The new frontier of investment

The increase in funding during the first six months of 2021 shows how private equity and venture capital investors have become confident in navigating the unprecedented challenges of the previous year and adapting to ‘the new normal’

2020 was a year like no other for all sectors of the economy, and the private equity (PE) and venture capital (VC) market was not spared either. However, despite the challenging economic conditions, the industry has proven resilient and adaptable to the new working environment.

The Middle East and North Africa (MENA) PE/VC market has expanded over the last few years as regional governments look to support SMEs as part of diversification plans despite the double whammy of COVID-19 and volatile oil prices.

“PE/VC firms in the MENA region are overwhelmingly optimistic going into 2021, with nearly three-quarters expecting investment activity to increase and 43% focusing on making new investments,” said S&P Global.

As Middle Eastern economies emerge from the pandemic into the new normal, PE/VC firms such as Investcorp, Wamda, SHUAA Capital, Middle East Venture Capital, Saudi-based STV and Mubadala Capital Ventures lookout for deals after the economic fallout made companies cheaper to buy and scandals such as the collapse of Abraaj Capital trimmed competition.

Though there is an increasing number of investment opportunities in the MENA region, the market is still in its infancy compared to other emerging markets. As such, investors are pouring money into startups in a bid to unearth the next MENA unicorn following the 2019 acquisition of Dubai-based Careem by Uber Technologies in a $3.1 billion (AED 11.38 billion) deal, Amazon’s $580 million (AED 2.13 billion) takeover of Souq.com and Anghami’s $220 million (AED 807.9 million) public offering in New York via a merger with a special purpose acquisition company (SPAC).

According to Bain & Company, “Based on heavy global activity in early 2021, pentup demand will likely have a strong positive impact on current-year deal numbers. All indicators suggest that funds will continue to chase deals in the sectors least affected or actually enhanced by the ongoing COVID-19 crisis.”

The wave of deal-making in the MENA region is being led by Gulf states such as UAE, Saudi Arabia and Kuwait. As regional PE/VC investors position themselves for improved economic conditions there is a clear focus on new technologies whether that be enterprise and the cloud, edutech, fintech, Insurtech, MedTech, legaltech, artificial intelligence (AI), blockchain as well as other markets such as logistics and mobility and consumer and marketplaces.

“As the COVID-19 situation normalized over the summer, PE investors turned their attention back to executing deals, leading the industry into a strong rebound in the second half of the year,” said S&P Global.

An enabling environment

In 2020, divestment activity tumbled due to the outbreak of the pandemic, dropping by 16% to just 2,185 exit transactions compared to the previous year, due to pricing uncertainty and market volatility. However, MENA PE/VC firms are seeing a rebound in business with initial public offerings (IPOs) viewed as the main exit strategy as well as trade sales and secondary buyouts – a trend representing shifting industry dynamics region.

With around $35.4 billion in assets under management (AUM) diversified by geography, asset class, and client type, Bahrain-based Investcorp has invested $1.4 billion into the region over the past decade and made a return of about 1.8 times on invested capital. Investcorp helped more four family-controlled Saudi companies in which it held stakes to list in Riyadh.

The PE firm and global alternative investment manager helped with the IPOs of jewelry manufacturer L’Azurde, gym owner Leejam Sports, grocery chain BinDawood Holding with car rental firm Theeb Rent-a-Car Co. being the latest listing. Theeb raised $137.6 million (SAR 516 million) in April by offering 12.9 million shares, representing 30% of the company’s share capital at $10.66 (SAR 40) per share.

Investcorp joined forces with global asset manager Aberdeen Standard Investments to launch the Aberdeen Standard Investcorp Infrastructure Partners fund in 2019. The new regional infrastructure fund, whose size is estimated

to be around $800 million and is anchored by Saudi wealth fund Public Investment Fund, looks to continue investing in the Gulf region’s real estate assets.

“On top of inorganic growth strategies to enhance the value of their existing portfolio, PE/VC investors are increasingly turning their attention to minority investments in response to rising numbers of cash-strapped companies in need of liquidity injections,” said S&P Global.

Meanwhile, following the merger with Abu Dhabi Financial Group in 2019, SHUAA Capital has divested several non-core assets as it pursues more tech investments. SHUAA Capital and Goldilocks Fund, a fund managed by its subsidiary, sold 3.8% and 9.8% stakes, respectively, in Bahrain’s Khaleeji Commercial Bank to GFH Financial Group in June.

In May 2021, the Dubai-based asset management firm also divested its Mirfa Power Holding Company stake in a deal that is expected to contribute $11.2 million in Q2 2021 and reclassify the negative cash flow hedge reserve of $14.4 million to the firm’s condensed financial statement. SHUAA acted as financial advisor on Anghami’s listing on Nasdaq Stock Exchange in March and also backed the IPO with $30 million funding through private investment in a public equity (PIPE) deal.

SHUAA confirmed that it was in preliminary talks with investment banks in July to launch three blank-check firms,

SPACs, as the financial services platform looks to open the emerging market to GCC investors.

Bloomberg said that investor enthusiasm for blank-check firms is heating up in the MENA region at a time when the momentum for the investment vehicles has waned in the US after the lackluster share performance of recent deals and increasing scrutiny from regulators.

