Making waves

Private equity vehicles and sovereign wealth funds from the Middle East are making headlines - and worrying politicians - with high-profile direct investments in Western markets, writes Rob Kotecki.

For many years, Middle Eastern institutions have been active in international private equity, mainly as limited partners in Western buyout funds. Of late, however, investment funds from the region have also risen to prominence as competitors to international financial sponsors, buying companies directly in Europe and North America. Recent highlights of the trend include the ongoing effort by Three Delta, an investment arm of the Qatari government, to acquire UK supermarket chain Sainsbury's, and the $948 million purchase in August of Barneys New York, an up-market clothing retailer in Manhattan, by Istithmar, a group that invests on behalf of the ruler of Dubai. Dubai International Capital, another government-backed entity from the UAE building an international investment portfolio, recently announced plans to open an office in the US.

There are several drivers behind this switch from indirect to direct investing. Having assembled sophisticated investment teams and armed with a lower cost of capital compared to institutionally backed LBO funds, regional institutions are looking to refurbish their investment portfolios, and direct purchases are very much part of the mix.

“Middle Eastern investors are still looking to the West to diversify from an over-reliance on oil revenues,” explains Abe Saad of AB Capital, a privately owned investment firm in Dubai. He says these investors tend to look for controlling stakes in Western assets where they can employ their own experience in sectors such as real estate and tourism, alongside smaller stakes in large, listed publicly listed global blue-chip companies.

Some predict that the recent turmoil in the international debt markets will further strengthen the competitive position of Middle Eastern sponsors, especially those with access to alternative sources of funding in the form of Islamic finance, or Shariah-compliant capital. Mark Thompson, co-chair of the private equity practice at law firm King & Spalding, which recently opened several offices throughout the Middle East: “Although not completely unaffected, the credit crunch isn't going to slow Islamic investors the same way as their conventional peers given how they handle leverage, so you should see even more opportunities for these funds going forward.”

Charles Ogburn, global head of corporate investment at Arcapita in Bahrain, echoes the appeal of the current climate: “Coming out of our very acquisitive autumn last year, we found high prices throughout the market in the first half of 2007, but after the events this summer, we're finding some real opportunities.” Arcapita's recent $1.04 billion acquisition of HT Troplast, a German maker of PVC window and door fittings, came this August, just as financing markets were beginning to prove far less friendly to funding conventional LBOs.

SHOPPING ABROAD

Acquisitions in Europe and US by Middle Eastern financial sponsors, 2003 – 2007 YTD
Announced Value $m # deals
2003 468 9
2004 2,418 13
2005 6,843 23
2006 8,389 31
2007 YTD 4,840 9