2013 annual report2

3

Foreword

Dear Friends of the MENA Private Equity Association and Colleagues,

I am much honored to introduce the 8th edition of the Private Equity & Venture Capital in the MENA Region annual report. Since 2006, this report has presented the state of our industries and overall economic development in the region. Those of you who have been part of the regions private equity and venture capital landscapes would likely agree that this period of time represents an eventful part of our professional lives. We witnessed extraordinary economic development with the cyclical ups and downs of which we are all aware, as well as a crippling financial crisis that deeply impacted both investors and the regions growth and development opportunities.

Such challenging circumstances have profoundly impacted the stakeholders in our investment community, including regulatory bodies, the general public, fund managers, and entrepreneurs. In particular, these groups have developed a sophisticated view of what actually drives economic value and the role private investors can play to foster and accelerate the development and growth of companies and industries to build a sustainable and internationally competitive regional economy. This has led to a fundamental shift in the relationship between private equity investors and managers. Investors have become more knowledgeable, and therefore more selective and vocal, and managers have generally adjusted to accommodate the needs of these more sophisticated investors. As a result, we are continuously gaining more trust from all of our stakeholders and this is actually the key factor for the long-term success of our industry.

The MENA Private Equity Association is not only the platform through which we can collaborate and communicate our efforts, but also the collective voice that conveys the impact of our investment activities on the regional economy and supports our relationships with other private equity and venture capital associations around the world. By delivering superior transparency, sharing global best practices, providing training, and actively participating in regional and global industry discussions, we can guide others on the path towards sustainable value creation, successful businesses, and healthy returns for investors.

Let us all work together to make that happen and let us actively tap global intellect and resources that will help us to achieve our goals. Participation in the MENA Private Equity Association, through both engaged membership and provision of investment data, will shed light on the actual development of our industry in the Middle East and North Africa. This transparency is critical to regaining the trust and interest of international investors in deploying capital to our region, which in turn will drive success in fundraising efforts.

I extend a special thank you to our Director, Lina El Zein, as well as her advisors and service providers who are tirelessly supporting our cause. Last but not least, we want to thank the sponsors of the MENA Private Equity Association and, more particularly, of this 2013 annual report.

Sincerely Yours,

4 5

e MENA Private Equity Association extends its sincere appreciation to Zawya for sharing primary data and industry insights that informed this annual report. We are most grateful to KMPG for developing the report analysis.

KPMG

Charlotte Harris, Associate, KPMG

Zuhaib Khan, Assistant Manager, KPMGVikas Papriwal, UAE Head of Transactions and Restructuring, KPMG

Brad Whitteld, Associate Director, Private Equity and Sovereign Wealth Funds, KPMG

Zawya - Thomson Reuters

Youmna Akiki, Research Associate, Zawya Investment Monitors, omson Reuters

Ali Arab, Product Manager, Zawya Financial Solutions, omson ReutersJosiane Assaad, Content Manager, Zawya Investment Monitors, omson Reuters

Steering Committee We also thank the annual report steering committee for its valuable input and contributions towards the development of this report.

Haythem Macki, Partner, Growthgate Capital

Ali Arab, Product Manager, Zawya Financial Solutions, omson Reuters

Huda Al-Lawati, Managing Director, e Abraaj Group

Anthony Hobeika, Head of Research and Strategy, Gulf Capital

Imad Ghandour, Managing Director, CedarBridge Partners

Samer Sarraf, UAE Country Head, Amwal AlKhaleej

Dr. Helmut Schuehsler, Chairman, TVM Capital Group & CEO, TVM Capital Healthcare Partners

Karim Ben Salah, Managing Director, Malaz Capital

Media Task Force We are most grateful for public relations and media campaign support from the following: Nahed Ashour, Senior Manager Arabic Content and Media, Capital MSL

Sponsors Without the support of the following generous sponsors, this report would not have been possible.

We also extend our thanks to the thought leadership and survey participants.

6 7

Abdullatif Alissa Group Holding Company (AAGH)

Headquartered in Riyadh, the Kingdom of Saudi Arabia (KSA), the Abdullatif Alissa Group Holding Company (AAGH) embodies success and leadership that have been built on values, forward thinking, and diversity. Established in the 1940s with a primary focus in textiles and foodstu trading, over the past six decades the Alissa Group has evolved into a diversied conglomerate. Today, the Alissa Group is considered a pioneer of automotive sales, service, nancing, and leasing in the Kingdom. e group has diversied interests through its Investment and Business Development Division (IBDD) from the Middle East to the Far East, in sectors such as real estate, building materials, consumer nance, food and beverage, retail, manufacturing, and services all created to complement the AAGH ecosystem and enhance stakeholder value.

With a complete separation of ownership and control, built on best practices and managed by seasoned professionals who possess an unwavering commitment to quality and service excellence, the Alissa Group enjoys a respected position in the Kingdom and is considered the benchmark of a successful, institutionalized, family-owned conglomerate.

AAGH understands that success comes not from standing still, but through intelligent diversication and leveraging existing assets. We believe our next generation of growth will derive from new opportunities and diversication.

rough the combined power and resources of AAGH, we provide the experience, expertise, and contacts to help our investments reach the next stage and beyond.

We understand that every company is unique, as are its opportunities and challenges. Regardless of the vertical or moment in time, every successful company has common traits, such as strong fundamentals, a solid business model, seasoned management, and long-term vision. We seek great ideas from various sectors. We keep an open mind and consider unique opportunities. We strategically invest in new businesses that complement our existing ecosystem. We do this through organic development or by inorganic means i.e. by way of mergers, acquisitions, or partnerships.

Sponsor Profile

8 9

Sponsor Profile

Growthgate Capital Corporation is a growth investment rm that conducts direct equity investments with an emphasis on mid-sized companies operating in the GCC and the wider MENA region. Growthgate Capital is a permanent capital investment rm that was formed in 2007, and has representative oces in Beirut and in Dubai. GrowthGate Capital has circa $1.7 billion of assets-under-monitoring and a shareholder equity of $450 million.

e founding shareholders of Growthgate Capital include State-owned banks, public pension funds, investment companies, single-family oces and a group of prominent corporate leaders from the Middle East region.

www.growthgate.com

Vision. Integrity. Focus.

10 11

Sponsor Profile

Investing in Value Creation in Healthcare

TVM Capital Healthcare Partners Ltd. was established in 2009 as a DFSA-licensed fund manager operating out of the Dubai International Financial Centre (DIFC), and was the regions rst private equity rm dedicated exclusively to the healthcare sector. We have established ourselves as a developer of healthcare business concepts, as well as an investor and leader in building growth businesses in private healthcare in the MENA region and India. We focus on companies in the eld of healthcare services, pharmaceuticals, devices, and other hospital-related businesses. TVM Capital Healthcare Partners strength is the breadth and depth of our international relationships, our commitment to quality, transparency, and innovation in the way we do business. Our strong local presence, excellent investors, and a strategic global partner network provide a powerful support system for the entrepreneurs and management teams we back.

We create, invest in, and grow pioneering companies, supported by partnerships with strong international healthcare institutions such as the Spaulding Rehabilitation Network (a Harvard Medical School teaching hospital), Joslin Diabetes Center (an independent, non-prot institution aliated with Harvard Medical School), and Bourn Hall Clinic, Cambridge, UK (the worlds rst in-vitro fertilization clinic).

