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Strategy

October 2008

Private Equity – Tremendous Prospects for the Taking!


MENA

Private Equity Fundraising in Emerging Markets is Increasing Rapidly: Despite the


Global market turmoil and Sub-prime crisis, emerging markets private equity fundraising
continued to grow not just in 2007 but in the first half of 2008 as well. However, it is
likely to see some moderation now on the back of the financial crisis that started in the
US and soon spread into global financial crisis.

Fundraising in the Middle East bit sedate in the first half of 2008: After witnessing a
stellar growth in 2007 on the fund raising front, as well as fund sizes, private equity in
the MENA region witnessed some moderation in 1H-2008. Nonetheless, this seems to
be an aberration and activity is expected to pick up soon.

MENA Private Equity Sector focus MENA GDP Growth


Telecomes & IT
1%
Oil & Gas Transport
7% 8%
Construction Services
(Real GDP Growth)

3% 5%

Others
Healthcare 18%
11%

Financial Services
11%

Consumer Goods
3%

Basic Materials
33%

Source: Zawya Private Equity Monitor Source: IMF

Saudi Arabia, the market to watch out for: The geographic focus of regional funds is
changing and becoming more di­verse, as mandates and operations broaden to include
other regions with many regional players opening offices in regions like Saudi Arabia,
Turkey, Egypt and North Africa region. Saudi Arabia due to large economic reforms and
privatization efforts of the government holds the maximum promise and private equity
players with physical presence and local know how likely to tremendously benefit from
the tremendous potential the Kingdom offers.

Healthcare, Financial, Education, Services and Transport the most promising sectors:
Omar M. El-Quqa, CFA
Executive Vice President The spending power of the region’s growing middle class is influencing a shift in investment
omar@global.com.kw
Phone No:(965) 22951110
focus away from oil & gas to service-based and consumer-oriented businesses.

Faisal Hasan, CFA Current financial crisis offers tremendous opportunity: Private equity investments continue
Head of Research
fhasan@global.com.kw to generate consistently higher returns than most public equity markets and bond markets. The
Phone No:(965) 22951270
most profitable fund vintages to invest in have often been those where the in-going investments
Digvijay Tanwar have been made in challenging times. 2008 may well be one of these. As a result, people are
Financial Analyst
dtanwar@global.com.kw very bullish about return prospects for 2008-10 vintages. The most successful investors in
Phone No:(965) 22951275 private equity have been those with a consistent long-term strategy, investing over a long
period. Fundamentally nothing has changed: private equity will continue to grow, and will
continue to deliver net returns well in excess of those available in the public markets.

Strategy - MENA Private Equity 1


Global Research - Private Equity Global Investment House

Private Equity – Ready to deliver


In the recent years, alternative investment asset classes such as private equity have
become increasingly important source of capital in the global financial system. Private
equity activity in particular (defined as equity investments by professionally managed
partnerships that involve leveraged buyouts or other equity investments with a substantial
indebtedness) has accelerated noticeably. The tremendous growth of private equity in
the Middle East and North Africa (MENA) region in the past few years in general and
2005 onwards in particular, reached record highs in 2007, with the wealth created from
oil spreading further inside the GCC and into MENA. Improving investment conditions,
increased liquidity, and mounting international interest in these emerging markets led to
private equity as a quality asset class capable of providing good returns.

According to the research paper “The Globalization of Alternative Investments Working


Papers Volume 1: The Global Economic Impact of Private Equity Report 2008” published
by the World Economic Forum, the total value of firms (both equity and debt) acquired
in leveraged buyouts is estimated to be US$3.6trillion during 1970 to 2007, of which
US$2.7trillion worth of transactions occurred between 2001-2007. The asset class has grown
in scale such that by 2005 about 2% of non-government US employees worked for firms
that received private-equity investment, and in global scope such that a majority of private
equity transactions now take place outside the United States. Simultaneously, many private
equity firms have expanded dramatically in size and global reach, and the sector has attracted
attention from many other players, such as politicians, regulators and organized labor.

Worldwide, private equity funds manage over US$1.0trillion of capital currently. About
two-thirds of this capital is managed by buyout funds, where leverage can multiply the
investment size by three or four times base capital. Overall, private equity funds play
an increasingly important role as financial intermediaries in addition to their significant
day-to-day involvement as board members and advisors.

Virtually all private-equity funds are organized as limited partnerships, with private equity
firms serving as the general partner (GP) of the funds, and large institutional investors and
wealthy individuals providing the bulk of the capital as limited partners (LPs). These
limited partnerships typically last for 10 years, and partnership agreements signed at the
funds’ inceptions clearly define the expected payments to GPs. These payments consist of
both fixed and variable components. While the fixed component resembles pricing terms
of mutual-fund and hedge-fund services, the variable component has no analogue among
most mutual funds and is quite different from the variable incentive fees of hedge funds.

Data sources

We construct our dataset from several sources. Our main data source is the “Zawya
Private Equity Monitor”, from where we obtained detailed information on terms and
conditions of the private equity funds raised in the MENA, besides the report “Private
Equity and Venture Capital in the Middle East in 2007” by Gulf Venture Capital
Association (GVCA). In addition we also obtained information from Emerging Markets
Private Equity Association (EMPEA) and Private Equity Intelligence Ltd (Preqin) along
with our interactions with industry experts among others.

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Private Equity Worldwide


Private equity is an industry that continues to be heavily concentrated in the US and the
UK. According to Preqin database, there are currently (September 2008) a record 1,595
private equity funds in the market, a 24.3% increase over 1,283 funds reported at the end
of 2007. The aggregate target being sought by new funds currently stands at US$934bn,
an increase of 33.7% from the US$698.5bn capital sought at the end of 2007.

Chart 1: Funds in Market by Type and Size

Source: Preqin

Fundraising Worldwide

Despite continuing problems in the credit markets, private equity fundraising has
continued at a strong pace in terms of capital commitments, with a total of US$323bn
committed during 1H-2008 with a total of 372 funds achieving final close during 1H-
2008. This represents a 12.5% increase from the US$287.2bn raised during H2-2007, and
matches the US$323.6bn raised during the very successful first half of 2007. However,
the current financial turmoil and resultant slowing of economic growth worldwide would
have an impact on the private equity fund raising as well, which is likely to slow down.
Private equity players globally are likely to feel the pinch of the credit squeeze and may
find it difficult to raise funds with the same ease as they had in the recent past.

Table 1: Funds in Market by Region, Type and Size (September 2008)


USA EUROPE ROW
Type Aggregate Average Aggregate Average Aggregate Average
No. of No. of No. of
Target Size Size Target Size Size Target Size Size
Funds Funds Funds
(US$bn) (US$mn) (US$bn) (US$mn) (US$bn) (US$mn)
Buyout 156 190 1218 72 80 1108 60 33 555
Fund of Funds 110 55 498 82 34 416 19 3 177
Mezzanine 25 13 524 12 9 715 2 0 189
Real Estate 235 152 645 122 57 470 60 30 493
Venture 231 43 185 93 17 183 130 25 193
Other 85 107 1254 49 43 870 52 42 799
Total: 842 560 665.1 430 240 558.1 323 133 411.8
Source: Preqin

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Global Research - Private Equity Global Investment House

Looking at the funds in market by fund type illustrates that buyout funds remain the most
prominent type of funds in the market, accounting for 33% of total capital sought. There
are 288 buyout funds on the road targeting to raise US$303bn in capital commitments.
There are currently 417 real estate funds on the road targeting to raise US$239bn in
capital commitments or 26% of the total capital sought. There are 454 venture funds in
the market with a target aggregate size of US$85bn. This represents 9% of the entire
capital sought by private equity funds on the road.

Although fundraising has maintained a strong pace in terms of aggregate commitments


raised during the first half of 2008, the number of funds achieving a final close has fallen
considerably from earlier quarters, and is still falling well short of the required level to
bring stability and equilibrium to the fundraising market. Activity within the sector is
low, with fund managers finding it very challenging to raise funds as investors remain
reluctant to make new long-term commitments in the current environment.

At the end of September 2008, there were 24 funds on the road seeking to raise US$5bn
or more in commitments. The target size of these funds makes up 23% of the total capital
sought by funds on the road. Seven of these large funds are targeting to raise US$10bn
or more in capital commitments. Funds classified as mega funds include Blackstone
Capital Partners VI, a buyout fund targeting to raise US$20bn in capital commitments
and and CVC European Equity Partners V, which has a target size of Euro11bn.

The average size of funds closed in 2Q-2008 stands at US$983mn, far exceeding the
average size of funds on the road which stood at US$593mn. With larger funds remaining
popular amongst investors, many smaller funds are finding conditions to be increasingly
competitive, with the absolute number of other funds on the road all vying for the
investors’ attention causing funds to remain on the road for longer than some managers
anticipated. As per Preqin estimates, fundraising period is now taking an average of 14.2
months to complete, up from 12.0 months in 2007, and 11.1 months in 2006.

