7 minute read
Venturing Forth
MEA Finance talks with Alex Gemici, Chairman & CEO, Greenstone Equity Partners, who paints a detailed picture of the prospects for the Private Equity and Venture Capital market in the Middle East, telling us that while there are challenges, there are also bright spots in the region too
Alex Gemici Chairman & CEO, Greenstone Equity Partners
Private Equity activity reached a peak in Q4 2020, remaining positive in 2021. How do you sum up the regional PE & VC market?
In short: VC is booming, and PE continues to consolidate. While the Financial Times reported that, globally, PE broke a 40-year record with $500 billion of deals in the first half of this year alone, some markets, including the MENA region, have not grown in the same pace. It remains true that on a relative basis, private funding is substantially underutilized in MENA compared to Western markets.
Today, the venture capital industry in the region is enjoying a “purple patch” as governments around the region from Amman to Kuwait City look to support SMEs as part of their efforts to diversify their economies from fossil fuel production. Sovereign funds are also either making direct investments or backing venture funds in the hope that they will unearth the next MENA unicorn, or at minimum help drive economic growth in the business and service sectors. The UAE, Jordan and Lebanon continue to be the centers of influence for PE and VC in the MENA region. Overall, however, a lack of finance available for businesses, particularly SMEs, continues to present challenge to growth. This results in SMEs’ inability to utilize capital to scale as rapidly as they should. A growing youth population also means local governments need to generate levels of economic growth capable of putting these young people to work. As governments alone cannot employ the waves of young people coming into the workforce, they need the private sector to drive employment and further growth. Meanwhile, MENA-based PE firms are still recovering with more firms simply shutting down or consolidating due to capital raising challenges. EY reports that regional participants in the sector have raised about $1 billion in capital over the past five years, down from the high of around $5 billion in 2008. Local fund managers acknowledge that there is little appetite from either local or international investors to commit to funds from the region. One factor in this is the geographical diversification needs of local investors, and continued imbalance in risk-adjusted returns between North America/Europe and MENA. The difficulties in fund-raising predate the pandemic. The dislocation in the marketplace started as early as 2015, even before the Abraaj implosion in 2018. The long-term outlook for MENAbased PE is that the sector is downsizing to a more modest level and fund-raising remains difficult.
Which market sectors or industries in our region will see the most Private Equity and VC activity?
There are unprecedented opportunities in the market on which PE and VC firms can capitalize across sectors leading the transition to the fourth industrial revolution. Sectors that are attracting interest and investment include financial services, AI, robotics, service sector solutions, healthcare, and education. There is also a strong, continued investment in renewables, food security, and sustainable real estate. In each of these industries, much of the focus revolves around technology to create adaptive, efficient, and effective solutions to face expected global challenges and increase economic productivity.
The bright spot today is that there is growing VC interest to back technology start-ups in the region. MENA’s fintech industry alone is expected to hit a record valuation of $3.45 billion by 2026. In just the first quarter of 2021, related venture investments increased 163% year-on-year, as the pandemic caused an acceleration in the fintech industry.
Focus will be the differentiator, with PE firms focusing on established companies with track record, profitability and solid cashflows. It is worth noting that, globally, PE firms today have $1.6 trillion in their disposal to go on a shopping spree for companies, and that dry powder is slated to grow further as a record number of PE funds are currently on the market to raise an additional $900 billion this year alone. However, considering that the US and Europe have so many PE firms with effectively unlimited dry powder pushing valuations ever higher, investment opportunities in MENA, which continue to be attractively priced relative to other regions, look more and more appealing.
How have Private Equity Funds performed in the past 18 months?
Driven by increased activity and investor appetite for disruptive technology companies, VC is the clear winner globally with an annual trailing return of almost 54% in 2020. These returns remain consistent with strong three- and five-year returns of 30% and 20%. As a result of these returns, GCCbased investor interest in this strategy has grown substantially, even during the pandemic. Greenstone Equity Partners was an early adopter of virtual roadshows, starting in March 2020, and, during the ongoing travel restrictions, was able to leverage its relationships to secure new capital for its fund manager partners at similar or higher volume than 2019 across a number of alternative investment strategies. With more available opportunities in the alternative fund space, investments into Shariah-compliant funds have also grown significantly in the past 18 months.
MENA VC investment into start-ups ticked up to $245 million in Q1 2021 as investors focused on fintech solutions across the spectrum, as well as e-commerce and cloud kitchens. There have also been several blockbuster VC exits in the last 18 months which have delivered stellar returns for local and international investors alike: Careem sold to Uber in early 2020, InstaShop sold to DeliveryHero, and Lebanonbased music streaming platform Anghami’s merged with Nasdaqlisted SPAC Vistas Media Acquisition Company, which raised $100 million in its 2020 listing.
Do you expect Private Equity firms to become more involved in M&A in the region?
In Q2 2021, global PE and VC buyout deals doubled to just over 1,000 compared to Q1 2021. There is considerable pentup demand for M&A and consolidation persists, particularly in the UAE, Saudi Arabia, Qatar, Kuwait and Egypt. Through the first half of 2021, the total value of mergers and acquisitions in MENA reached $44.8 billion.
While there is movement, there is still room for more activity. Major sectors in need of consolidation include financial services (banks), healthcare (clinics, hospitals, pharmacies), real estate and hospitality (hotels, restaurants etc.), as well as covid-impacted industries. There are also a number of potential opportunities currently available in the market including in cybersecurity, distribution and construction sectors.
Greenstone Equity Partners is also seeing increased interest in infrastructure both from fund managers looking to raise capital from the region and local investors looking to deploy capital into sustainable projects. We expect this trend to continue over the next five years.
Are SPACs (Special Purpose Acquisition Companies) competition or an opportunity for Private Equity?
Special Purpose Acquisition Companies, also known as blank check companies, are not new - they were invented in 1993. For many reasons, the SPAC structure languished for the first 25 years in its existence and then exploded into the market in 2020 with unexpected veracity. SPACs raised $45 billion between 1993 and 2019. In 2020 alone, the number jumped to $65 billion and during the first six months of this year, an additional $115 billion were raised by SPACs. According to SPAC Analytics, compared to the traditional IPOs, SPACs went from less than 1% of the IPO market in 2003 to 55% in 2020 and 65% of the IPO market this year.
Why are SPACs relevant to private equity deployment challenges? Unlike private equity funds, which have up to seven years to deploy capital, most SPACs have to complete their acquisition in 18 months or must return the money back to investors. The promotors of SPACs, who generally have the most to gain from the transactions, are loath to return money to investors and are therefore routinely outbidding everyone else in the market. Bloomberg recently categorized this as a risk that the SPAC promoters “might agree to disastrously overpay for a company”. The SPAC speculation hit a level in the first quarter of this year where global PE firms from TPG and Riverstone to even Softbank have started their own SPACs with primarily retail investor funds, as opposed to their own funds’ investor capital. The viability of SPACs is open for debate and the post-acquisition stock price gains and losses will dictate if SPACs are here to stay or a short-term fad.