TVM Capital Healthcare Partners is part of TVM Capital Group, an aliation of globally acting venture capital and private equity rms with an operating track record of 30 years. TVM Capital Group has nanced more than 120 healthcare and life science companies and has documented its success as a growth capital investor through 43 initial public oerings from its portfolio.

For more information please visit: www.tvm-capital.ae or www.tvm-capital.com

Sponsor Profile

Zawya, a omson Reuters business, is the preeminent source of Middle East and North Africa business intelligence. Our membership solutions provide unique content and tools including detailed proles on public and private sector companies in the region, unparalleled reporting on MENA markets, asset classes, and details of regional projects to provide in-depth analysis for investors and business professionals in order to make more informed investment decisions and build protable relationships.

Its free news site, Zawya.com, attracts C-level professionals from the business and nance world providing breaking news powered by Reuters as well as content from major regional providers. Zawya.com Arabic oers a broader selection of news genre for the Arabic speaking community, reaching graduates up to senior level managers from across the MENA region. Empowering entrepreneurs and SME community within the UAE, BusinessPulse.ae, oers the environment to support success through its news, featured articles and business tools designed specically to guide businesses through each stage of development as well as inspire professionals with success stories from across the region.

rough its services, Zawya empowers nearly 1 million professionals with the insight and transparency they need to conduct business eectively by empowering them to build protable relationships.KPMG is a global network of professional rms with over 155,000 sta in member rms across 155 countries.

KPMG in the UAE was established in 1974 and has grown to 750 professional sta led by more than 25 partners, across 8 oces in the country. We work closely with our colleagues in oces throughout the MENA region and across the world.

12 13

Table of ContentsImportant Notice1.1 Basis Of Preparation1.2 Definitions And Assumptions1.3 Data Filtering

KPMG Introductory Message

Private Equity In The MENA Region3.1 Summary3.2 Funds 3.2.1 Funds Raised To Date3.3 Investments 3.3.1 Information Limitations 3.3.2 Investments Made To Date3.4 Regional Focus3.5 Sector Focus3.6 Exits

The MENA Merger And Acquisition Market Over The Past Decade Anthony Hobeika, Head of Research and Strategy, Gulf Capital

Shareholder ActivismYasser Akkaoui, Chairman/Shareholder Activist, Capital Concept sal.

An open dialogue with the Securities & Commodities AuthorityBy Dr. Ryan Lemand, Senior Economic Advisor & Head of Risk Management, Securities & Commodities Authority

Is A Private Equity Partner Beneficial To Your Family Business?Khaled Baranbo, Investment & Business Development Manager, Abdullatif Alissa Group Holding Company

Survey8.1 Survey of General Partners (GPs) In The MENA Region8.2 Respondent Profile 8.3 Survey Results

Appendix9.1 About The MENA Private Equity Association9.2 Members Directory9.3 Private Equity And Venture Capital Firms In MENA

Important Notice

1.1 Basis Of Preparation

1is report has been prepared based on data provided by the MENA Private Equity Association and sourced from the Zawya Private Equity Monitor.

Historical data was updated from that used in the 2012 annual report to reect increased disclosure of information in the market. KPMG member rms have not initiated any primary research in relation to this dra report and have not sought to establish or conrm the reliability of the data provided by the MENA Private Equity Association and Zawya.

e information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is or will continue to be accurate. No one should act on such information without appropriate professional advice aer a thorough examination of the particular situation.

In analyzing and determining the parameters of available data, it has been necessary to apply certain criteria, the most signicant of which are as follows:

Private equity is dened to include houses that have a General Partner/Limited Partner structure, investment companies and quasi-governmental entities that are run by, and operate in the same way as, a private equity house.

Venture capital for the purpose of this report is dened as a fund specically dedicated to venture capital investments. is includes funds by venture capital rms, and venture funds under private equity rms.

Funds managed from MENA, but whose focus is to invest solely outside the region, are excluded from the fundraising and investment totals.

MENA includes Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, the United Arab Emirates, and Yemen.

Investment size represents the total investment (both the debt and equity portions). However, fund size only considers equity invested, as we have no visibility on debt exposure by funds.

e fund raising totals are the amounts closed/committed for fund raising funds, closed funds, investing funds, fully vested funds, and liquidated funds.

Exits are dened to include partial exits, although simple dilutions have not been included.

14 15

1.2 Denitions and Assumptions

For analytical purposes, we have considered the following types of funds, as dened by Zawyas Private Equity Monitor:

Announced: Ocial launch of funds which are yet to commence fund raising.

Rumored: Funds expected to announce their intention to commence fund raising.

Fund raising: Funds that have been announced and are in the process of raising capital.

Investing: Funds that have closed and are actively seeking and/or making investments.

Fully invested: Funds that have invested all capital raised. Some of the investments may have divested in this stage, but not all.

Liquidation: Funds that have divested all investments and have fullled all obligations to share-holders.

1.3 Data Filtering

e primary data sourced from Zawya has been ltered according to the denitions used in the Emerging Markets Private Equity Association (EMPEA) research methodology. In particular, we have used the following denitions:

Fund Size: In the case of funds yet to make a rst close, or where no close information is avail-able, fund size is equivalent to the target amount, and is noted as such. For funds achieving at least one ocial close, fund size is reported as the capital raised to date, while for funds that have made a nal close, the fund size is the total capital raised. All amounts are reported in USD millions. Rumored funds are excluded.

Currency: Where funds data has been provided in a currency other than USD, exchange rates applied are from the last day of the month in which each close is reported, e.g. rst close reported in on 15 April 2013 would be calculated using the exchange rate for 30 April 2013, taken from publicly available sources.

Funds of funds or secondaries are excluded.

Region: Statistics are based on the market approach and funds are categorized based on the intended destination for investments (as dened in a funds announced mandate) as opposed to where the private equity rm is located. With regard to multi-region funds, we have included these to the extent that there is a focus on the MENA region. EMPEA methodology includes only those multi-region funds whose primary intention is to invest in emerging markets. However, the source data does not provide visibility on primary geographic intention.

Funds established with a specic mandate to invest in real estate are excluded from the fundraising, investment, and exit totals. e remaining real estate investments relate to funds with mixed investment mandates.

Conventional infrastructure funds, or funds investing directly in greeneld infrastructure projects (e.g. bridges, roads, etc.), are excluded from fundraising totals. However, funds that make private equity investments (determined based on target returns) in companies operating in the infrastructure sector are included.

EMPEA does not track or report other alternative asset classes, including hedge funds, real estate funds, and conventional infrastructure funds. In our analysis we have excluded data from investment-type companies, real estate rms, and sovereign wealth funds.

16 17

KPMG Introductory Message

Vikas PapriwalPartner Transaction Services

KPMGT: + 971 4 403 0300

E: [email protected]

2KPMG is pleased to continue its association with the MENA Private Equity Association in, once again, producing the annual report on the private equity (PE) and venture capital (VC) industries in the MENA region.