Chart 2: Year on Year Global PE Relative Fundraising Comparison


Months

Source: Preqin

Investments Worldwide

Private equity deals too have sharply fallen with a lot less deals happening as institutional
investors have become highly cautious when presented with new investment opportunities

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As per Standard and Poor’s data, the number of private equity deals post 3Q-2007 when
the financial crisis first surfaced has come down drastically with only 410 new private
equity deals happening in 3Q-2008 almost 34% down from 620 reported for 3Q-2007.

Chart 3: Number of New Private Equity Deals


Credit Crisis
3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008
Source: Dealogic

Big deals are difficult to come by as liquidity has dried. Deals are done with much lower
levels of debt, and more equity. As a result, the new deal size too has come down sharply
with the size of new private equity deals standing at US$134mn, much lower than the
peak of US$519mn in 2Q-2008.

Chart 4: Average Size of New Private Equity Deals

Credit Crisis
US$ mn

3Q2006

4Q2006

1Q2007

2Q2007

3Q2007

4Q2007

1Q2008

2Q2008

3Q2008

Source: Dealogic

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Private Equity in Emerging Markets


Fundraising in Emerging Markets

Despite the Global market turmoil and Sub-prime crisis, emerging markets private
equity fundraising continued to grow not just in 2007 but in the first half of 2008 as well.
However, the crisis reached a new level only in the third quarter and consequently the
high growth, which the emerging markets had witnessed until recently, is likely to tone
down. According to data compiled by Emerging Markets Private Equity Association
(EMPEA) in 2007, two hundred and four private equity funds focused on emerging
markets raised US$59.2bn in capital commitments. This figure represents a 78%
increase over the US$33.2bn raised by 162 funds in 2006, and a 17-fold increase over
the US$3.5bn raised in 2003.

Chart 5: Funds Raised for Emerging Markets Private Equity


(US$ mn)

Source: EMPEA estimates

During 2007, the growth had been stupendous, beating all expectations in nearly all
emerging markets regions. Growth of Asia funds continued at an even faster pace than
in 2006, and Latin American private equity continued to benefit from renewed interest.
Fundraising in Central and Eastern Europe rose 300%. Middle East funds sustained the
tremendous growth of previous years and grew by 71% in 2007. After a significant
increase in 2006, African fundraising remained steady in 2007; unlike past years, the
majority of funds raised were for investments across the region, beyond South Africa.

Table 2: Growth in Funds Raised, 2005–2007


Emerging CEE/ Latin Middle
Years Asia Russia America Africa East Pan-EM Total EM
2005-2006 26% 21% 109% 197% 54% -29% 29%
2006-2007 48% 347% 66% -1% 71% 58% 78%
Source: EMPEA estimates

The increases in 2007 were multi-dimensional and attributable to both growth of funds
in the market and notable increases in fund sizes. New entrants included both US and
European private equity managers turning to Asia and Central and Eastern Europe, and
domestic funds in the Middle East and Latin America. Fund sizes grew more than 50%,
with funds holding final closes in 2007, raising on average US$426mn versus US$272mn

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in 2006. Among closed funds, 54% held final closes at US$250mn or under, compared
with 65% in 2006.

The nature of private equity funds dictates that the fund manager initially announces
the fund, along with the sector specialization, size, investment strategy, and so forth.
The private equity fund then, goes through different stages regarding the capital raising
process. The fund starts raising its target capital before it closes. Private equity funds
normally have multiple closing dates before it starts investing the capital raised. After it
is fully vested, the fund manager liquidates the fund through calculated exit strategies.

As in 2006, the majority of funds that achieved final closes in 2007 raised US$250mn or
less. However this portion of the emerging market private equity background decreased
from 65% of funds in 2006 to only 54% in 2007. In 2007, 19 funds in the market raised
US$1bn or more. Of these 19 funds, 17 achieved final closes during 2007. This compares
with only four funds of such size in 2006.

While the vast majority of funds in these markets continued to be generalist in strategy
and focused on growth capital, the 2007 landscape included a number of funds with
sector strategies, including infrastructure, energy and natural resources, agribusiness,
environment and consumer funds.

Table 3: Sector Focus among Funds with Closes in 2007


No. of Fund Value
Sector Funds ($US mn)
Generalist 118 39,137
Technology 34 7,595
Infrastructure 8 3,395
Energy 6 1,538
Natural Resources 1 1,300
Financial Services 3 1,020
Industrials/Manufacturing 5 981
Consumer 4 624
Agriculture/Agribusiness 4 356
Environment 4 262
Other/NA 17 2,952
Total 204 59,161
Source: EMPEA estimates

Of funds in the market, 58% were generalist in strategy (representing 66% of capital
raised). Another 17% were focused on technology, while eight funds, or 4% of the total
number of funds and 6% of the capital, were primarily investing in the infrastructure
sector.

The growth continued unabated in the first half of 2008 as well and despite much
skepticism grew substantially. However, the financial crisis reached a new height only in
the third quarter which is likely to have a significant impact on the fund raising front. This
was predominantly due to Emerging Asia in which 104 funds dedicated to investments
in emerging markets raised US$35.3bn in capital in the first half of 2008, a 68% increase

Strategy - MENA Private Equity 


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over the amount raised during the same period in 2007. The total value of private equity
funds raised in the 1H2008 exceeds the US$33.2bn raised during all of 2006.

As had happened in the past years, Emerging Asia continues to lead in emerging markets
fundraising. Funds focused on Emerging Asian private equity markets raised a total of
US$26.3bn, more than double the US$11.6bn raised by Emerging Asian funds in the
first half of 2007. Pan-Asian regional funds accounted for US$11bn of the US$26.3bn
total raised for Emerging Asia, while fundraising among China-dedicated funds boomed,
with a turning point US$11.2bn raised through June 2008. Capital commitments for
India-dedicated funds grew by 357% over the same period in 2007, raising a total of
US$3bn in the first half of 2008. Consequently, funds focused on Emerging Asian
markets accounted for 75% of capital raised in the first half of 2008, versus 55% during
the same period in 2007. This portion of the Emerging Market PE landscape had earlier
decreased from 65% of funds in 2006 to only 54% in 2007.

Chart 6: Emerging Market Fund Focus Composition


2006 2007
Multi-
Region 10%

Multi-
CEE/Rus Region 8%
Sia
17%
CEE/Rus
Emergin Sia 7%
Emergin g Asia
g Asia 75%
55% Lat Am/
Lat Am/ Carib 4%
Carib
6% Africa 3%
Africa Middle East
3% 3%
Middle East
9%
Source: EMPEA estimates. Note: Emerging Asia excludes funds focused on investments in Japan, Australia, and
New Zealand.

While capital raised by Emerging Asian funds has grown considerably in the first half
of 2008, the pace of fundraising among funds focused on other emerging market regions
is roughly tracking with trends in 2007. Funds focused on growth and expansion capital
continue to dominate emerging markets private equity, accounting for nearly half of
funds raised in 1H2008, up from 38% of the total raised in the first half of 2007. Venture
capital funds represented 26% of capital and buyout funds 13%.

Table 4: Funds Raised by Regional Focus


(US$mn) 1H 2007 1H 2008
Emerging Asia 11,549 26,295
Multi-Region 2,127 2,739
CEE/Russia 3,611 2,537
Lat Am/ Carib. 1,354 1,289
Africa 592 1,258
Middle East 1,816 1,140
Total 21,049 35,258
Source: EMPEA estimates. Note: Emerging Asia excludes funds focused on investments in Japan, Australia, and
New Zealand.

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MENA Private Equity – Driven by high liquidity


Private equity in the MENA region has continued its robust growth in 2007, although a
bit sedate in 2008 on the fund raising front. This growth was made possible due to a lot
of factors, mainly the increase in liquidity in the MENA region on the back of the recent
surge in high oil prices. Other factors that contributed to the private equity rise relates to
the governments’ initiatives to foster this sector through privatizations, along the efforts
exerted by fund managers and investment firms to encourage private equity as means of
financing.

There is no doubt that the recent surge in oil prices have provided the MENA countries
with ample liquidity enabling them to rehabilitate and diversify their economies which
have long been dependent on the oil sector. To that end, the MENA governments have
embarked on a total “make-over” of their economies. Massive infrastructure projects
throughout the GCC in particular, enhancement of financial sectors, privatization efforts
and opening the markets to international competition in MENA region are only a few
of the efforts undertaken by the MENA governments to capitalize on their growing
cash balances. Relatively cheap valuations of MENA listed companies, coupled with an
increasingly progressive regulatory environment, are expected to attract more long-term
institutional money to the region.

