Tuesday, 22 September 2009

Challenges for Private Equity in the GCC

Entrepreneurs in the oil-rich Gulf have many challenges to overcome that begin with raising the required capital for their businesses. In this wealthy region, one may wonder why Gulf investors shy away from private equity, where all of the angel investors are.

It is, in fact, not possible to say that Gulf investors or even expatriates based in the region shy away from risky investments. Over the past few years, we have all seen real estate buyers purchase property that cannot be registered in their names from developers who have no established history delivering projects. We have also seen these same buyers borrow money from banks and place a down payment on a unit in order to flip it in the not-too-distant future. All of the elements show that investors have been ready to go into risky territory.

A similar pattern has been noticed in the stock market, where investors purchase stocks of companies that are overpriced without conducting any due diligence on the company’s background, including its management and the PE ratio of the stock itself. So why aren’t we witnessing the same pattern with the private equity industry in the region?

The first issue that must be noted is the lack of avenues for investors to find such potential projects and for entrepreneurs to locate such investors. In fact, most entrepreneurs that I have come across who have not raised money from immediate family and friends have done so by a complete serendipitous coincidence. Freej, a very popular UAE-based animated cartoon series, was funded because a colleague of the show’s creator saw the creator’s sketches on his workstation while fetching a document and shared the drawings with their boss. The creator tells me that when he was called into to the boss’s office, he thought he was in trouble for drawing. His boss, however, encouraged him and introduced him to potential investors. Freej turned out to be the most successful programme in the country.

In Dubai, the Sheikh Mohammed Bin Rashid Establishment for Young Business Leaders has been very successful in funding projects by young Emiratis. The centre, however, does not fund projects by non-nationals, even though there is a majority expatriate population. This circumstance leaves a large gap in the private equity niche that should be filled as soon as possible. Many expats have the proper education and commitment to see small business grow into large corporations. We saw such incidences happen across the Gulf in the 1970s and 1980s through joint ownerships with Gulf nationals. Other institutions in the UAE that offer private equity include Mubadala, National Bank of Abu Dhabi and the Sheikh Khalifa Fund. Gulf Finance House and Al Baraka in Bahrain also have units dedicated to PE, as does Kuwait Finance House.

Proper legislation must be introduced to protect the rights of both parties. ‘Intellectual property rights’ is a notion that is still developing in the Gulf, although it has been recognised recently as an essential part of an entrepreneur sharing his or her ideas with an investor.

Often, an entrepreneur will share an idea with someone who has a network of potential investors that can be approached for funding.

Non-governmental developments in the past few years have also assisted in the emergence of this nascent but essential industry, such as the creation of the Gulf Venture Capital Association, a non-profit trade and industry association that promotes a risk-taking investment culture and provides information on the VC/PE industry by organising conferences and training workshops.

Clearly, funding isn’t a challenge in the GCC. A report published recently by Merrill Lynch Global Wealth Management stated that in 2008, the number of dollar millionaires in Saudi Arabia stood at 91,600. In the UAE, the number was 67,100. The report also stated that financial wealth in the Middle East stood at US$1.4 trillion last year and is expected to rise to US$1.9 trillion in 2013. The challenge remains in finding a way to channel the money to budding entrepreneurs.

With the recently released Arab Human Development report estimating that the Arab world needs to create 50 million new jobs by 2020, access to private equity funding will need to be streamlined and institutionalised. The regional governments cannot possibly create that many jobs on their own, so a large part of this challenge will rest on the shoulders of young entrepreneurs who will need to find the right investors at the right time.

There is a need for early-stage funding of projects in the Gulf. Whether they are started by national or expatriate elements, or a combination of both, is a secondary issue at this stage. In the end, it is the Gulf that will benefit from a boom in this industry.

*This article first appeared in Moneyworks magazine in the September issue.

1 comment:

Rara Avis said...

Salam Mr. Al-Qassemi,
I'm a regular reader of yours posts. Keep your vocal presence active!!!

On another note, I was not able to find an RSS link on your blog... Is it a lapse on my part?

Rara Avis