2013 continued to be a challenging year for the PE and VC industries in the region, with signs of a decline in investment activity evident in the decrease in both the total number of transactions (101 in 2012 to 66 in 2013) and total value of investments (USD 0.9 billion in 2012 to USD 0.7 billion in 2013). While the industry in general continued to invest cautiously favoring the non-cyclical and defensive sectors such as oil and gas and healthcare, investors are increasingly broadening their focus across a range of sectors including food and beverage and leisure/tourism, which were the two largest sectors of investment by value during 2013. e information technology (IT) sector continued to experience the most investments by volume during 2013, although these investments on average are relatively smaller in value than in other sectors.

ere is evidence to suggest that market sentiment and investment activity is improving in countries such as Egypt, which have historically been impacted by the Arab Spring. While Egypt is yet to see a complete return in the levels of PE activity, it was one of the top three investment destinations within MENA by value and volume during 2013.

Following a period of decline in 2011 and 2012, total funds raised during 2013 decreased from 2012 levels (USD 0.7 billion in 2013 compared to USD 0.9 billion in 2012). While the reduced level of fundraising in 2012 and 2013 compared to earlier periods is partly reective of the increased focus on venture capital and small- and medium enterprise-sized (SME) growth capital investments, it also reects the general lack of deal ow in the region as regional PE players continue focusing on preserving and enhancing value from existing portfolios and preparing for successful exits. at said, it is encouraging to note that there has been an increase in the total value of funds announced (although we note that many are yet to close) during 2013, as compared to the prior year (USD 2.6 billion in 2013 compared to USD 1.8 billion in 2012).

e medium to long-term outlook for the PE and VC industries in the region is positive. With the ongoing slow down of the more mature markets in the West, the MENA region is likely to remain a region of opportunity and a hub for PE and VC activity as its strong macro-fundamentals continue to drive the regions economic road to recovery.

We would like to note that this report would not have been possible without the eorts of Zawya, the MENA Private Equity Association, and the members of the annual report committee. We are grateful to them for sharing primary data and industry insights and we support the eorts of the Association in furthering the interests of private equity in this part of the world.

Private Equity In The MENA Region 3

Funds Raised & Investments Completed

3.1 Summary

e private equity (PE) industry in the MENA region has demonstrated relatively at performance in 2013 with a marginal decrease in the number and total value of known investments compared to the prior year. e fundraising environment also continued to remain relatively challenging with a decrease in total funds raised during 2013 as compared to 2012.

Similar to many countries outside of the region, in particular those impacted by the Euro-zone crisis, the total number of investments decreased from 101 in 2012 to 66 in 2013. e average investment size during 2013 at USD 15 million was broadly consistent with 2012 levels (USD 16 million) with the continuing focus on venture capital (VC), growth capital, and SME investments.

PE and VC rms in the MENA region continued to favor the information technology (IT) and oil and gas services sectors, which accounted for approximately 50% of the total number of investments in 2013. Sectors that were most signicantly impacted by the global nancial crisis, such as real estate, construction, and nancial services, continued to see low levels of investment activity in 2013.

Note: For the purpose of illustration, assuming investments without buy size data (ie. 20 such investments during 2013) are valued at the 2013 average of USD 15 million per investment (for investments with buy

size data), total investments for 2013 will increase by USD 300 million to USD 1,010 million.

Source: Zawya Private Equity Monitor

7,113

726 1,224 1,057 863 744

3,006

1,177 1,154

510 917 1,010

10091

76

93101

6675

67

51

67

58

46

0

20

40

60

80

100

120

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011 2012 2013

No

. of in

vestments

Fun

ds r

aise

d / i

nve

stm

ent v

alue

Funds raised (left axis)Investment value (left axis)Total number of investments (right axis)Number of investments with known value (right axis)

18 19

Continuing the trend seen in recent years, and supported by their favorable demographics, the United Arab Emirates (UAE), Egypt (despite social unrest), and Lebanon remained popular destinations for investment in 2013. e Kingdom of Saudi Arabia (KSA) continued to attract the highest value of investments in both 2012 and 2013 (USD 273 million and USD 110 million, respectively). Based on our understanding, not all of the deals in the KSA have been made public and therefore are excluded from our data set. While investment volume in Egypt was lower in 2013 compared to the previous year, we expect investment activity to return to historical levels in the short- to medium-term.

Sixteen funds were launched during 2013, representing USD 2.6 billion of potential capital. Of the 16 funds announced, two funds successfully closed, raising USD 744 million (27% of the total announced).

e MENA regions economic demographics remain strong, particularly following various nancial stimulus packages announced by key regional economies, including KSA. Together with a growing population, continuing consumer spending, and oil prices remaining above USD 100 per barrel, the regional economy is expected to continue recovering with signicant planned investment in infrastructure, healthcare, and education.

e regional fundraising environment continues to be challenging resulting in a decline in fundraising in 2013. Following a period of decline in 2011 and 2012, total funds raised during 2013 (USD 0.7 billion) decreased on 2012 levels (USD 0.9 billion). We continue to see a focus towards funds with a growth capital, VC, and SME investment focus, which tend to be smaller in size compared to buyout funds, which were prevalent in 2007 and 2008. Successfully raised funds in 2013 had an average close of USD 74 million compared to USD 43 million in 2012.

To some extent, the at level of fundraising may be attributable to the increased focus by many regional PE players on managing their current portfolios. Furthermore, fund managers with legacy funds dating back to 2008 and 2009 are focusing more on executing exits and realizing returns for their LPs.

e total value of funds announced in 2013 (16 funds with a combined ITS of USD 2.6 billion, of which two successfully closed raising USD 273 million) increased compared to 2012, by USD 0.8 billion. is demonstrates an improvement in investor sentiments in the region and investment opportunities available in the short- to medium-term. From our experience of the market, key PE players in the region have stepped up fund raising eorts particularly during Q4 of 2013 and Q1 of 2014. Investors are increasingly deploying funds on a deal-by-deal basis, instead of launching specic funds. Deal-by-deal deployment of funds is not captured in our data set.

A number of PE funds in the region are nearing the end of their lifecycles. While some funds have already made opportunistic exits, many are faced with increasing pressure to sell and return funds to their LPs. ere was a decrease in the number of exits completed during 2012 and 2013 (37 combined), compared to a total of 51 during 2010 and 2011. Despite this decline in exit volume, we expect an increase in exit activity over the next year.


Funds Raised

From our experience of the market, key PE players in the region have stepped up fund raising eorts particularly during Q4 of 2013 and Q1 of 2014. Investors are increasingly deploying funds on a deal-by-deal basis, instead of launching specic funds. Deal-by-deal deployment of funds is not captured in our data set.

3.2 Funds

3.2.1 Funds Raised to Date

e ongoing global macroeconomic challenges, driven primarily by the continuing uncertainty in Europe, has created a dicult fundraising environment with just USD 744 million of funds raised during 2013 compared to USD 863 million in 2012. However, there are some positive signs that the fundraising community in the MENA region remains optimistic with funds worth USD 2.6 billion being announced in 2013, an increase of USD 0.8 billion compared to 2012.

e reduced level of fundraising may also be partly attributable to the increased focus by many regional PE players on managing, preserving, and enhancing value within their current portfolios. Furthermore, fund managers are putting more resources towards exploring exit opportunities in an eort to realize returns for their LPs.