Table 5: Fundamental difference in MENA & International Market


  Developed Emerging MENA
Economic growth Stagnant/low (0-2%) Very high (7-9%) Very high (7-9%)
Housing crisis Major None None
Budget Huge deficit Huge deficit Surplus
Credit crunch impact Major Average Average
Correlation with international markets Very high High Low but increasing
Balance of trade Deficit Deficit Surplus
Banking Sector effect of Credit crunch Turmoil Considerably Marginally hit
Effect of increasing commodity prices Negative Negative Net positive
Currency stability Volatile Volatile Stable
Source: Global Research

The MENA countries have also realized the importance of involving the private sector
in this restructuring, so privatization has played a pivotal part in the process. The private
equity market is an important source of funds for startup and young firms, firms in
financial distress and those seeking buyout financing.

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Chart 7: IPO Activity 9M-2008 VS 9M-2007 Chart 8: IPO Trends by Quarter

.6%
90

(US$ mn)
(US$ mn)

Source: Zawya IPO Monitor Source: Zawya IPO Monitor

Recent trends in the GCC had positive spill-over effects on the MENA regions. MENA
countries have adopted “openness” to their economic and financial sectors, which gave
cash rich private equity managers the incentive to seek investment opportunities within the
region. To that end, private equity funds that invest in the MENA region have increased
tremendously in numbers and sizes, whereby over US$13bn in private equity capital are
currently under management in the region. What is noteworthy is that until recently, many
local and international private equity operators had looked at the MENA region only to
raise cash. However, due to the rapid economic growth and fundamental strength of the
MENA countries, many of them are looking for investment opportunities as well. The
Carlyle Group was one of the first to set office in the region and is actively looking at
investment avenues in many of the region’s own companies. Similarly, Investcorp, which
until recently was using the Gulf money to invest in foreign markets also launched Gulf
Growth Capital Fund, that solely looks for investment opportunities primarily in the GCC
region. And while the real estate and construction sectors are attracting a large share of
these investments for the time being, opportunities in private-sector transportation, financial
services, travel and tourism, energy, and other sectors are flourishing as never before.

Private equity activity in the MENA region has a potential to continue growing in the
years ahead. Based on available data related to private equity transaction volumes as a
percentage of GDP, the region is still underserved relative to other regions throughout
the world.

Chart 9: Private Equity as a Percentage of GDP


3.5%
Potential for PE in
the Region

1.7%

0.3%

USA UK MENA
Source: Global Research, IFSL Research.

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The results of the 2007 GVCA survey on the impact of private equity investments on
private companies in the GCC region highlighted the financial as well as non financial
contributions that a private equity infuses in the partner company. The survey results
indicated average annual growth in sales in the years following the investment of 92%;
in capital expenditure of 86%; in exports of 95%; and in research and development
(R&D) expenditure of 32%. These high-growth companies, financed by private equity
and venture capital – are central to GCC governments’ efforts to develop their non-oil
economies. Besides the funding from private equity houses, the private equity executives
also bring expertise and experience from other companies in their portfolios to these
companies, including strategy and finance, and industry-specific knowledge. Many of
these private equity investors are also instrumental in introducing international best
practice and sound corporate governance.

Fundraising in the MENA Region

After witnessing a stellar growth in 2007 on the fund raising front, as well as fund sizes,
private equity in the MENA region witnessed some moderation in 1H-2008. According
to EMPEA data, the fundraising for private equity invest­ment in the region has grown
manifold over the past five years and has increased from a meager US$680mn raised in
2003 to over US$5bn in 2007. Average fund sizes have also grown from US$215mn in
2005 to US$265mn in 2007. However, fund raising declined to US$1.14bn in the first
half as compared to US$1.8bn raised in the first half of 2008. Nonetheless, this seems to
be an aberration and activity is expected to pick up soon.

Chart 10: MENA Region Private Equity Funds Raised


(US$ mn)

Source: EMPEA estimates

As per the GVCA report 2007, 64% of all capital raised was for funds larger than
US$500mn, while in 2006 this figure was 19% (22% in 2005). The tendency to raise funds
larger than US$500mn will probably continue in the future, particularly for infrastructure
investments. With billions of dollars of infrastructure assets set to be privatized or to be
built, infrastructure funds today have a much larger market in the region than buyout
funds. Yet, the mid-market funds (US$100mn to US$500mn) maintained a significant
market share in 2007 and are expected to remain a major player on the regional scenes
for years to come. With transaction sizes centering inbetween US$20mn and US$100mn
mark, such funds will be in an optimum position to tap into the majority of the deals in
the region.

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First permanent capital vehicle from MENA region listed on the London Stock
Exchange

Global Investment House set up a private equity permanent capital vehicle, Global MENA
Financial Assets Limited (GMFA), focusing on the high growth financial services sector
of the MENA (including Turkey) region. GMFA is the first permanent capital vehicle
from MENA region listed on the London Stock Exchange (Main Market), which would
invest in private equity assets.

Even in the adverse market conditions, especially for the financial services sector,
GMFA’s IPO got subscribed more than 100% with interest from both the European and
Middle East investors. European investors’ primarily included financial institutions and
pension funds, whereas Middle Eastern interest came from business conglomerates and
sovereign backed funds.

GMFA was successfully listed on the main market of London Stock Exchange on
18th July, 2008. This further created a company with a market capitalization of over
US$500mn, making it one of the largest funds from the emerging markets to float on the
London Stock Exchange till date. The issue drew huge interest from European investors
despite difficult market conditions even in such markets where many IPO are being
pulled back or delayed due to the global market conditions.

Status of Investing –MENA Private Equity Funds

From the beginning of 2006 till 1H-2008, the majority of the private equity funds raised
in the MENA region are in the ‘Investing’ phase, where 40 funds with a total size value
of US$10,433mn, 35.9% of total value, are classified as part of the group. Funds that are
in the “fund raising” stage throughout the same period in the MENA region constituted
44.5% of total value of funds. Announced private equity funds in the MENA region
during the period have a combined size of US$2,670mn, which constitutes 9.2% of the
total fund sizes of private equity funds in the region. There were 7 rumored funds for
a total size of US$2,540mn while there was a sole fund in the liquidation process for a
total size of US$500mn.

Chart 11: MENA Private Equity Funds by Status of Investing, 2006-1H-2008

Rumored
8%
Investing
45% Liquidation
1%

Announced
16%

Fund Raising
30%
Source: Zawya Private Equity Monitor

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According to GVCA report, the cumulative funds raised during the period 2005 to 2007
has increased more than threefold from US$4.7bn funds raised cumulatively up to 2005
to US$13.4bn up to 2007. However, total assets under management as a percentage of
total funds (announced and closed) marginally decreased from 68% in 2006 to 58% in
2007. This was primarily because of larger size funds announced in 2007 for which a
large proportion has not yet started the fund raising activity.

Nature and Size of Investments

The MENA private equity market is relatively young, not quite mature and has witnessed
unprecedented growth in the last few years. Due to lack of maturity, a number of PE
investments continue to go unreported. Furthermore, some PE houses have not revealed the
size of their PE investments, leading to further limitations on the information available. We
have done our analysis below based on data available as per zawya private equity monitor.

Chart 12: MENA Private Equity Investments (2006- 1H-2008)


(US$ mn)

Investment Size
Source: Zawya Private Equity Monitor

As can be seen, the total PE investments in the MENA region have increased substantially
in the recent past. During 2006, the number of investments made stood at US$1,577mn
through a total of 69 transactions. The number increased to US$3,901mn for the year
2007 through the same number of transactions. However it is worth mentioning that the
2007 figure was largely inflated due to the US$1.4bn acquisition of Egyptian Fertilizers
Company by a consortium led by Abraaj Capital. Deal sizes in the region have risen
significantly from an average of US$33.6mn in 2006 to US$79.6mn in 2007 representing
an increase of 137%.

However, the recent financial turmoil has cast a shadow of uncertainty over the private
equity industry as well, with institutional investors remaining highly cautious when
presented with new investment opportunities. Consequently, the number of investments
made till 1H-2008 is far fewer with only 16 reported as per zawya private equity monitor,
down from 33 during the same period in 2007. Not only have the number of transactions
fallen significantly in 1H-2008 but so has the size, with the largest deal closed being Intaj
Capital’s purchase of a majority stake at an announced $188m transaction size.

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Focus of investments

The geographic focus of regional funds is changing and becoming more di­verse as
mandates and operations broaden to include other regions with many regional players
opening offices in regions like Turkey, Egypt and North Africa region. Egypt emerged
as the preferred destination for investment in the MENA region, with US$2.4bn being
invested in the last decade. The higher level of investments in the past 10 years is mainly
due to two investments of more than US$500mn each, carried out in 2006 and 2007 and
accounted for 82% of the total Egyptian investments.

Chart 13: Break Up of Investments in MENA region (2005-2007)


(US$ mn)

Source: Zawya Private Equity Monitor, GVCA

Once these two significant investments are excluded from the analysis, the geographic
split shows a considerable amount of investments in the UAE (27%) and Saudi Arabia
(22%) and modest totals in Jordan and Egypt with a combined US$0.8bn being deployed
into these countries in the past decade.

