Private Equity 28 May, 2006

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Success Stories in the Arab World
Private Equity28 May, 2006
Arif Naqvi Executive Vice Chairman CEO Abraaj
Capital
2
Christopher Columbus

• Conceived of special incentives (carried
  interest) to take the trip to the new world
• All expenses paid
• 10 of all profits (no preferred return)
• 5 of all gold, and Title of Admiral for life
• Commonly depicted as the first in private
  equity, but what of Sinbad the Sailor? What of
  the early Arab seafarer traders and the spice
  routes carrying frankincense from Yemen?
• So the profession as is as old as man itself,
  perhaps not the oldest but at least as lucrative!

3
There are approximately 35 PE firms in the Middle
East today, primarily concentrated in the UAE

• Tunisia
• Tuninvest
• Swicorp

• Lebanon
• Middle East Capital Group
• Capital Trust Group
• Byblos Bank

• UAE
• Abraaj Capital
• Dubai International Capital
• Injazat Tech. Fund
• Ithmar Capital
• Shuaa Capital
• The GCC Energy Fund Managers
• Isthitmaar
• The National Investor
• HSBC Private Equity
• Gulf Capital
• The Group
• SW Source Capital
• Scimitar Ventures
• MFA (DIB)

• Bahrain
• Emerging Markets Partnership
• Gulf Finance House
• Merchant Bridge Group

• Morocco
• ATLAMED SA

• Saudi
• Amwal Al Khaleej
• Athar Al Majid Hold.
• Swicorp

• India
• Over 100 foreign PE players operating

• Egypt
• Citadel Capital
• EFG Hermes
• Gulf Arab Investment Co.
• Oasis Capital

• Jordan
• Foursan Group
• The Jordan Fund

• Kuwait
• Kamco
• Global Investment House
• Kuwait Financial Center

Note Excludes all pure VC and real estate
funds Source Gulf Venture Capital Association,
Zawya, Company websites, AltAssets, Industry
Interviews
4
With over 42 traditional private equity funds
Note Excludes all pure VC and real estate funds
Source Zawya
5
With over US 5.8 billion in total fund size
Note Excludes all pure VC and real estate
funds Source Zawya
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Which have been active, some since 1994
Note Excludes all pure VC and real estate
funds Source Zawya
7
There are another 13 funds currently being raised
for over US 2.8 billion
Note Excludes all pure VC and real estate
funds Source Zawya
8
There are another 9 funds announced to date for
over US 16.5 billion.
Note Excludes all pure VC and real estate
funds Source Zawya
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with another 8 funds rumored to be raised for
over US 1.8 billion
Note Excludes all pure VC and real estate
funds Source Zawya
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Currently minimal competition from global players
in the region
With the exception of India, global private
equity firms have historically ignored the region
Global Private Equity Firm Distribution
Comments

• Region was historically small with deal flow and
  exit opportunities rare
• Regional turmoil and strict regulations for
  foreign investors
• More recently, the regional dynamic has changed
  with relative government stability, gradual
  improvement of regulations, developing capital
  markets, and increased liquidity looking to be
  deployed within the region

Excluding India
Source Global Venture Capital Database 2004
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Regionally, by the end of 2005 it is estimated
that the total PE industry had over US5.7
billion under management
MENA PE Total Fund Size (US million)
Note Does not include VC and real estate
funds Source Gulf Venture Capital Association,
Zawya, Company websites, Private Equity Online,
Industry interviews
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Drivers of The Private Equity Industry
Description
Regional Perspective
Macroeconomic Conditions

• Stable economic growth and macroeconomic
  environment

• The Region has witnessed impressive growth rates
  despite unstable political environments in some
  countries

Regulatory Economic Restructuring

• Improvement in regulatory infrastructure and
  shift in economic policies caused by
  privatizations, globalization and efficient
  deployment of capital

• Improving regulatory environment in most
  countries with competition to attract capital
• Economic liberalization under way in a number of
  countries and family businesses undergoing
  generational change

Availability of Capital

• Financial institutions and pension funds
  providing capital

• Post 9/11 the appetite of local investors turned
  to regional investment opportunities

Exit mechanism

• Availability of exit routes either through trade
  sales or IPOs

• Increasing IPO and MA activity, as well as
  impressive performance of stock markets
• Governments getting into governance and out of
  management
• New exchanges like DIFX launched

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With the majority of countries in the region
growing at above 5 per annum
Saudi Arabia
Nominal GDP US million, 2005E
UAE
Egypt
Kuwait
Morocco
Oman
Lebanon
Bahrain
Jordan
Qatar
Real GDP Growth Average 2005,
Comments

• With real GDP growth in most countries exceeding
  5, the regional economies are amongst the
  fastest growing in the world
• Real GDP growth is expected to increase at more
  than twice the rate of population growth leading
  to an accelerated growth in living standards
  across the region