While the number of funds which successfully raised capital in 2013 decreased compared to the period 2010 to 2012, the average close per fund increased to USD 74 million (from USD 43 million in 2012), reecting an improvement in investor sentiments.

7,113

726 1,224 1,057 863 744

36

10

17 21 20

10

-5

10

15

20

25

30

35

40

-1 , 000

2 , 000

3 , 000

4 , 000

5 , 000

6 , 000

7 , 000

8 , 000

2008 2009 2010 2011 2012 2013

No. of closes

$m

Funds raised ($m) No. of closes

20 21


Cumulative funds under management increased to USD 24.3 billion in 2013.

e following table details major funds that successfully closed during 2013.

Note: Gulf Credit Opportunities Fund closed twice during 2013 (combined amounts raised of USD 25 million).


Major funds raised in 2013

Fund name Fund ManagerInvestment Focus

Announcement year ITS ($m)

Funds raised in 2013 ($m) Close

1 ICD Food & Agribusiness Fund

To be Announced Growth Capital 2012 600 350

First close

2 NBK Capital Equity Partners Fund II

NBK Capital Limited Growth Capital 2013 300 195

First close

3 Capital North Africa Venture Fund II Capital Invest Growth Capital 2011 115 103

First close

4 Samena Special Situation Fund II (SSSF II)

Samena Capital Growth Capital 2011 700 25

Second close

5

Gulf Credit Opportunities Fund L.P. I (formerly known as Gulf Credit Partners)

Gulf Capital Growth Capital 2011 300 20 Second close

6 Bidaya Fund Cairo Financial Holding Growth Capital 2012 40 19 First close

7 Badia Impact FundAccelerator Technology Holdings

Venture Capital 2012 25 17 First close

8 FCPR Tuninvest Croissance

Tuninvest Finance Group Growth Capital 2013 22 10

First close

9

Gulf Credit Opportunities Fund L.P. I (formerly known as Gulf Credit Partners)

Gulf Capital Growth Capital 2011 300 6 Third close

Total 744

19,636 20,363 21,586

22,643 23,506 24,250

-

5,000

10,000

15,000

20,000

25,000

2008 2009 2010 2011 2012 2013

Cum

ulat

ive

fun

ds ($

m)

Cumulative Funds Under Management Since 2000


Funds Raised By Type

During 2013, there were three funds that raised capital of more than USD 100 million. e largest raised capital was USD 350 million by the ICD Food & Agribusiness Fund, which has a focus on growth capital.

Out of the major funds that raised capital in 2013, only two funds were announced in 2013 and the remaining funds were announced prior to 2013 (across 2011 and 2012). Consistent with trends in the past, the average time taken for PE funds to successfully close from the date of announcement remains greater than 12 months. Out of the 16 new funds announced in 2013 with a combined ITS of USD 2.6 billion, only two funds recorded a successful close during their rst year, representing 11% of the combined initial target size (ITS) of funds announced in 2013.

2013 continued the trend towards a high proportion of growth capital and venture capital, with all of the 9 funds successfully closing during the year having a growth capital or VC investment focus.

e rise of growth capital and VC funds from 2011 onwards is a reection of opportunities being sought aer by fund managers. In an emerging region where returns are characterized by earnings growth as opposed to leverage, growth capital funds have become increasingly popular due to the perceived growth prospects yielding higher returns and better value.

7,115

7261,223 1,057 863 744

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2008 2009 2010 2011 2012 2013

$ m

Gro wth Cap ital

Ven ture Cap ital

Balan ced Fun d

Buyo ut

Cap ital Development

Distressed

En erg y an d Po wer

Mezzan in e Cap ital

Pre -IPO

Seco n dary In vestments

SME Gro wth Cap ital

22 23



Funds Raised By ITS Size

Total Active Funds By Volume 2000

One of the common characteristics of growth capital and VC funds is that their investments tend to be comparatively smaller minority stake investments. is is reected in the initial target size (ITS) of those funds which successfully closed. Funds which successfully raised in 2013 had an average close of USD 74 million compared to USD 43 million in 2012.

Active funds represent those funds that have been announced and have not yet been fully realized or wound down. Half of the total active funds are actively investing, with 13% fully vested and 30% raising capital.

Announced7%Fully vested

13%

Fund Raising30%

Investing50%

8,904

1,526

5,687

3,107

1,751

2,874

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2009 2010 2011 2012 2013

$ m

0-499 m 500 -999 m 1000 m+

Investment Value By Volume & Year

3.3 Investments

3.3.1 Information Limitations

Market practitioners estimate that up to 30% of PE investments in the region are unannounced. Furthermore, in some cases where investments are publically announced, PE houses have not revealed the size of the investment. Approximately 30% of announced investments in 2013 have not publicly disclosed their size.

We also note that 2008 to 2012 gures in the current year report will not equal prior year report as data changes year on year based on new announcements made.

Additionally, in the absence of comprehensive information on nancing structures used by PE houses for funding transactions, we are unable to analyze and comment on the debt/equity nancing strategies used for structuring investments. Hence, deal sizes are reported as total transaction size rather than equity investment.

3.3.2 Investments Made to Date

e total number of PE investments completed by MENA PE funds has decreased from 101 in 2012 to 66 in 2013.

Despite an overall increase in liquidity in the region, the level has not yet recovered to the 2008 level. Furthermore, the IPO market both locally and globally is yet to see any signicant resurgence. As a result, PE remains a key funding option for companies looking for access to new capital.


3,500

3,000

2,500

2,000

1,500

1,000

500

02008 2009 2010 2011 2012 2013

0

20

40

60

80

100

120

Invest Value Total no. of investsNo. of invests with value

3,006

100

75

91

67

1,177 1,15451

76

93

67

210

917

58

101

66

46

710

24 25


Regional Split of Investment Volume in 2013

Regional Split of Investment Volume Since 2006

Based on those investments with a known value, the average investment size of transactions completed during 2013 remains broadly consistent with 2012 levels at USD 15 million. As previously discussed, we have seen an increase in growth capital VC and SME investments, which are generally lower value, minority interest investments. ere has been an absence of large buy out deals post global nancial crisis and this is anticipated to remain the case for the next 12 to 18 months.

e table below presents the top 10 investments by size.

In terms of the individual value of investments, the largest investment with a value of USD 350 million was made by Abraaj Private Equity Fund IV in the consumer goods sector in West Africa. ere were a further ve investments in the MENA region with a value greater than USD 25 million, two of which were in the food and beverage sector. One of these large transactions was in the oil and gas sector, reecting the continuing prominence of this sector in the region. e oil and gas sector continues to attract PE investment, enhanced by aging infrastructure with oshore and onshore elds requiring maintenance, modication, or an increase in production capacity.