Chart 14: MENA Private Equity Deals by Geographic Distribution (2007 – 1H-2008)

Source: Zawya Private Equity Monitor

In 2007, private equity investment in Egypt stood at US$1,539mn which was highest
in the region in one country. However this was again largely inflated by the US$1.4bn
investment into Egyptian Fertilizers Company. The UAE continued to be a hot destination
with US$782mn deployed in the market. Investments in Saudi Arabia reached US$729mn,
which was the third highest in the region after Egypt and UAE. This was mainly due to
the economic liberalization policies adopted by the Saudi government and reflected by
the Saudi Arabian General Investment Authority (SAGIA) 2010 plan.

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Saudi Arabia – A Unique Opportunity

The Saudi economy offers a highly attractive economic landscape for private equity
investors. The Nominal GDP of the economy has grown at a CAGR of 15% during the
period 2002-2007 while the real GDP increased at a CAGR of 5% for the same period. With
around 50% of the population less than the 20 years age bracket and another 33% in between
20-40 age group, demographics remain attractive and this, coupled with high oil prices have
ensured governments thrust on infrastructure and social spending remained high.

According to a World Bank report, Saudi Arabia is the 7th fastest reformer globally, and
2nd fastest within MENA. Also, the Kingdom’s surge in ranking to 16th in the world
and as the best in the MENA region in regards to ease of doing business is a reflection
of the reformatory action taken by the government to derisk its economy from oil.

Sectors of high potential include sectors subject to privatization and regulatory reforms
such as air travel, telecom, financial services and services such as education, healthcare,
food and beverage, consumer goods, and transportation.

Chart 15: World Bank: Ease of Doing Business Survey Ranking – Saudi Arabia

Source: World Bank

All the above offers a unique opportunity to tap this high potential market. However, a
number of obstacles stand in the way of effective access to this attractive market. The
PE deal volume as a percentage of GDP is still among the lowest and is estimated to
around 0.1% as compared to around 1.5% in the UAE. The reluctance of family owners
to relinquish control, high valuation expectations, unique social and regulatory setting
and relational business culture and talent scarcity are some of the factors that have
made it difficult for outside players to execute deals in the Kingdom. Thus a physical
presence with right contacts in the Kingdom along with a deep understanding of the
social and regulatory setting become the key to success for private equity players to
benefit from the private equity boom that the Kingdom is on the verge of witnessing.

With relatively cheap valuations of Saudi listed companies due to the current
meltdown, coupled with an increasingly progressive regulatory environment, long-term
institutional money will be attracted to the region. Global Investment House is the most
active private equity player in the Kingdom with around 31% share of the investment
universe of GCC PE houses.

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Chart 16: Sector focus of Private Equity Investments in MENA region (2007 – 1H-2008)
Telecomes & IT
1%
Oil & Gas Transport
7% 8%
Construction Services
3% 5%

Others
Healthcare 18%
11%

Financial Services
11%

Consumer Goods
3%

Basic Materials
33%
Source: Zawya Private Equity Monitor

The spending power of the region’s growing middle class is influencing a shift in investment
focus away from oil & gas to service-based and consumer-oriented businesses. During
the period from 2007 till 1H-2008, investments made were highest in the Basic Materials
sector with a total of US$1,422mn worth investments. It was followed by Healthcare sector
(11% of all investments) followed by Financial Services (11%), Transport (8%), Oil and
Gas (7%) and Services (5%) sectors. Basic materials sector was again influenced by the
US$1.4bn investment in Egyptian Fertilizers Company. As the economies and population
of the region will grow, social infrastructure needs in healthcare and education will increase
and these will be the sectors that private equity players would look for.

Table 6: Key Sectors to Look Out For:


Sectors Specific Investment Opportunities
Energy Companies engaged in exploration and production, gas handling and
transportation etc. are attractively positioned to benefit from increasing private
sector participation in mid-and downstream oil sector with a total of US$300bn
spending in oil/gas infrastructure. The sector is projected to grow significantly
with gas production expected to increase by 8% in the next five years in the
Middle East. Emerging market demand for Petrochemicals/Fertilizers and
Aluminum will drive gas production. MENA Oil/ Gas offshore services market
size is US$7.5bn and is expected to grow to US$12.5bn by 2012 at a CAGR of
10% and another US$15bn to be spent in LNG export terminals.
Key subsectors:
- Oil and gas exploration/drilling services
- Oil Refining and marketing
- Gas – Upstream and downstream
- Oil and Gas (LNG) transportation
- Oil and Gas Construction Services

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Utilities/ MENA region faces shortage of power following demand and consumption
Infrastructure growth with the consumption rising by 7%. Privatization of power sector assets
and growing acceptance of Integrated Utilities projects is likely to attract further
investments. Also an expanding industrial base and the setting up of GCC power
grid is likely to increase the utilization efficiency and may result in improved
margins for the operators. As per zawya estimates around US$150bn of planned
capital expenditure has been announced so far to be carried out in the next few
years.
Key subsectors:
- Power Equipment Industry
- Power Construction and allied services
- Power Projects management
- Water Projects, Waste water management including recycling
Retail/ Consumer Driven by increasing purchasing power and low retail penetration, the retail
Goods spends going forward are expected to rise. Retail companies, especially those with
franchises for foreign labels in any retail activity, are expected to offer good growth
potential and with increasing population and lifestyle improvements the prospects
look bright. Saudi Arabia, UAE and Egypt have good potential for growth.
Key subsectors:
- Hypermarkets and Supermarkets
- Fashion Retailing and Specialty Retailing
- Beauty, Fitness Centers, Pharmacy
- Electronics Retailing
- Restaurants and Food/Beverages
- Consumer Finance
Logistics The sector is expected to ride on the on-going project & infrastructure investments
and impending retail boom in the region. Companies with established region-wise
network and presence all across the supply chain are expected to benefit. 
Key subsectors:
- Warehousing, Distribution services, Contract logistics
- Port Management and Port services
- Freight and Forwarding
- Oil, Gas, and Petrochemicals Transportation
Health Care Healthcare and Pharmaceuticals continues to grow at a high rate with rising health
care spending in the region. Factors like population growth (at a higher rate than
Europe or US). Mckinsey estimates Healthcare spending to increase at a CAGR
of 10% up to 2025. Currently MENA Healthcare is characterized by low private
sector penetration which currently stands at 25% of total expenditure. This is
expected to increase with increased private sector participation. Introduction of
mandatory medical insurance for expatriates and private sector employees in
Saudi Arabia and UAE with other countries also expected to follow, just adds to
the growing potential in the sector.
Key subsectors:
- Diagnostic centers and Medical Centers
- Hospital Operations and Management
- Healthcare Equipment and Devices - Distribution
- Pharmacy Retailing & Distribution

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Education Higher education especially in developing the technical skills which will help
in the development of small and medium enterprises. Current GCC general
education market size is estimated at over US$3.0bn including Saudi market size
of US$1.5bn. Young population and rising standard of living is driving the need
for quality education and with low private sector participation, the sector offers
an attractive preposition. With the private sector participation in Saudi on the
uprise and growing at 6.5% as against 3% in government sector, the market offers
attractive opportunity.
Key subsectors:
- Education Management
- Primary and General Education Schools
- Higher Education
Financial The financial sector in the MENA has largely been insulated from the mortgage
Services crisis in United States with mortgage finance still evolving in MENA. Most
product categories/markets, consumer segments remain fragmented and immature
and fundamentals look attractive. Ongoing industry transformation provides
scope for M&As, recapitalization and restructuring. The sector offers relatively
lower risk with a proven path for exit multiple expansions.
Key subsectors:
- Banking
- Auto finance
- Consumer finance
- Mortgage Finance
- Stock and Commodity Exchanges
- Brokers and Intermediaries
Real Estate Construction and real estate sector’s share in GDP has been rising fast with record
level of spending happening and many projects in the pipeline. As per Zawya
estimates, a record US$1.5trillion projects are either in execution or planned
while MEED forecasts project spend of over US$2trillion by 2020.
Key subsectors:
- Construction contractors
- Construction equipment leasing companies
- Interior Decoration
Transport - Air MENA being centrally located between Asia and Europe enjoys geographical
advantage with Dubai fast emerging as a global hub in air transportation. Growth
rate is high in the region with international arrivals growing at 13% and revenue
per passenger kilometer growing at 20% in 2007 is highest in the world. With
high levels of capital expenditure in between US$25-30bn in airport expansions
expected in the next few years, this sector too offers attractive investment
opportunity for PE players.
Key subsectors:
- Airport management and services
- Aircraft maintenance
- Air Cargo Services
- Low cost Airlines

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Metals - Middle East enjoys competitive advantage in aluminum production which is


Aluminum & Steel almost 30% cheaper than the West and China due to its low energy cost. Also
proximity to key markets (Asia) provides another advantage. It is estimated
that a total of US$30bn is to be spent in new aluminim projects in the MENA
region. Steel also is in strong demand for construction sector with GCC being
net importer.
Key subsectors:
- Aluminium Production
- Downstream Production (Aluminium/Steel)
Travel & Tourism In its drive to reduce dependencies on oil revenue, the GCC governments have
been promoting travel and tourism projects in their countries in particular UAE,
Saudi Arabia, Bahrain, and Oman. The industry is healthily growing with travel
and tourism growth in MENA expected to grow at 7% in 2008 (6% in 2007). The
occupancy and average room rates are high in the region particularly in UAE,
Saudi Arabia, Egypt and Oman.
Key subsectors:
- Hotel sector especially in UAE, Saudi Arabia, Egypt, Oman
- Air Cargo Services
Source: Global Research

Exits by Value and Number

Private equity investments are relatively illiquid, particularly in the early years. The
life-cycle of an average private equity fund investment averages three to seven years.
Investors in private securities generally exit their investment and achieve returns through
an initial public offering, a sale (to corporate buyers or another private equity firm), a
merger, or a recapitalization. As the companies are not listed on a public exchange,
investors wishing to exit their private equity holding do so by selling the holding to
another investor through the secondary market.

