Fortune in Crisis

Companies and their owners are trying to make sense of what to do next amid the most chaotic economic environment since the 1930s.  While the global financial crisis has had a direct impact on the economies of the Middle East, stock markets are down markedly- short-term credit has dried up and major indicators including realty development, consumer spending, and retail sales, have been affected- the GCC markets have faired relatively well, chiefly due to oil outputs and lack of toxic assets in the banking sector.

During this turmoil, new business leaders will emerge, and for mid-market PE firms like GrowthGate the potential could be significant: bold, strategic thinking today can be game-changing tomorrow.  For instance, fragmented industries like oil field service companies, private wealth management firms, and FMCG businesses are ripe for innovation, and opportunities are materializing as players from energy, consumable goods, and financial services industries begin to address the unmet demands of regional consumers.

The market opportunity lies today more than ever, in acquiring high growth businesses despite market conditions.  GrowthGate is still identifying profitable, young enterprises that are asset- light, well managed, with no excessive leverage or major Capex budgets, and with the potential of exporting their trade throughout the region, with minimum regulatory requirements. These businesses will represent the biggest opportunities for PE investments in the years to come.

Companies that miss the unique window of opportunity to become a platform acquisition for interested acquirers in today’s market could be forgoing a strategic outcome, and may ultimately find themselves playing catch-up with those firms that have embarked on the consolidation trend offered by the current market conditions.

Market Conditions

In the face of a financial Tsunami, world political leaders and financial firms have coordinated their efforts to reduce the current credit constraints and stabilize capital markets.  In the Middle East, governments and regulators have eased the credit crunch by pumping liquidity into the banking sector, ring-fencing certain troubled companies that had excessive gearing levels or that were badly managed, and declared massive public works to keep the economy humming, fueled by strong oil prices -albeit at a lesser level than the heyday of the past boom years.

Stock markets in the GCC have either recovered or held well, led principally by Saudi, Qatar and Abu Dhabi, while other markets have shown resilience (Lebanon), opportunities (Jordan) and prospects (Egypt, Tunisia, Syria). The IPO market is expected to come back from a near halt but not to a level where PE-backed IPOs could be slated for imminent flotation.

The credit crunch has indirectly affected the PE industry. While PE investments in the Middle East have relied in the past on some form of indebtedness, this was nowhere near the terms and levels seen in developed markets. Hence, the limited bank funding slightly affects PE activity. What have been impacted by the credit squeeze are the portfolio companies held by PE firms, which have witnessed tighter terms and conditions for operational and expansion financing.

Niche Play

The middle sized corporate sector will be the ‘heart & soul’ of the PE industry in the Middle East and especially in the GCC. Large funds that amassed billions in the past years have realized that single-billion dollar deals –let alone multi-billion dollar deals – are far and few in between.  Prized assets such as telecom, airlines, mineral & mining firms, and oil & gas are ‘off market’, being firmly within State control. Large corporations including banks, construction firms and commercial conglomerates remain fully or partly owned by wealthy families and individuals who neither need the capital nor the interference of PE investors. Add to that, the scarcity of financing and lack of appetite from banking sources to fund such mega acquisitions. 

Some 80% of Middle East businesses are comprised of small to middle-sized enterprises that anchor every sector of the economy not covered by the public sector. They generate exports, create employment, develop sectors, and provide a wide range for PE firms to choose from.  These firms are generally less leveraged than larger counterparts, are closely managed with little room for un-checked fraud, and have more manageable asset bases which render the return on employed capital a true benchmark for their profitability.

With highly leveraged deals valued in the billions of dollars having proven illusionary in the region, PE firms will be looking at the middle market to put their capital to work.