Note Bubble size not to scale Source Economist
Intelligence Unit
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Large forex reserves, low inflation, and budget
surpluses in many countries have led to economic
stability and growth
Credit Rating
Budget Balance
CPI Inflation Rate
Total Forex Reserves
Moodys
of GDP, 2005E
2005E,
2005E, US billion
4.2
(4.2)
Baa3
0.4
18.6
A3
6.0
4.4
A1
4.9
(9.3)
Ba1
1.0
(7.4)
Ba1
2.4
(8.8)
B3
9.1
(3.3)
B2
3.6
33.0
A2
4.5
(10.8)
Ba2
8.8
15.6
A1
1.4
11.7
Baa1
2.7
4.0
Baa1
Source Economist Intelligence Unit, Moodys
Investor Service
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In 1999, the GCC and ME region had negative FDI
inflows, however, post 9/11 there has been a
reversal of capital flight and increased amounts
of FDI
FDI Inflows US million, 1999 - 2004
CAGR 26
CAGR 38
CAGR 15
CAGR 15
Source UNCTAD
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Which combined with oil prices over US 70 per
barrel has created a tremendous amount of excess
liquidity looking for investment
Historical and Projected Oil Prices 1980 -2015,
Brent Crude US per barrel
Current Price - 72.19
Peak Price - 74.6 May 2005

• Due to high oil prices, the GCC economies
  (especially Saudi Arabia and Kuwait) have
  recorded large budget surpluses for FY 2004 and
  FY 2005
• Oil prices are expected to come down to around
  US 47 per barrel over the next five years but
  are also predicted at 100!!!

US per barrel
Iraq war

• OPEC raises production triggering a price war
• Iran/Iraq tensions

Gulf war
Asian financial crisis
Source Energy Information Administration,
Bloomberg
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There will be a number of trends emerging in the
regional PE landscape over the next few years

• As the number of PE firms and funds increase
  there will be significant variation amongst top
  and bottom quartile performance

Variation in PE Performance

• Increased amounts of regional institutional
  investments as PE has become a viable asset class
  in the region
• Assets allocated for PE abroad will increasingly
  be available for PE investment within the region

Institutional Investment
Sharia Compliant PE

• Rapid growth in Islamic banking, and other
  Sharia compliant products in the region
• Lack of Sharia compliant investment
  opportunities in the region
• New and innovative Islamic PE structured funds
  will be introduced soon

• Is a trend being seen increasingly in the West
• The rapid increase in firms in the region will
  allow PE shops to work together on sizeable
  transactions and create another viable exit route

Secondary Buyouts Exits

• Currently almost no international PE presence in
  the region
• Dedicated PE firms will not enter the region very
  soon, however PE arms of investment banks that
  have had relationships in the region are looking
  to enter currently

Emergence of International Players
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Regional Private Equity Passing fancy or
permanent addition to M.E. Investment World?

• Globalization in all business areas will
  accelerate the same trend will continue for
  private equity
• Impact of economic slowdown
• Will regional private equity recede or decline?
• Will private equity return to early 90s,
  traditional nature smaller firms one
  specialty local focus only no cross border
  operations?
• Economic predictions / private equity predictions
• Are often wrong (look at predictions a few years
  ago Internet investing wave of future, not
  overvalued high yield investing still
  attractive IPO market would continue to provide
  exits)
• Regional private equity firms will continue their
  growth
• Newer funds will have a harder time getting
  capital
• Continue to raise capital in meaningful amounts
  investors will focus on brand names,
  predictability, and length of track record
• Commercial banks, investment banks, insurance
  companies with global franchises will take
  advantage of them / grow their private equity
  franchises
• Regional firms will provide their own internal
  funds of funds to allow investors more balanced
  private equity portfolios
• Emergence of new regional firms will be slowed
  down portfolio problems will have to be
  addressed first
• The Coming Challenges

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Where should we be going and the importance of
this Conference

• More transparency
• Reporting and disclosing information have to be
  continually emphasized throughout the PE industry
  due to the faltering performance of many funds
• Better communication of how PE firms create value
  is in the best interests of the PE industry. The
  introduction of a new Sarbanes-Oxley ruling for
  PE firms might be around the corner if discipline
  and conflicts of interests are not addressed
• Better Corporate Governance
• Good governance of a private equity firm
  facilitates the long-term success of the
  partnership. However, the inherent nature of the
  PE business tends to offer short-term temptations
  for less-than-good governance
• To avoid short-sighted and short term actions a
  private equity firm must do what it pushes its
  own portfolio companies to do Plan
  strategically in advance of crisis seeking
  outside advice from experts
• Best Practices
• Formation of a regional governing body comprising
  of representatives from PE firms, regulators and
  other economic sectors across the region that
  will issue guidelines on best practices within
  the PE industry
• Improved Legal Infrastructures
• The private equity industry in the region has
  grown by leaps and bounds but still lacks depth
  due to uncertainty about rules and regulations
• It is imperative that the legal platform be
  strengthened in order to serve as the backbone
  for the development of the industry for years to
  come regulators need to focus on this industry
• Conclusion

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Thank You