The MENA private equity industry being still in its early stages, most funds are still in the
deployment stage and consequently few exits have been realized by this stage. However,
the exit rate is likely to increase as investments made in the past few years reach realization.
A recent private equity confidence survey by Deloitte shows that the private equity exits
are likely to go up in the next twelve months with 42% predicting trade sales will be the
dominant exit route and 39% believing an IPO will be the dominant exit route.

Chart 17: Exits by Value and Number in MENA region (2006-1H-2008)


(US$ mn)

Source: Zawya Private Equity Monitor

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During 2006, there were 18 exit transactions while the amount realized was only available
for 15 of them worth US$154mn. In 2007, the number of exits was almost similar to
2006 at 16, however details were provided for only 7 of them. The exit value soared to
US$1,289mn in 2007. So far in 2008, only nine exits in the MENA region have been
reported with the amount for only two exits available. For the first half 2008, the value
of exit reported was US$2,555mn. The two prominent exits that have happened in recent
times is Abraaj Capital’s sale of its stake in the EFG Hermes Holding for US$1.1bn in
2007 and recently concluded US$2.5bn in the 1H-2008 of Egyptian Fertilizers Company
sold to Orascom Construction Industries.

In the exits to date, the holding period appears to vary from one to four years, with an
average of just over two years with the internal rate of returns (IRRs) achieved by these
exits ranging between 31% and an outlier 348% considered very healthy returns for
a nascent industry. Many investments are reaching realization faster than the planned
typical investment horizon of three to five years.

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Private Equity Fund Performance


Over the past few years private equity has become broadly accepted as an asset class
which not only enhances the returns but at the same time contributes to portfolio
diversification. Although there is some correlation between returns on private equity
and public equity and bond markets the correlation is not high. A major reason for
the substantial growth of the private equity market in the past few years has been the
anticipation by institutional investors of returns substantially higher than that can be
earned in alternative markets.

With all together different kind, size, liquidity and term of investment appetite needed
for private equity investments which only institutional investors and HNIs can take, the
expected returns are high and a major attraction for them to invest their money.

Worldwide, institutional investors’ commitment to alternative investments has risen.


Institutional investors have recently exhibited an increasing appetite for investing
in private equity to seek higher returns that the sector has historically provided. US
institutional investors at the end of 2007 allocated the highest proportion of their portfolios
to private equity than European and Japanese. However their average allocation of 7%
has increased only marginally between 2005 and 2007, whereas the share of portfolio
allocation to private equity in Europe increased from 4% to 6% and doubled from 2% to
4% in Japan. An important reason for the high growth of the private equity market has
been the fact that private equity investments generated consistently higher returns than
most public equity markets and bond markets.

As per data compiled by Cambridge Associates LLC Proprietary Index, private equity
returns in the CEE & Russia PE had far outperformed returns in other regions. The private
equity industry has produced strong returns in one year period ending Mar-2008, with
all regional private equity investments giving high double digit returns while the return
on benchmark S&P index being in red. CEE & Russia PE provided the highest return
of 66.95 while Western Europe came second at 37.1% return. The returns on Emerging
markets VC & PE and Asia (ex Japan) PE with 28.5% and 25.7% too was substantially
high. The net return of Emerging markets VC and private equity funds measured at end
Mar-2008 was: 3 years 27.7%, five years 25.8% and ten years 9.6%.

Table 7: Comparative End-to-End Returns by Region (as of 31 March 2008)


One Three Five Ten
Index
Year Year Year Year
Emerging Markets VC & PE 28.5% 27.7% 25.8% 9.6%
Latin America & Caribbean PE 31.5% 26.1% 18.6% 1.1%
Asia (ex Japan) PE 25.7% 22.6% 21.1% 8.8%
CEE & Russia PE 66.9% 46.5% 47.3% 20.8%
MSCI Emerging Markets 21.7% 29.6% 36.0% 12.5%
US VC 11.6% 14.1% 11.6% 32.8%
US PE 11.2% 23.2% 24.1% 13.1%
Western Europe PE 37.1% 44.4% 38.0% 26.5%
S&P 500 -5.1% 5.9% 11.3% 3.5%
Source: Cambridge Associates LLC

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As private equity investments are generally medium and long term investments, one year
returns are inappropriate as a realistic measure of private equity performance due to the
volatility in returns. We therefore look at the rolling 3 year, 5 year and 10 year returns
for Emerging markets VC & PE returns.

Chart 18: Trends in Emerging Markets VC & PE Returns (As of March 31, 2008)
50% 1 Year
40%
30% 3 Year
20% 5 Year
10%
10 Year
0%
-10%
Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08
Source: Cambridge Associates LLC

What is noteworthy is that the graph plotted of these returns is upward sloping
substantiating the high returns generated by private equity investments throughout the
period. It is also important to note that throughout the past 10 year period, the returns
have always been positive.

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Sovereign Wealth Funds


Sovereign wealth funds (SWFs) have grown substantially in size over recent years and
are increasingly in the limelight with the investments being made by these of late. High
oil prices have boosted the total assets of SWFs to record levels thus increasing their
influence in global financial markets. Since the start of the sub-prime crisis SWFs,
have invested over US$60bn predominantly in US and Swiss banks and according to
Dealogic, cross-border M&A deals by SWFs totaled US$49bn in 2007, up 165% from
US$19bn in the previous year. Another US$24bn has already been invested in the first
three months of 2008.

According to “The Preqin Sovereign Wealth Fund Review”, the total assets of all
sovereign wealth funds stood at around US$3.05 trillion at the end of 2007, with this
capital coming from 46 confirmed funds. On average, sovereign wealth funds have
grown by 33% over the figure at the end of 2006, with the combined total assets rising by
a significant 51% - indicating that it is the bigger funds that are growing fastest. Merrill
Lynch estimates the value of assets held by SWFs will grow to US$8.0 trillion by 2011
and the IMF is predicting this figure to exceed US$12 trillion by 2015 substantiating the
fact the role that SWFs would play in the near future.

Table 8: Sovereign Wealth Funds - Middle East


Assets estimated
Fund Name (US$bn)
Abu Dhabi Investment Council (Abu Dhabi) 875.0
SAMA Foreign Holdings (Saudi Arabia) 300.0
Kuwait Investment Authority (Kuwait) 250.0
Qatar Investment Authority (Qatar) 60.0
Brunei Investment Agency (Brunei) 30.0
Kazakhstan National Fund (Kazakhstan) 21.5
Dubai International Capital (Dubai) 13.0
Oil Stabilization Fund (Iran) 12.9
Istithmar World (Dubai) 12.0
Mubadala Development Company (Abu Dhabi) 10.0
Mumtalakat Holding Company (Bahrain) 10.0
Public Investment Fund (Saudi Arabia) 5.3
State General Reserve Fund (Oman) 2.0
Source: SWF Institute, EMPEA

Middle Eastern investors have been one of the driving forces behind this growth, and
currently represent the largest regional group. With oil prices rising sharply and reaching
record levels over the past five years led to a significant amount of wealth generation by the
major oil producing nations. This has resulted in significant cumulative current account
and trade surpluses for the Middle Eastern SWFs, which are significantly increasing
their presence on the international scene as they try to diversify their economies away
from a reliance on oil and gas.

This boom in Middle Eastern sovereign capital is also one of the driving forces behind
the growth in the GCC private equity market with Preqin estimates indicating the figure
for SWFs committed to private equity between US$120 - US$150bn or almost 10% of

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the global total capital available to the private equity industry. Preqin further estimates
52% of all SWFs invest in private equity funds, 33% do not invest while no information
was available for the remaining 15%. According to the 2008 Norton Rose/EMPEA
survey “Sovereign Wealth Funds and the Global Private Equity Land­scape,” 70% of PE
firms surveyed expected an increasing amount of investment from SWFs, through co-
investments on deals (41%), investing directly in fund management companies (13%),
or via fund commitments (16%).