3.4 Regional Focus

Top ten investments in 2013 - by valueFund name Target company Country Sector

Greater than $25m

1. Abraaj Private Equity Fund IV Fan Milk Ghana Consumer goods

2. Investcorp Gulf Opportunity Fund I B.S.C. Leejam Sports Company Saudi Arabia Leisure and Tourism

3. Gulf Capital Equity Partners II Chef Middle East Qatar Food and Beverages

4. Gulf Capital Equity Partners II OCB Oileld Services Free Zone Company

UAE Oil and Gas

5. NBK Capital Mezzanine Fund I Al Rowad Saudi Arabia Education

6. NBK Capital Equity Partners Fund II Shakespeare and Co. UAE Food and Beverages

Less than $25m

7. Beltone Capital Holding for Financial Investments S.A.E.

Total Egypt Egypt Oil and Gas

8. CedarBridge Partners Fund I Dreamworks Spa UAE Leisure and Tourism

9. Gulf Credit Opportunities Fund L.P. I Turknet Iletisim Hizmetleri A.S.

Turkey Telecommunications

10. Samena Special Situation Fund II Samena Connect Company ASEAN Transport

Egypt20%UAE

20%

Morocco4%

Saudi Arabia12%

Tunisia1%

Jordan11%

Lebanon18%

Other MENA8%

Turkey1%

OutsideMENA[5%]

Other6%

Egypt18%

UAE15%

Morocco13%

Saudi Arabia7%

Tunisia7%

Jordan7%

Lebanon6% Kuwait

5%Other MENA

9%Turkey

4%

OutsideMENA[9%]

Other13%


Investment Volume By Sector in 2013Investment Volume By Sector Since 2006

While Egypt has seen the largest number of PE investments since 2006 (18%), the ongoing political uncertainty in the country since 2011 has resulted in a decline in total value of investment in the country. However, given its strong demographics, the country has maintained its volume of investment activity (20% in 2013). As the country transitions towards regaining political stability, PE deal activity and value of investments made are gradually expected to return to levels experienced prior to 2011.

e UAE, Egypt, and Lebanon led the number of investments for the MENA region, representing over half of the total number of investments for 2013, the largest of which being Gulf Capital Equity Partners IIs investment of approximately USD 50 million in OCB Oileld Services Free Zone Company. e UAE continues to be a popular destination for fund managers and, given the size and dynamic nature of the economy, it is unlikely that this trend will change going forward.

During 2013, 6% of investments involved target companies outside of the MENA region. Turkey proved to be the most attractive country outside of the region, with 1% of the total number of investments made in 2013. Turkeys growing population, rising infrastructure spend, stable political environment, and close proximity to both Europe and MENA has made it a popular destination for investments.

We understand that while several PE investments took place in KSA in 2013, not all of these deals have been made public. erefore, KSA may be under-represented in the data with only 12% of regional PE investments in 2013.

3.5 Sector Focus

InformationTechnology

17%

Education3%Manufacturing

10%

Telecoms4%

Oil & Gas9%

Health care6%

Consumer goods5%

Food & Beverages6%

Leisure2%

Media4%

Transport6%

Other28%

InformationTechnology

30%

Education1%

Manufacturing3%

Telecoms3%

Oil & Gas17%

Health care9%

Consumer goods9%

Food & Beverages8%

Leisure6%

Media6%

Transport5%

Other3%

26 27


No. Of Divestments & Exit Value

e proportion of investments by volume attributable to the information technology, media, telecoms (TMT), and healthcare sectors has increased in recent years. Information technology accounted for 30% of the total investment volume in 2013. It is important to note that the majority of information technology investments were venture capital in nature (19 out of 20 investments), hence were smaller in terms of investment value.

Key sectors of investment for the PE rms continued to be the non-cyclical sectors such as oil and gas and healthcare, which accounted for nearly 26% of the total investments by volume in 2013.

As expected, the sectors most heavily impacted by the global nancial crisis, such as construction, real estate, and nancial services, have fallen behind. e challenges faced by the nancial services sector continued in 2013 with reduced level of investments.

While the industry in general continued to invest cautiously favoring the non-cyclical and defensive sectors such as oil and gas and healthcare, investors are increasingly broadening their focus across a range of sectors including food and beverage and leisure/tourism, which were the two largest sectors of investment by value during 2013.

3.6 Exits

$m

No

. of d

ivestmen

ts2008

Total value of divestments ($M)

No. of divestments with exit value

No. of divestments

3,3143,500 40

35

30

25

20

15

10

5

-

3,000

2,500

2,000

1,500

1,000

500

-

156 117

389

1,804

1,180

2009 2010 2011 2012 2013

79

17

88

17

28

17 17

34

16

21

e impact of the global nancial crisis on liquidity, valuations, and investor appetite has resulted in longer than anticipated holding horizons for PE investments. As a result, the number of exits completed during 2012 and 2013 decreased when compared to 2010 and 2011.

As discussed, the PE industry has increased its focus in recent years to maximizing value within the portfolio through strategic and operational performance improvements. However, while some funds have already made opportunistic exits, many are now faced with the increasing pressure to sell down and realize value for their LPs. erefore, one would expect that as the regional economies stabilize and liquidity in the market continues to improve, a further increase in the number of divestments will occur in the short- to medium-term.

Capital markets globally during 2013 started to demonstrate growth in IPO activity. During 2013, a number of MENA-based companies listed on the foreign stock exchange markets, including Al Noor Hospital (Ithmar Capital) and Gulf Marine Services (Gulf Capital) on the London Stock Exchange and Sotipapier (Swicorp) on the Tunis Stock Exchange.

We have focused on analyzing the volume of divestments, as opposed to the value, given that a number of investments are either unannounced, or when they are announced, the values are undisclosed.

28 29

4 The MENA Merger and Acquisition Market Over The Past Decade

Source: Thomson One, Gulf Capital Research

By Anthony Hobeika, Head of Research and Strategy, Gulf Capital Pvt. JSC

e merger and acquisition (M&A) market in the MENA region has been on a recovery path since 2009, following a drop from peak levels reached in 2008. During the last ve years, the regional deal-making activity has evolved on many fronts, laying a solid foundation for future growth.

Measured by the announced value of completed deals in the region (excluding buybacks, IPOs, and rights issuances by public companies), total MENA M&As (Graph 1) reached approximately US$26 billion in 2013, representing one of the most active years in the post-nancial crisis era. is is compared to US$10 billion and US$16 billion of deals closed in the years 2011 and 2012, respectively. In terms of the total number of completed deals, the last ve years maintained a stable performance, at levels slightly lower than the 2008 numbers.

is trend of rising deal values and stable deal volumes indicates a resumption of the rise in the average transaction sizes across MENA (Graph 2). Although below the 2006 and 2007 tickets, the market is gradually witnessing a comeback of selected large deals.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$26

$16

$10$13

$36

$22

$5$3

$18$24

80

113152

249

483

368422

368 349 321

Total deal value (in bn)

Graph 1: Breakdown of M&A Deals in MENA by YearOver the Past Decade

Steady recovery since 2009



When benchmarked against the global M&A market, the MENA deal-making activity is on a long-term growth trajectory and is outperforming many peer regions (Graph 3). However, when compared to the size of its economy, MENAs M&A market remains relatively small, but has sucient room for future growth. e total M&A deals during the period 2009-2013 represent a mere 3% of the 2013 GDP, compared to a much higher ratio of 13% globally (Graph 4).

Selected geographies have accounted for the bulk of the regional M&A activity during recent years, with the GCC countries being the most active, and in particular, the UAE. In terms of transaction values, the Arabian Gulf attracted more than 51% of total M&As during the 2009-2013 period, compared to 34% during the 2004-2008 period. Egypt lost some ground to the benet of its peers, however, it remains one of the major recipients. Morocco is a country witnessing increased activity, which is an indication of its growing economic appeal. In terms of transaction volumes, the overall picture remains unchanged, with Jordan witnessing important M&A activity at the lower end of the market in terms of deal size.

