have outside shareholders. If a good governance model is not yet in place from the outset, then PE investment could face a difficult time. In terms of fund strategies, more and more funds are seeking controlling stakes. While in 2005, only 3 percent of transactions were control buyouts, by 2008, some 26 percent of transactions volume and half of transactions values were control buyouts. 4. Timeline for due dilligence and regulatory constraints are further exisiting hindrances, next to valuation disputes, disagreement on exit strategies and investors rights and privilages.
  • 15. Source: Deloitte Mena Private Equity Confidence Survey 2009
  • 16. Source: Deloitte Mena Private Equity Confidence Survey 2009
  • 17. How was the fundraising in 2008 ? Middle East private equity fund managers raised a record $6.4 billion in 2008. This is up more than 10 percent over 2007 and more than double the amount raised in 2005. Large size funds are mostly responsible for this growth, with the average fund size in 2008 being US$258 million, compared with US$213 million in 2007 and just US$177 million in 2006. Present liquidity results from (1) an increase in fundraising and (2) a decrease in deals, with the number of private equity investments dropping by 22 percent between 2007 and 2008, as well as the total investment size, which fell by 31 percent. Regional players are experiencing an increasing request for funds with a mandate that includes MENA, to expand and include South Asia, Southeast Asia and/or Africa.
  • 18. Sectors of focus : Transport Health care Oil & gas Financial Services Construction Consumer Power & Utilities Various Successfull countries over the last four years were : Saudi Arabia, Egypt and UAE. Also Jordanie and Turkey managed to be included in some of the fund strategies (proxemity specialised investments).
  • 19. The near future The regional funds are cash rich with US$11 billion in capital under management yet to be deployed. This dry powder gives the PE sector a strategic opportunity vis--vis target companies, given the present limited scope of other funding sources available in the current global financial environment. The large funds will have more difficulties for closing. Exits will be more difficult due to tight financial markets (less IPO possibilities ...). The funds will have to sit longer on their investments and grow them further. On the other hand their will be a relative abundance of opportunities. Midsize and family owned business will gain on importance.
  • 20. The increased attention from international players that the GCC region witnessed in 2007 is expected to be disrupted only temporary. Sustained robust economic performance of the GCC region most propably will attract additional allocation from international institutional investors over the medium term. Note: The population of the MENA region comprises about 6% of the total world population. It is equivalent in number to one third of the population of the People's Republic of China, is almost equivalent to the population of the European Union, and is one and a quarter times larger than the population of the United States.
  • 21. Paul WOUTERS Lawyer Antwerp Bar Association, Belgium Counsel Bener Law Office, Istanbul Turkey Yapi Kredi Plaza C Blok Kat: 4 34330 Istanbul - Turkey Email : paul.wouters@bener.com.tr