Chart 19: Percentage of SWFs that Invest in Private Equity

Do not
Invest Invest
52% 33%

Unknown
15%

Source: Preqin

MENA Sovereign Wealth Funds

A considerable number of investments made by the SWFs mainly go unreported or


data is not available. In the absence of that we have analyzed only the data as has been
available from Zawya Private Equity Monitor for which the transactions size is available
in the last five years which again highlight the growing participation of SWFs in the
regional PE landscape.

During the period, Istithmar has made the largest number of investments (22) followed
by Dubai Investment Capital (DIC) and Mubadala. However, based solely on investment
size, ADIA and Mubadala have invested the largest amount of capital to date. In 2006,
Istithmar made five acquisitions in the US totaling US$2.4bn, with half of this money
invested in the US real estate market (including 280 Park Avenue which was subsequently
sold in 2007).

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Chart 20: Investments by Regional SWFs (2003-2007)


(USD bn)

ADIC

QIA

Isthithmar

KIA

DIFC

DIC

ADIA

Mubadala
Source: Zawya Private Equity Monitor, GVCA

Previously the regional SWFs had been targeting the western and European markets for
their investments. Some of the acquisitions were Qatar Investment Authority taking a
20% stake in the London Stock Exchange. In 2007, DIC made sizeable investments in
the banking giants HSBC Holdings in the UK and ICICI bank in India. ADIA invested
US$7.5bn in Citigroup, to acquire a minority stake. In 2006, DIC acquired Travelodge,
the UK’s budget hotel business, paying US$1.3bn for the chain’s 291 hotels.

Table 9: Subprime capital infusions from SWFs


End Sept 2008 US$bn Stake (%)
Citigroup 22.0 12.7
Merrill Lynch 12.2 23.0
UBS 11.5 12.0
Morgan Stanley 5.0 9.9
Barclays 5.0 5.2
Canadian Imperial Bank 2.7 11.1
Bear Stearns 1.0 6.0
Total 59.4  
Source: Bloomberg, SWF Institute

Although there is still a significant concentration on the US and the United Kingdom, in
2007 there has been increased focus on investing in the MENA region and developing
markets. In 2007, US$6.6bn was invested into the UAE, the largest transaction being
Mubadala’s US$4bn investment in Emirates Aluminium.

Chart 21: Aggregate Investments by SWFs


(USD bn)

Source: Zawya Private Equity Monitor, GVCA

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Exits in the SWF market seem limited, because the market perception is that they prefer
to have long term, risk-averse portfolios and tend to pursue buy-and-hold strategies,
with no short positions and perhaps no borrowing or direct lending of any kind. They
probably have long horizons and, like other long-term investors, are willing to step in
when asset prices fall.

Istithmar’s sale of its two Park Avenue properties in the US. It claims the original strategy
was to hold on to these investments and attributes the sale to ‘unusual opportunities’ in
the market. Istithmar made a 63% return on the 230 Park Avenue purchase price (bought
for US$705mn in 2005 and sold for US$1.1bn) and a 12.5% return on 280 Park Avenue
(bought for US$1.2bn in 2006 sold for US$1.4bn).

DIC acquired the Tussauds Group in 2005 for US$1.5bn and sold it to Merlin’s
Entertainment Group two years later for US$2bn (which is majority owned by Blackstone
private equity group) while maintaining a 20% stake in the merged Group.

The most notable feature of the SWF investor universe is the huge amount of potential
for further growth. With the combined total assets of these investors currently standing
at US$3.05 trillion, and with oil prices at high levels, the potential for further growth
is immense. In the past, SWFs had been conservative and concentrated on low risk
instruments such as government bonds and bank deposits. However, there is now a
growing trend to move towards private equity type deals, real estate, commodities and
hedge funds. There will be a growing appetite for foreign investments in the coming
years as petrodollar wealth is recycled on global financial markets. Considering the size
and growth expected in SWFs, even a small proportion of total assets directed towards
private equity will ensure that these funds represent an increasingly important share of
the overall investor universe.

Furthermore, the fact that SWFs typically lack liabilities that they are obligated to pay out
on, and do not have external investors able to withdraw capital at short notice, coupled
with a lack of restrictions on the investments they can make corroborate the increasing
significance that SWFs will hold in investments made into private equity and real estate.
A number of institutions are actively looking to increase their existing allocations, or are
currently in the process of examining whether to enter the asset class for the first time - a
trend that is likely to continue in coming years.

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Opportunities and Challenges - Stock Market Correction and


future of Private Equity
There has been a wave of corrections sweeping the regional markets. The regional markets,
which had earlier remained largely insulated from the global financial turmoil, have been
falling sharply taking cues from global markets. We attribute this decline to negative
sentiments prevailing in the market. The decline in the market has also been triggered
by the outflow of foreign investments. Foreign investors have been exiting emerging
markets (MENA markets being no exception) on account of liquidity crunch and losses
in the equity markets. The selling pressures by foreign investors have accentuated over
the past two months in the wake of recent crisis of Lehman Brothers and Merrill Lynch.
Margin calls from local investors have been also adding the woes to the market. This has
cast a shadow of uncertainty over the private equity industry as well. Fundraising and
deal flow is down, and institutional investors remain highly cautious when presented
with new investment opportunities.

Table 10: Performance of Regional Markets


2005 2006 2007 YTD*
Kuwait 67.6% -10.6% 31.7% -30.7%
Qatar 83.4% -41.0% 48.2% -24.1%
Bahrain 22.7% -4.4% 29.8% -20.4%
Saudi Arabia 103.7% -52.5% 39.1% -49.8%
UAE 102.9% -39.9% 33.6% -34.5%
Oman 44.4% 14.5% 61.9% -32.3%
Egypt 146.3% 10.3% 51.3% -51.6%
Jordon 56.1% -29.3% 21.9% -16.5%
Tunnisia 21.0% 44.3% 12.1% 16.4%
Lebanon 105.6% -9.6% 26.8% -8.7%
Morocco 19.9% 57.4% 25.9% -5.4%
Nikkei 40.2% 6.9% -11.1% -46.4%
S&P 500 -2.9% 17.0% 3.5% -36.7%
*YTD as on October 29, 2008
Source: Global Research

However MENA economies are more robust and fundamentally different from other
economies. Considering the fundamental factors in the region, the only negative factor
in the current economic scenario is the real estate market in Dubai. After recording
spectacular growth over the past few years, we expect Dubai real estate market to slowdown
in coming years as the expect supply-demand gap is bridged. Dubai government has also
taken steps to curb speculation in the real market which might slowdown the growth
to some extent in the near term. However we firmly believe that these regulations will
strengthen the market in the long run.

We believe that the fundamental factors remain intact and this should help the market
tide over the recent declines. In the wake of recent sell-off, the regional markets are
trading at an attractive level. This has created an opportunity for private equity. The
main reason for the expected rapid recovery is the strong fundamentals of the regional
companies.

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The subprime crisis has had no fundamental impact on the macroeconomic performance
of the MENA region. Economic growth is being sustained mainly by non-oil sectors
including construction, retail, transportation, and financial services.

The lack of contagion is attributable to weaker integration of MENA’s financial sector


with those of the US and Europe; and improvements in MENA’s fundamentals over the
last decade - including better fiscal and monetary management; more open regimes with
more flexible exchange rates, and better debt and financial management that has reduced
exposure to international capital markets.

Chart 22: Strong GDP growth in MENA Chart 23: MENA Among the Fastest Growing
Economies in the World

(Real GDP Growth)


(US$ mn)

Source: IMF World Economic Outlook, October 2008 Source: IMF World Economic Outlook, October 2008

Oil price declines are significant but not disastrous. Most government budgets and
investment programs in the Middle East will remain intact unless oil falls below US$50/
barrel. Prolonged drop below US$50 is highly unlikely because global demand for oil
continues to rise while supply is largely static. The governments in the MENA region have
amassed huge reserve funds which they could deploy to support regional growth if the
outlook darkens. The government has saved 70% of their surplus oil revenues over the past
five years and Sovereign wealth funds in the MENA region have over US$1.5 trillion at
their disposal. So the growth and funding of various projects is less likely to be impacted
with the region continuing to remain the most insulated of the global credit crunch.

The repricing that has taken place has woken investors up to the risks inherent in riding
the equity market wave far more convincingly then the financial advisers’ mere words
had been doing earlier. The repricing that has happened in both 2006 and now will to
an extent put a word of caution to high-net worth individuals who questioned why they
should lock their money into a private equity fund for a longer period when they could
reap in great returns on the stock market in a month’s time. People would have more
realistic expectations. They would remember these periods and realize that situations
can quickly change.

The silver lining of the current stock market correction is that these pricing expectations
will now start to come into line with reality, opening the door for more deals which
had been a major impediment for deals not happening as per the GVCA survey 2007.
The drop in stock market value also means that company valuations are less inflated
than they were one year ago and there is more value to be found. Company owners too

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would be more realistic about valuations and consequently would be more receptive to
private equity alternatives. There also seems to be less resistance from local businesses to
private equity, now that they can see cases where the cash injection has made a positive
difference.