$158

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$217

$98$67

$89

$267

$128

$76

$283

$146

Average deal size (in mn)

Graph 2: Average M&A Deal Sizes in MENA Over the Past Decade

Steady recovery since 2009

Graph 4: Ratio of TotalM&A Deal Values

2009-2014 to GDP 2013MENA

Sucientroom forfuture growth

3%

13%Global

Total M&As to GDP Ratio

Graph 3: Cumulative %age Share of MENA M&A Dealsin Global M&A Deals Since 2004

%age share in Global M&A Deal volume

%age share in Global M&A Deal value

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0.30%

0.18%

0.34%

0.21%

0.38%0.39%

0.72%

0.65%

0.80%0.72%

0.84%

0.69%

0.87%

0.70%

0.90%

0.75%

0.46%0.46%

0.64% 0.64%

Growing MENA M&Arelative market size

30 31



In terms of industries, the cyclical sectors have accounted for the bulk of the regional M&As over the past decade. In particular, the nancial, telecommunications, industry, oil and gas, and real estate sectors are the primary recipients of deals. ese segments have witnessed some of the largest transactions in the market.

In an indication of the appeal of the region on the global scene, foreign acquisitions of regional companies are currently accounting for a large share of the MENA M&As, totaling over the last ve years a cumulative 36% of the value of deals and 29% of the number of deals. On a yearly basis, the general trend is positive, indicating a gradually growing foreign interest in the region.

Graph 5: Breakdown of the Value ofM&A Deals by Geography

2004-2008

2009-2013

Egyp

t

UAE

Moro

cco

Kuwa

it

KSA

Qatar

Iraq

Othe

rs

GCC and some NorthAfrica Account for thebulk of M&As

38%

25%

16%

23%

7%

11%10% 9%

4%

8%

1%

7%

2%4%

24%

13%

Graph 7: Breakdown of the Value ofM&A Deals by Industry

Graph 8: Breakdown of the Number ofM&A Deals by Industry

2004-2008

2009-2013

2004-2008

2009-2013Cyclical Sectors arethe largest recipients

Cyclical Sectors arethe largest recipients

20%18%

15%14%

11%

5%3% 2% 2% 2% 2% 1% 1% 1% 1%

0%1%2%2%

4%4%3%3%5%5%6%

2%2%

19%

9%9%9%

Graph 6: Breakdown of the number ofDeals by Geography

2004-2008

2009-2013

Jord

an

UAE

Egyp

t

KSA

Kuwa

itMo

rocc

oOm

an

Bahr

ainOt

hers

Besides GCC, Egypt, Morocco and Jordan are active

10%

22%25%

19%17%

15%

9% 10%10%

9% 8%6% 4% 4%

5%3%

13%13%

Fina

ncia

ls

Tele

com

s

Indu

stry

O&

G

Real

est

ate

F&B

Tran

spor

t

Cons

truc

tion

Busi

ness

Ser

v.

Hea

lthca

re

Hos

pita

lity

Insu

ranc

e

Who

lesa

le

Pow

er &

Wat

er

Phar

ma.

Agric

ultu

re

Fina

ncia

ls

Tele

com

s

Indu

stry

O&

G

Real

est

ate

F&B

Tran

spor

t

Cons

truc

tion

Busi

ness

Ser

v.

Hea

lthca

re

Hos

pita

lity

Insu

ranc

e

Who

lesa

le

Pow

er &

Wat

er

Phar

ma.

Agric

ultu

re



Whether the acquirer is a local or foreign entity, the considerations sought in the regional deals are largely majority stakes (Graph 10). In fact, while these stakes have averaged approximately 50% or slightly less during the past years, the percentage owned aer successive M&As targeting the same company was, in most cases, majority. is indicates acquirers intentions to build control over their target entities.

56%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

40% 37%30%

12%

61%61%53%

41%

27%

% of total deal value

Graph 9: Historical % Share of Foreign Players in Total MENA M&As

43%

34%

24% 24%31% 34%

34%

22%

58%

38%

(14% excl.Lafarge/OCIdeal)

Noticeable foreign participation, on a gradual uptrend since 2007

Graph 10: Historical Average Acquisition Stakes Per Deal in MENA

% bought during deal

% owned after deal

0.31%

60% 67%

758%68%

80%

60%70%

48% 51%

35%

50%

30%41%

50%

73%

42%

59%

0.49%

608%

Building majority stakes are the mostsought in MENA M&A deals

32 33


In terms of deal valuations (Graph 11), during the period 2009-13 and based on the available disclosed data, a large number of MENA transactions managed to close at a premium to peer emerging countries. When measured by the deals Enterprise Value to EBITDA ratios, MENA deals depict a premium to emerging markets by around 7% and to advanced regions by around 18%. However, when measured by deal Price to Earnings ratio, the MENA region has transacted at mere premium of 1% to emerging countries and a discount of 8% to advanced countries.

Graph 11: Average 2009-13 Deal Valuation Multiples

MENA

9.6x Emerging8.9x

Advanced8.1x

12.6x12.4x

13.7x

Enterprise Value to EBITDA ratio Deal Equity Value to Net Income ratio

MENA M&A valuations in linewith global trends

Shareholder Activism5By Yasser Akkaoui, Chairman/Shareholder Activist, Capital Concept sal.

Mr. Yasser Akkaoui is the founder and chairman of Capital Concept sal. Since 2004, Mr. Akkaoui has been reinforcing corporate governance and shareholder activism in the Middle East. In 2013, he developed the Governance and Integrity Rating (GIR), the rst independent corporate governance rating methodology worldwide, which was then followed by the Investors for Governance and Integrity (IGI) declaration.

It is time for investors to increase eorts in reinforcing their rights.

It is time for shareholders to stand up for their rights. It is time for shareholders to sound concerns about how their investments are managed. It is time for shareholders to play a role in mitigating and identifying risk.

Shareholder activists are uniting to create a common understanding of risks and provide a platform that allows them to exercise and reconrm their rights in a constructive way. is will not only protect shareholder rights, but also have a positive impact on the corporate environment in the region.

What is the scene like today? ere are 1,304 companies listed on the seventeen Arab exchanges, from Morocco to Yemen. ere is little liquidity or activity on these markets, caps are low on exchanges, and there is hardly enough activity to even call it a market. e shareholder base is very low and the oats of these companies are very limited. Many companies suer from governance failures, whereby majority shareholders deny minority shareholders rights.

Regulators issued corporate governance codes as early as 2006-2007, and companies had until 2010 to comply with these requirements. However, adherence to these codes remains ceremonial without genuine commitment by companies and regulators to serious progressive corporate governance engagements.

Minority shareholders feel alienated and poorly represented on boards, whether through weak status of voting rights or a lack of transparency and disclosure. ey oen do not attend annual general meetings because they feel they will not be heard or their vote will not count. In such an opaque environment, the entire concept of corporate governance becomes dysfunctional due to the absence of the most important stakeholder in the equation the investor.

