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Deep, deep pockets

A multitude of government institutions and formally established family offices make the Gulf Region a rich source of capital for the world's leading GPs. The most significant local player is ADIA, the giant investment authority in Abu Dhabi.

For outsiders, the Middle East is no easy place to do business given the cultural intricacies of the gulf region. But for many fundraising general partners, in contrast with other parts of Asia, it has been an intriguing destination for many years. Saudi Arabia, Bahrain, Kuwait, Qatar and Oman have all been popular. And the trip down to Abu Dhabi, the emirate that is home to one of the most powerful limited partners in the world, has been ? and still is ? a must.

Deep pockets filled with oil-fuelled wealth are the most obvious attraction of the region ? especially now that crude oil is trading at record prices. Also appealing is the in-depth understanding of the mechanics of private equity fund investment that some of the local investors have developed over time.

?There are huge pools of liquidity in this part of the world, and a lot of it is very smart money?, says the head of marketing at a global fund of funds manager with a number of large clients in the region.

Not only are gulf investors at the forefront of funding the development of a home-grown, inwardly investing private equity industry (nearly $3.5 billion was raised by Middle Eastern and North African private equity firms in 2005, eight times the total in 2004). In addition, many international private equity firms have worked hard over the years to make inroads into the region in order to access local capital. Given the discretion with which business is done in the Arab world, this required them to build close personal relationships with decision-makers who are often intensely private.

?There are huge pools of liquidity in this part of the world, and a lot of it is very smart money.?

Among the general partner groups to have done this successfully is The Carlyle Group, one of the most accomplished fundraisers in the business. According to market sources, Carlyle has approximately 100 investing clients in the Middle East, which gives a sense of the size of the region's limited partner universe.

In broad terms, two main sources of funding are available to visiting general partners: institutions investing the surplus capital of local governments, and family offices aiming to diversify their holdings.

According to professional fundraisers, the latter group can be something of an acquired taste. Comments the head of investor relations at a London-based buyout firm: ?Middle Eastern high net worth money can be capricious and opaque, and it may not always be obvious whether a family office has a genuinely long-term commitment to the asset class. Brand names are considered extremely important, and personal introductions are often essential. You have to know the people well.?

When you do, however, dealings can be very fruitful, and numerous Middle Eastern family groups are described as highly sophisticated private equity investors. Examples include the Olayan Group and Jarir Investment, which are both based in Saudi Arabia's capital Riyadh.

A member of the Jarir Group, which was set up in 1979 by two entrepreneurial brothers and whose core business comprises Saudi Arabia's largest chain book and stationary stores, Jarir Investment has invested in funds advised by at least 15 US private equity groups and, according to a source, has a particularly close relationship with Bain Capital in Boston. Says a source: ?Jarir makes commitments worth around $50 million and in terms of picking funds is well beyond brand names.?

ADIA SUPERLATIVES
Alongside family money, the other major source of capital are the local investment authorities. By far the most notable among them is Abu Dhabi Investment Authorities (ADIA), which stands out both in terms of size and reputation.

?ADIA is the only limited partner in the Middle East that I would describe as genuinely influential ? everybody else is just too secretive,? says a fund placement professional who knows the group well. But even ADIA, at least by international standards, likes to hold its cards close to its chest.

The size of its portfolio is kept secret, for example. Observers estimate that the group has between $300 and $500 billion of total capital, and according to a source familiar with the group, its net income of oil-driven cash-flows is currently not far short of $1 billion a week.

Private equity has long been an important component in ADIA's allocation model, and with the enormous financial resources at its disposal, it is able ? and willing ? to place big, big bets in the asset class. A rare example of publicity surrounding an ADIA commitment came in August 2006 when the group subscribed to $600 million worth of shares in the IPO of AP Alternative Assets, the Apollo Management vehicle listed on the Euronext stock exchange in Amsterdam.

Given such evidence of ADIA's outstanding commitment capability, it is no wonder that GPs are happily getting in line outside the offices of Abu Baker Khouri, George Sudarskis and Zafar Iqbal Rehmat Khan, three senior investment officials looking after the private equity programme.

?They are very return-oriented and can be quite bureaucratic in their approach, but once they get behind an idea, they will move decisively,? says a professional who has negotiated with the ADIA team. Another practitioner says: ?To their credit, they can be quite invasive. Their due diligence is very thorough.?

Another thorough, sizeable and increasingly powerful LP based in the region is the Kuwait Investment Authority (KIA), which manages the financial reserves of the state of Kuwait. With investment professionals based in Safat and London, the KIA invests in buyout, venture capital and mezzanine funds globally. People familiar with the KIA speak of a consistent, regular participant in the asset class looking to make commitments worth $30 million and upwards.

Other frequently mentioned Middle Eastern organisation active in international private equity include the Qatar Investment Authority, which recently made headlines as a direct investor when it acquired the private equity-sponsored UK nursing home operator Four Seasons Healthcare in a £1.4 billion transaction; the Kuwait Fund for Arab Economic Development; Evolvence Capital, a direct investor and fund of funds sponsor based in Dubai with $1 billion of capital and Dubai International Capital (DIC), the investment arm of Dubai Holdings set up in 2004, which in addition to operating a direct investment platform has a fund investment team led by Alan Hyslop. Thus far, DIC has invested approximately $400 million off its balance sheet in international limited partnerships.

Looking ahead, there is a school of thought that says the Middle East has only just begun to discover international private equity as an attractive asset class. Observers predict that institutional interest will continue to grow in the coming years. This is why private equity groups contemplating the future structure of their funding base cannot afford to ignore the region, even if more transparent capital appears to be available elsewhere in the world.