The demand for investment capital would continue to grow in the region and consequently
deals will continue to be done. However the deals would be done with much lower
levels of debt, and more equity as fewer lenders would provide debt to fund acquisition.
Minority stake transactions will predominate with local private equity players because
of the regional expertise likely to be more active.

The most profitable fund vintages to invest in have often been those where the in-going
investments have been made in challenging times. 2008 may well be one of these. As a
result, people are very bullish about return prospects for 2008-10 vintages.

Chart 24: USA Private Equity Funds Performance by Vintage Year (IRR)
1990-91 2001-2002
Savings & Loan Crisis Tech Bubble
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Source: Cambridge Associates

The most successful investors in private equity have been those with a consistent long-
term strategy, investing over a long period. Fundamentally nothing has changed: private
equity will continue to grow, and will continue to deliver net returns well in excess of
those available in the public markets.

Strategy - MENA Private Equity 29


Appendix

30
MENA Private Equity Investments (2007-1H-2008)
Size in
Fund / Institution Target Company Country Sector Industry US$mn
1H-2008 Tranactions        
Intaj Capital Jordan Aviation Jordan Transport Airlines 188.0
Al-Futtaim MENA Real Estate
Development Fund Cairo Festival City Egypt Real Estate Shopping Malls 84.0
Global Buyout Fund L.P. Al Sawani Group Saudi Arabia Retail General Retailers 66.5
Global Opportunistic Fund II Al Sawani Group Saudi Arabia Retail General Retailers 30.0
Global Opportunistic Fund II Evergrande Real Estate Group China Real Estate Real Estate Developer 30.0
Global Research - Private Equity

The Port Fund L.P. Global Gateway Logistics City Philippines Transport Specialized Aviation Services 30.0
Saraya Real Estate Mena Fund Saraya Bandar Jissah Oman Real Estate Landlords and Developers 17.0
Intaj Capital Petroser Algeria Oil and Gas Distribution and Marketing 15.0
Istithmar Gulf Stream Asset Management LLC United States Financial Services Asset Management -
Istithmar ESPA International United Kingdom Travel and Tourism Recreation -
Swicorp Joussour Fund Mosvold Middle East Jackup Ltd UAE Construction Heavy Construction -
SHUAA Partners Fund I, L.P. Drake and Scull International Dubai UAE Construction Electro-Mechanical Contractors -
Ithmar Fund II Dewan Architects and Engineers UAE Construction Engineering Services -
Amwal Fund II Dubai Contracting Company UAE Construction Building Contractors -
Dubai International Capital The True Group Singapore Healthcare Healthcare Services -
Saraya Real Estate Mena Fund Saraya Sochi Russian Federation Real Estate Landlords and Developers -
Infrastructure and Growth Capital Fund Bosicor Group Pakistan Oil and Gas Integrated Oil Companies -
The Libya Fund Etelaf Oil Services Libya Oil and Gas Oilfield Services and Equipment -
EuroMena Fund Intercontinentale Bank of Lebanon Lebanon Financial Services Commercial Banks -
Abraaj Buyout Fund II Osian’s Connoisseurs of Art Private Limited India Services Education and Culture -
MENA Infrastructure Fund Alexandria International Container Terminals Egypt Transport Marine and Seaport Services -
EuroMena Fund National Printing Company Egypt Basic Materials Containers and Packaging -
Unicorn Global Private Equity Fund I Gulf Strategic Partners WLL Bahrain Oil and Gas Oilfield Services and Equipment -
Global Investment House

Strategy - MENA Private Equity


MENA Private Equity Investments (2007-1H-2008) - Continued
Size in
Fund / Institution Target Company Country Sector Industry US$mn
2007 Tranactions
Infrastructure and Growth Capital Fund Egyptian Fertilizers Company Egypt Basic Materials Fertilizers 1,400.0
Dubai International Capital Och-Ziff Capital Management Group LLC United States Financial Services Asset Management 1,260.0
Dubai International Capital Alliance Medical United Kingdom Healthcare Medical Equipment 1,250.0
Dubai International Capital Mauser AG Germany Basic Materials Containers and Packaging 1,155.0
Dubai International Capital HSBC Holdings PLC United Kingdom Financial Services Commercial Banks 1,000.0
Istithmar Barneys New York United States Consumer Goods Department and Variety Stores 942.3
Istithmar 2 business parks in the South East of England United Kingdom Real Estate Landlords and Developers 388.0

Strategy - MENA Private Equity


Global Research - Private Equity

Istithmar Mazagan Resort Morocco Travel and Tourism Hotels and Resorts 350.0
Aldar Private Equity Fund Infrastructure and Growth Capital Fund UAE Financial Services Investment Funds - Islamic 200.0
Abraaj Buyout Fund II Saudi Tadawi Company Saudi Arabia Healthcare Pharmaceuticals 177.0
Swicorp Joussour Fund Eastern Petrochemical Company Saudi Arabia Oil and Gas Refining and Petrochemicals 175.0
Infrastructure and Growth Capital Fund Acibadem Saglik Hizmetleri and Ticaret Turkey Healthcare Healthcare Services 162.5
Global Buyout Fund L.P. Fon Finansal Kiralam A.S. Turkey Financial Services Credit and Finance 120.0
Infrastructure and Growth Capital Fund Global Educational Management Systems UAE Services Education and Culture 111.0
Infrastructure and Growth Capital Fund Air Arabia UAE Transport Airlines 101.0
Istithmar Queen Elizabeth 2 United Kingdom Travel and Tourism Recreation 100.0
Ithmar Fund II Mushrif Trading and Contracting Company UAE Construction Heavy Construction 96.6
Gulf Capital Education Company Saudi Arabia Services Education and Culture 93.0
Swicorp Joussour Fund Egyptian Refining Company Egypt Oil and Gas Refining and Petrochemicals 80.0
Global Buyout Fund L.P. Planet Pharmacies LLC UAE Healthcare Pharmaceuticals 77.5
IDB Infrastructure Fund L.P. Maegma Hot-rolled Coils Malaysia Mining and Metals Fabricated Metal Products 73.0
Intaj Capital Amlak Saudi Arabia Financial Services Credit and Finance - Islamic 64.0
Swicorp Emerge Invest Pulsar MENA MENA Real Estate Landlords and Developers 60.0
Global Buyout Fund L.P. Al Jazeera Steel Products Company Oman Mining and Metals Fabricated Metal Products 53.7
Istithmar Hans Energy Company Limited China Transport Warehousing and Storage 52.0
Global Investment House

31
United Yemen Telecommunication Services
KFICME Private Equity Fund Company Yemen Telecoms and IT Telecom Operators 41.9
Saraya Real Estate Mena Fund Saraya Islands UAE Real Estate Landlords and Developers 40.0
Amwal Fund II Right Angle Media FZ LLC UAE Media Advertising 37.5
MENA Private Equity Investments (2007-1H-2008) - Continued
Size in
Fund / Institution Target Company Country Sector Industry US$mn
KFICME Private Equity Fund Bayan Holding Company Kuwait Real Estate Landlords and Developers 37.0

32
The Pre-IPO Fund Ajlan and Brothers Company Saudi Arabia Consumer Goods Textiles and Apparel 35.0
Gulf Capital Gulf Marine Services UAE Transport Marine and Seaport Services 32.0
KFICME Private Equity Fund Arab Finance House Lebanon Financial Services Commercial Banks - Islamic 30.5
Global Opportunistic Fund II Planet Pharmacies LLC UAE Healthcare Pharmaceuticals 30.1
Global Opportunistic Fund II Real Estate Finance Company Saudi Arabia Financial Services Credit and Finance 30.0
Global Opportunistic Fund II Ajlan and Brothers Company Saudi Arabia Consumer Goods Textiles and Apparel 30.0
Gulf Capital Gulf Marine Services UAE Transport Marine and Seaport Services 24.0
Swicorp Joussour Fund Ghani Glass Limited Pakistan Basic Materials Containers and Packaging 22.0
Amwal Fund II Amwal Al Arabia Egypt Consumer Goods Textiles and Apparel 21.00
Global Research - Private Equity