34 35

Shareholders wish to be informed in advance of meetings and aorded the opportunity to add items to the agenda. ey want to know their vote counts and that their opinion contributes to the business, nancial, and other signicant decisions of the board.

Since 2010, shareholder activism has been redened. Shareholder activists are no longer labeled corporate raiders. ey are more aptly described as unsatised shareholders discontent with the level of commitment of a company in protecting their interests.

e risk emanating from the lack of governance standards is a factor in deterring potential investors, whether local or international, who are interested in emerging and frontier markets. e major deterrents for investors in these markets are weaknesses in governance that provide neither complete information nor guarantees for investors to exercise their rights.

e MENA region, with all of its challenges, remains a very appealing market for investing growth capital. Its rapid and continuous development with little to no leveraging makes it an attractive investment destination. However, the lack of transparency and weak protection of shareholder rights is not encouraging foreign direct investment.

When in New York in February, I visited the largest funds in the United States (US) and met with the leading Arab investors based there. e resounding consensus was that the lack of transparency and dearth of protection of shareholder rights discounts the region from US investment radars. is lack of satisfaction necessitates a shareholder-driven solution that encourages shareholder communication of expectations to companies, regulators, central banks, and capital markets authorities to reinstate condence in investee companies.

We assessed this urgency and concluded that an optimal solution is to design a corporate governance rating methodology that clearly responds to shareholder needs As such, we created the Governance and Integrity Rating (GIR). GIR allows the nancial community to manage governance risk for the benet of shareholders by providing rating scores and rubrics that are critical for assessing governance structures.

It acknowledges the expectations, concerns, and challenges in corporate governance that are deterring potential investors. Companies that implement corporate governance practices beyond the Capital Markets Authorities requirements now can comply with GIR standards to instill an additional level of investor condence.

GIR provides shareholders with the rst independent corporate governance rating methodology regionally and internationally. GIRs concept stemmed from working alongside shareholders, investment development funds, private equity funds, pension funds, mutual funds, family oces, and regulators, including the Organisation for Economic Co-operation and Development (OECD), central banks, and capital markets authorities.

e methodology employed delivers to shareholders critical information about the company they have invested in or a target company they are assessing. e indices help analyze the companys level of commitment to corporate governance, as well as serve as a dashboard to monitor the companys advancement and the progressiveness.

e system permits shareholders to more proactively participate during general assembly meetings and board meetings to ensure corporate governance is prioritized. It allows board members to assume an ecient and eective role during board terms by placing corporate governance-related concerns on assembly and board meeting agendas, which, when taken seriously, strengthens shareholders condence in their investments.

GIR can also be utilized by companies and nancial institutions that seek to identify areas of improvement in their corporate governance programs and who are progressive enough to immediately respond and implement changes. ese companies will be positioned at the forefront of corporate governance compliance, positively reinforcing their reputation to existing and future investors.

GIR is useful on a pre-deal level. Investors such as private equity funds have integrated GIR into their due diligence for target investee companies, especially in emerging markets and frontier markets where transparency is not the norm. Information that GIR provides on companies in emerging markets is priceless and can identify areas of corporate governance risk to promote transparency and accountability.

In an eort to protect shareholders rights, GIR operates on an ad-hoc level whenever a shareholder feels that his or her rights are violated or not respected. GIR supports launching an investigation around such violations, informing the entire investment community and alerting local and regional regulators who are urged to immediately take action to preserve the rights of shareholders.

In tandem with GIR, a signatory declaration was needed. erefore, Capital Concept launched the Investors for Governance & Integrity (IGI), which convenes like-minded investors and corporations that recognize the importance of corporate governance in mitigating risk on a macroeconomic level, including its microeconomic implications. ese investors seek data that identies the most favorable geographies in which to invest and facilitates foreign direct investment to the MENA region that fullls global economic development outcomes.

Since the launch of GIR, awareness of its presence is growing among private equity funds. New funds are signing the IGI declaration each month to show support for a risk-free investment. Increasingly, funds are integrating IGI on a pre-deal or due diligence level.

Shareholder activism is burgeoning and crucial to the progression and advancement of the MENA nancial industry. It is time for local shareholders to exercise their rights to play a proactive role in the success of the companies they invest in and the nancial industry in general.

Reinforcing the implementation of best-in-class corporate governance can only be achieved in the MENA region when shareholders assume the roles of shareholder activists to promote an investment environment that is conducive and attractive to regional and foreign investors alike.

36 37

By Khaled Baranbo, Investment & Business Development Manager, Abdullatif Alissa Group Holding Company

6 Is A Private Equity Partner Beneficial To Your Family Business?

Family businesses account for three-fourths of the private-sector economy in the MENA region. Many private equity transactions in the region involve family businesses on either side of the transaction. However, executing private equity deals with family businesses as targets is a highly sensitive matter. Such transactions require a clear understanding of cultural dierences and local business practices. Moreover, private equity investors should demonstrate the value addition that they contribute to the family business, as well as establish good rapport with the business owners and appreciate the signicance of the familys achievements. In order to build strong and healthy relationships with family businesses, private equity investors should fairly value the company and equitably structure the deal, in addition to sharing the long-term vision of the family shareholders.

e business model of private equity investing is to exit acquired portfolio companies at higher values than their respective entry prices. Such increases in portfolio company valuation usually result from both improved nancial performance and higher exit multiples. Much of the eorts of private equity investment professionals during the investment life cycle (deal origination, due diligence, closing, value creation, and exit) should focus on these two elements.

Following are major performance levers that are used by private equity professionals to add value to investee family businesses to improve their business and nancial performance prospects and to position the business appropriately for a lucrative exit:

Shared Risk: Sometimes family business owners are not willing to invest heavily to drive the business through its next growth phase. In these circumstances, a partnership with a private equity group can provide business owners with peace of mind knowing that they have securitized a part of their net worth and partnered with competent investors who are looking for ways to bring the business to its next level. As a partnership, the family business can continue to grow and legacy owners can continue to nancially participate in that growth without the concern associated with re-investing more of their own net worth back in the business.

a)

b) Strategic Planning and Performance Management: Private equity professionals help the target company to devise a coherent strategic plan. ey design proper corporate performance management processes that ensure control over strategy implementation and devise objective management incentives schemes that are linked to the achievement of business objectives.

c) Strengthening and Incentivizing the Management Team: Private equity professionals conduct a detailed review of the organization structure to conrm whether the current structure is optimal for the future business plan and assess the need to bring additional talent on board. ey maintain strong networks of industry and functional experts that they can leverage (via executive, board, or consulting capacities) to work on various performance improvement projects.

d) Institutionalization: Private equity investors help establish proper internal controls and ensure that policy, procedures, information technology systems, and best practices are implemented and appropriately utilized. ey institute a strong corporate governance system that encourages shared and independent decision making.

e) Capital Structure: Private equity professionals oer expert advice on the nancial restructuring of the target company, which results in increased protability and cash ow, coupled with a healthier balance sheet. Additionally, they help the target company build strong relationship with the banks, thus reducing nancing costs.

f) Business Development: Private equity professionals leverage their local and international networks to support investee companies in growing organically, whether it is through the addition of new products or services or geographic expansion.

g) Mergers & Acquisitions: Private equity professionals support investee companies in growing inorganically by systematically screening the market for potential value adding acquisition opportunities and executing such transactions capitalizing on their deal-making expertise.

h) Better Exit Opportunities to Family Business Shareholders: Historically, companies that were owned by private equity investors were sold at premiums compared to other family businesses that were not owned by private equity. Private equity professionals possess expertise in navigating through IPO processes, which many family owned businesses lack. In many cases, depending on the growth potential of the company and the size of their retained stake, family business owners can make as much or more from their minority interest as they did from selling their majority interest.

i) Succession Planning: Sometimes, next generation family members are either not inclined to take over or not capable of leading the business through its next phase of growth. Typically, business founders have managed all aspects of the business that can leave serious gaps when second-tier management or second-generation family members assume leadership. Private equity can be an important solution to these business challenges, by taking an objective view of the needs of the business. Private equity investors can facilitate critical mediation between various branches of the family business during transition periods and can introduce a professional management team to ensure a smooth transfer of control. ey focus on building a strong management team and look beyond the familial and legacy issues to build the best team for the job at hand in the best interest of the business.

