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Capital constraints

For MENA-based private equity funds, fundraising is no picnic, writes Jenny Blinch.

Private equity fundraising is an uphill struggle in any part of the world at the moment. The Middle East is no exception.

General partners based in the GCC have traditionally depended on support from regional HNWIs and family offices. This has meant their ability to raise capital has in no small part relied on the health of the real estate market, where many of the region’s investors concentrated their investment activity.

Now that GCC real estate has imploded, investors have had to put investment activity on ice as they sit out what one GP described as an “endemic lack of liquidity”. It may have been late arriving in the Middle East, but the economic crisis has recently been pounding the region in earnest. Dubai especially – epicentre of the region’s real estate boom – has taken a pummelling, as evidenced by this week’s $10 billion bailout from the UAE central bank.

Jenny Blinch

Even when it comes to the region’s institutional investors, which were more disciplined in their approach to asset allocation, there is little good news for the private equity industry, as these are suffering from the same funding and portfolio problems as institutional investors all over the world.

Adding to the already bleak picture is the fact that when the crisis hit, private equity was still relatively under-established in the region. 

Some Middle Eastern institutions, such as the giant Abu Dhabi Investment Authority in the UAE, are long-standing private equity investors with deep knowledge of the asset class. But on the whole, many LPs who committed to regional funds in the past two years would have been doing so for the first time.

Now that GCC real estate has imploded, investors have had to put investment activity on ice.

As such, and with a limited track record for the industry to refer to, there is little to persuade them to make new investments in similar funds any time soon.

With the near-term prospects for private equity fundraising closely tied to the financial health of a close-knit few, it’s no wonder MENA GPs have been trying to diversify their investor base. However, any advances managers were making in this direction were rudely interrupted by the credit crunch.

As one GP explained: “The unfortunate thing is non-regional sources are in a bind at this time as well. You can stick up a million and one slides and say 'our region compares favourably with this region and this region', but whether or not that motivates them to actually put money to work in your fund is a very different story.”

Those would-be international LPs with cash to invest are in many cases looking to deploy their capital closer to home, exploiting opportunities thrown up by the ongoing economic crisis. And while in the medium- to long-term many US and European institutional investors will be open to deploying capital in the emerging markets, there are more obvious temptations to be explored first – with China and India at the front of the queue.

All this means 2009 is likely to be a tough year for those Middle Eastern GPs not captive or sponsored by one of the region’s massive financial institutions. What they need now is patience and determination. Eventually conditions for fundraisers will improve, but they are unlikely to do so overnight.