Amwal Fund II Zohoor Al-Reef Saudi Arabia Consumer Goods Toiletries 20.0
EuroMena Fund IT Worx Egypt Telecoms and IT Software and Services 20.0
KFICME Private Equity Fund Rasmal Holding Company Kuwait Real Estate Landlords and Developers 18.1
Amwal Fund II KSAM 2 UAE Oil and Gas Refining and Petrochemicals 18.0
Amwal Fund II Egyptian Propylene and Polypropylene Company Egypt Oil and Gas Refining and Petrochemicals 18.0
Sabre Abraaj India Private Equity Fund I Limited Ramky Infrastructure Limited India Construction Heavy Construction 17.0
TNI Growth Capital Fund Emaar MGF Land India Real Estate Landlords and Developers 15.0
Delta Capital MENA Telecom Fund Karoui and Karoui World Tunisia Media Advertising 12.0
KFICME Private Equity Fund MENA Real Estate Company Kuwait Real Estate Landlords and Developers 10.8
Unicorn Global Private Equity Fund I US Precision Team Incorporated United States Conglomerates Diversified Services 10.5
EuroMena Fund Sodamco Holding Lebanon Construction Building Materials 10.0
Global Opportunistic Fund II Model Restaurants Company Jordan Travel and Tourism Restaurants 9.9
Unicorn Global Private Equity Fund I Al Assi UAE Conglomerates Diversified Services 9.0
Private Equity Fund Ajlan and Brothers company Saudi Arabia Consumer Goods Textiles and Apparel 8.8
MENA Small and Medium Enterprises Fund I Jordan Abyad Fertilizers and Chemicals Company Jordan Oil and Gas Fertilizer Manufacturing 8.0
Middle East Real Estate Opportunities Fund II Philadelphia Investment Group Limited Jordan Real Estate Landlords and Developers 7.0
Global Opportunistic Fund II Reach (Cargo Movers) Pvt. Ltd. India Transport Diversified Transport Services 5.0
Global Opportunistic Fund II Uma Precision Limited India Auto Ancillery Diversified Manufacturing 4.1
Global Investment House

Strategy - MENA Private Equity


EuroMena Fund Palestine Securities Exchange Palestinian Territories Financial Services Securities Markets 4.0
MENA Private Equity Investments (2007-1H-2008) - Continued
Size in
Fund / Institution Target Company Country Sector Industry US$mn
KFICME Private Equity Fund First Jordan Investment Company Jordan Financial Services Investment Companies 3.6
KFICME Private Equity Fund Gulf Capital UAE Financial Services Investment Companies 3.5
EuroMena Fund Siniora Food Industries Jordan Agriculture and Food Meat Products 3.2
KFICME Private Equity Fund Vision Network Television Limited Pakistan Media Radio and Television 2.4
KFICME Private Equity Fund Gulf Holding Company Kuwait Real Estate Landlords and Developers 2.3
Middle East Real Estate Opportunities Fund Philadelphia Investment Group Limited Jordan Real Estate Landlords and Developers 2.0
The Pre-IPO Fund Tamweel UAE Financial Services Credit and Finance - Islamic 1.3
KFICME Private Equity Fund Al Safat Takaful Insurance Company Kuwait Financial Services Insurance Companies - Islamic 1.3
The Pre-IPO Fund Dubai Financial Market UAE Financial Services Securities Markets 0.3

Strategy - MENA Private Equity


Global Research - Private Equity

Istithmar GLG Partners United Kingdom Financial Services Asset Management -


MENA Transformation Fund I Modern Emirates Heavy Cranes LLC UAE Construction Misc. Construction Services -
Dubai International Capital Rivoli Group UAE Conglomerates Diversified Trading -
HSBC Private Equity Middle East Byrne Equipment Rental UAE Services Equipment Leasing -
Catalyst Private Equity Omni Oil Technologies UAE Oil and Gas Oilfield Services and Equipment -
SHUAA Partners Fund I, L.P. Air Arabia UAE Transport Airlines -
Growth Gate E-Freight International UAE Transport Freight Forwarding Services -
GCC Energy Fund L.P. The Stellar Companies UAE Power and Utilities Misc. Utility Services -
MENA Transformation Fund ATA Invest Turkey Financial Services Investment Banks -
NBK Capital Equity Partners Yudum Food Turkey Agriculture and Food Edible Oils -
HSBC Private Equity Middle East Undisclosed company Saudi Arabia Healthcare Healthcare Services -
MENA Transformation Fund I Undisclosed company Saudi Arabia Healthcare Healthcare Services -
Catalyst Private Equity Millennium Energy Industries MENA Power and Utilities Electricity and Water Supply -
Jordan Dubai Capital Industrial Development Bank Jordan Financial Services Specialized Banks -
EuroMena Fund Arab Pharmaceutical Manufacturing Company Jordan Healthcare Pharmaceuticals -
Jordan Dubai Capital Amlak Finance - Jordan Jordan Financial Services Other Financial Services -
Jordan Dubai Capital Munya Woodland Resort and Spa Jordan Travel and Tourism Hotels and Resorts -
Jordan Dubai Capital Central Electricity Generating Company Jordan Power and Utilities Electricity Supply -
Global Investment House

33
Dubai International Capital ICICI Bank Limited India Financial Services Commercial Banks -
Dubai International Capital Alumina Materials Innovative Solutions (Almatis) Germany Mining and Metals Fabricated Metal Products -
MENA Small & Medium Enterprises Fund I IT Worx Egypt Telecoms and IT Software and Services -
Infrastructure and Growth Capital Fund Al Nouran holding Egypt Agriculture and Food Sugar -
Source: Zawya Private Equity Monitor
MENA Private Equity Exit (2007-1H-2008)
Size in

34
Fund / Institution Target Company Country Sector Industry Mn
1H-2008 Tranactions        
Infrastructure and Growth Capital Fund Egyptian Fertilizers Company Egypt Basic Materials Fertilizers 2,500.0
Unicorn Global Private Equity Fund I Ormix UAE Construction Cement 44.9
Amwal Fund I Damas Jewellery UAE Consumer Goods Jewellery and Luxury Products -
The Jordan Fund Arab Orient Insurance Company - Jordan Jordan Financial Services Insurance Companies -
Egyptian Direct Investment Fund Limited Cairo Medical Tower Laboratory Egypt Healthcare Hospitals and Clinics -
Egyptian Direct Investment Fund Limited Contact Car Trading Company Egypt Financial Services Credit and Finance -
SHUAA Partners Fund I, L.P. Damas Jewellery UAE Consumer Goods Jewellery and Luxury Products -
Abraaj Buyout Fund II GMMOS Group UAE Construction Heavy Construction -
Global Research - Private Equity

Abraaj Buyout Fund II National Air Services Saudi Arabia Transport Airlines -
2007 Tranactions        
Dubai International Capital Tussauds Group United Kingdom Travel and Tourism Recreation 2,000.0
Istithmar 280 Park Avenue United States Real Estate Landlords and Developers 1,350.0
Istithmar 230 Park Avenue United States Real Estate Landlords and Developers 1,150.0
Abraaj Buyout Fund II EFG - Hermes Egypt Financial Services Investment Banks 1,100.0
Amwal Fund I Bank Audi Lebanon Financial Services Commercial Banks 91.1
NBK Capital Equity Partners Yudum Food Turkey Agriculture & Food Edible Oils 70.7
Global Opportunistic Fund II Reliance Petroleum Limited India Oil and Gas Refining and Petrochemicals 48.4
Amwal Fund I Lebanese Canadian Bank Lebanon Financial Services Commercial Banks 13.5
Global Opportunistic Fund II Zhaojin Mining Industry Company Limited China Mining and Metals Metal Mining 11.4
The Pre-IPO Fund Gulf Navigation Group UAE Transport Maritime Shipping 8.2
The Pre-IPO Fund Combined Group Co. for Trading & Contracting Kuwait Construction Building Contractors 5.2
Global Opportunistic Fund II Parsvnath Developers (PDL) India Real Estate Landlords and Developers 0.9
Global Opportunistic Fund II Dubai Financial Group Market UAE Financial Services Securities Markets 0.3
Dubai International Capital Daimler Chrysler Germany, United States Automotive Assembly Plants -
EuroMena Fund Arab Pharmaceutical Manufacturing Company Jordan Healthcare Pharmaceuticals -
Lebanon Real Estate Development Fund, L.P. Park Hill Lebanon Real Estate Landlords and Developers -
Global Investment House

Strategy - MENA Private Equity


MENA Private Equity Exit (2007-1H-2008) - Continued
Size in
Fund / Institution Target Company Country Sector Industry Mn
Injazat Technology Fund Jordan Training Technology Group Jordan Telecoms and IT Software and Services -
Injazat Technology Fund Atos Origin Middle East Region-wide Telecoms and IT Software and Services -
Injazat Technology Fund Omnix Media Networks UAE Telecoms and IT Software and Services -
Lebanon Real Estate Development Fund, L.P. Park Clemenceau Lebanon Real Estate Landlords and Developers -
HSBC Private Equity Middle East Havelock AHI Bahrain Construction Specialty Contractors -
Abraaj Buyout Fund L.P. Maktoob Group Jordan Telecoms and IT Internet Services -

Strategy - MENA Private Equity


Abraaj Buyout Fund L.P. Septech Emirates UAE Industrial Manufacturing Industrial Machinery -
Global Research - Private Equity

Abraaj Buyout Fund L.P. Amwal Qatar Financial Services Diversified Financial Services -
Abraaj Real Estate Fund Arabtec Holding UAE Construction Misc. Construction Services -
Source: Zawya Private Equity Monitor
Global Investment House

35
Global Research - Private Equity Global Investment House

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36 Strategy - MENA Private Equity