PE/VC FIRMS IN THE MENA REGION ARE OVERWHELMINGLY OPTIMISTIC GOING INTO 2021, WITH NEARLY THREE-QUARTERS EXPECTING INVESTMENT ACTIVITY TO INCREASE AND 43% FOCUSING ON MAKING NEW INVESTMENTS

– S&P Global

VC fundraising

Signaling a positive outlook, thanks to COVID-19 vaccine-fuelled economic recovery expected in the new normal, VC investments are expected to remain robust in the MENA region heading into Q3 and Q4 especially in sectors like fintech and B2B services, AI, robotics and blockchain-related solutions – including non-fungible tokens.

In its Q1’21 Venture Pulse Report – Global trends report, KPMG said that the

global VC market saw an explosion of activity in Q1’21 as investors across the globe competed for the biggest and best deals. As several regional startups are considering raising their pre-IPO rounds, it appears that there is a significant amount of FOMO (the fear of missing out) in the market as investors are on the lookout for deals.

With as much as $1.9 trillion in dry powder globally, according to Preqin estimates, a low-interest-rate environment, government investment initiatives, and a changing regulatory landscape, it is likely that the hunt for good assets will continue to be very competitive. Together with promising new opportunities emerging in the market, the above factors bode well for economic expansion across different sectors especially in the GCC region where countries are diversifying their economies away from heavy reliance on oil revenues.

“The strong competition and numerous oversubscribed rounds helped accelerate deal activity quite significantly, at least for late-stage deals in addition to driving valuations upwards,” said KPMG.

July 2021 marked a promising turning point in the MENA VC market when UAEbased Kitopi raised $415 million in a Series C funding round, making it the newest entrant to the unicorn club (startups with a $1 billion valuation). Magnitt said that with over $1.2 billion invested in MENA-based startups in the first six months of the year compared to $1.1 billion invested in the full year of 2020, regional VC investors have set a new record for capital deployed with six months before the end of the year.

In Egypt, trucking marketplace startup Trella raised $42 million in a funding round that was led by Maersk Growth and Raed Ventures with participation from Algebra Venture among others. Another Egyptian startup Yodawy also raised $7.5 million in a Series B funding round in July. The investment in the digital pharmacy benefits marketplace was led by Global Ventures, Middle East Venture Partners, and Algebra Ventures.

The investment in most MENA startups is late-stage focused underlining the gradual maturity of the industry. “The investment activity in 2021 has been consistent in investors’ preference for transactions at later stage deals over riskier earlier stage startups in 2020,” said Magnitt.

This is evident in the case of Saudi Arabia’s Sary, a B2B marketplace that connects small businesses including mini-supermarkets, restaurants, and cafes with a network of fast-moving consumer goods wholesalers. The Saudi startup secured $30.5 million in Series B funding round in May 2021 shortly after closing its Series A round, which attracted $6.6 million in funding in April.

As startups are maturing, they require increased investments to fund their growth and scale up their services and products. In June, Kuwaiti flowers and gifts full-fledged e-commerce solution provider, Floward secured $27.5 million in a Series B funding round from STV and Impact46. Egyptian B2B e-commerce platform, MaxAB also raised $40 million in a Series A funding round that was led by impact investor RMBV with participation from existing investors Beco Capital and 4DX Ventures.

A global perspective

Globally, PE/VC investors are demonstrating an overwhelmingly bullish outlook for the industry and this relatively optimistic dynamic is expected to continue over the last six months against the backdrop of the highly contagious Delta variant of COVID-19 and the growing tensions between the US and its allies on one end and China on the other.

As investing for impact is gaining momentum among investors and policymakers alike, environmental, social and governance (ESG) factors continue to grab PE/VC investors’ attention. A study by S&P Global showed that 40% of global PE/VC firms are working on improving socially conscious standards within their current portfolio companies. This trend is also evident in the Middle East although ESG practices appear to be in the initial stages of development in the region.

“We anticipate environmental, social and governance (ESG) considerations to become an integral part of a sustainable value creation strategy for portfolio companies from the screening phase of deal-making through the exit of an investment,” said PwC.

PE/VC investors in the oil-rich GCC region and the entire MENA region aim to participate in the post-COVID-19 economic recovery and transformation in their respective countries by investing in sustainable core infrastructure projects. Investors continue to focus on pandemicaccelerated sectors.

“The pandemic increased funding in many areas as investors looked to get in on tech companies seeing a rapid acceleration in demand, including areas like software-as-a-service, delivery, and a wide range of consumer-focused digital solutions – from edtech and gaming to digital health services,” said KPMG.

The increase in H1 2021 investments across the MENA region shows how confident PE/VC investors have become in navigating the unprecedented challenges of the previous year and adapting to ‘the new normal’, boding well for any future challenges which may arise.b.

THE INVESTMENT ACTIVITY IN 2021 HAS BEEN CONSISTENT IN INVESTORS’ PREFERENCE FOR TRANSACTIONS AT LATER STAGE DEALS OVER RISKIER EARLIER STAGE STARTUPS IN 2020

– Magnitt