38 39

By Dr. Ryan LemandSenior Economic ADvisor & Head of Risk Management,Securities and Commodities Authority

7 An open dialogue with the Securities& commodities Authority

In accordance with the UAE governments vision of developing the capital market and contributing to national economic growth, the Securities and Commodities Authority (SCA, or e Authority) sought to bridge the gap between global investment management requirements and the opportunities oered by the rapidly expanding UAE economy.

In designing the decision 37/2012, which pertains to mutual funds, the SCA aims to make the UAE an attractive and hospitable environment for mutual funds.

Since the rst publication in August 2012, fund managers and compliance ocers have familiarized themselves with this mutual fund regulation. e Authority has processed over 400 applications and found that the majority of applicants had a clear idea of what the new regulation consists. It is therefore the purpose of this introduction, not to delve in the details, but to present the big picture so that market participants can benet fully from the mutual fund regulation.

Rather than simply adding a layer of red tape, the Authority designed this regulation to provide a landing path for mutual funds being established in the UAE and the greater MENA region.

e regulation sets the SCA as the reference point not just for licensing funds, but also for several categories of service providers. It sets the standards to qualify for and provide services to investment funds, thus helping identify opportunities for nancial services providers, a necessary element of the ecosystem that the Authority aims to create.

In ruling on acceptable marketing practices, the Authority has le a wide spectrum of tools freely accessible and limited the regulatory impact on what matters most: protecting investors rights and market integrity. e necessary focus on cross-border investments and the experience of the UAE as an international trading hub allowed the Authority to develop the mutual fund regulation in a way that retain attractiveness and visibility within the regional competing nancial markets, without compromising high standards.

is regulation is exible enough to accommodate private equity and venture capital funds and permits a simple legal framework for registering a Limited Partnership or General Partnership entity. A clear set of regulatory guidelines is now in place to suit private placements and fundraising activities, reducing further what previously was a substantial grey area. With the focus of the regulation rm on client protection, the fund manager is free to select the most suitable investment vehicle, whether it is for direct investment, co-investment, and secondary market transactions with the typical added advantage of no capital controls, favorable taxation regime, and a stable, dollar-pegged, nancial system.

e primary contribution of the mutual fund regulation is its provision of a solid, fair, and transparent legislative framework that claries rights and obligations of all stakeholders in the collective investment landscape. At the same time, the Authority has worked proactively to ensure the availability to investment managers of suitable instruments to gain and manage risk exposures.

Such instruments have been gradually regulated and accepted by the SCA over the past few years. With the addition of the mutual fund regulation (decision 37), they form a veritable toolbox of resources for investment managers.

ese resources include licenses for establishing or marketing mutual funds. By providing two simple categories for foreign and local funds and an approval for promotion material, the applicant is able to clearly identify the starting point of the authorization process.

Another resource is the set of legal regulations for operating an investment management company, nancial consultancy, and custodians. Whether the applicant desires to participate in the UAE investment management sector as a fund manager, in a research plus advisory capacity, or as an asset manager solution provider, the licensing process is clear and time-bound to ensure certainty of execution and optimal planning to launch in the UAE.

e regulatory framework is completed by advanced market-making solutions such as short selling, lending and borrowing securities, and liquidity provisions. e availability of these three tools translate into the following eect: local market access providers can ensure that the fund manager will nd liquidity to execute a transaction in a variety of scenarios, including borrowing the security when it is not ready available on their book and under tighter than usual credit markets via the availability of bank liquidity. e presence of delivery-versus-payment settlement also removes operational risks from the equation, allowing the fund manager the peace of mind of knowing that the main causes of slippage due to frictional costs and failed settlement have been taken care of.

In the constantly expanding and connecting global nancial system, ensuring information integrity is crucial. Most market abuse events happen due to misuse of information. Implementing the XBRL data framework is a long-term goal the Authority has been tirelessly working toward since 2011. is framework will bring state-of-the-art communications technology to UAE nancial markets, which will aect all facets of the securities markets, including the investment management sector. XBRL will allow for transparent, available, and reliable nancial data as a standard, and not an expensive privilege. is will strengthen market integrity, facilitate ows, and expand the reach and the potential client base of investment funds.

In conclusion, the mutual fund regulation is a welcome addition to a growing regulatory framework that illuminates a path for investment managers to enter the UAE, seek and communicate with investors in an open and safe way, access the local securities market with the support of competent service providers, and benet from world-class services.

40 41

Recently, we have noticed a growing trend of large family-owned conglomerates in the MENA region investing directly in private equity deals. Owing to long-term experience in managing businesses in the region, family-owned groups possess solid expertise in building and growing companies by utilizing the aforementioned levers. In addition, family-owned businesses maintain distinctive advantages over typical private equity players, such as the following:

Longer Time Horizon: Most of the private equity investments executed by family groups are long-term in nature and not bound by a denitive exit horizon. us, the target company shareholders consider the family group as an integral long-term partner of their family business, in comparison to private equity funds that require an exit in ve to seven years.

Cultural Sync: One of the primary reasons some private equity investments fail is the cultural shock that family business shareholders experience when the new private equity investor takes over and forces its approach. Unlike some private equity funds, family-owned groups know the regional cultural sensitivities and are better equipped to manage change smoothly.

Prestige and Network: Many small and medium enterprises prefer to be associated with large family groups because they are highly regarded in social circles that connect to signicant business networks.

e performance levers utilized by the private equity investor during the investment life cycle with the objective of achieving superior returns on invested capital are naturally in the best interest of the investee family business and shareholders thereof, due to the inherent alignment of interest in such equity partnership. Hence, there are many benets of having a private equity investor as a partner in the growth story of a family owned business.

a)

b)

c)

Survey8

Company Age Participants Country Of Establishment

8.1 Survey of General Partners (GPs) in the MENA Regione survey focuses on GPs in the MENA region. e survey consisted of 39 questions and was conducted during the second quarter of 2014. e aim of the survey was to obtain a greater understanding of the sentiments of the MENA regions PE industry from the perspective of GPs.

Methodology:e survey was prepared by Zawya and was conducted online with participation from representatives of 21 private equity rms in the MENA region. Participating rms had investments in a range of industries across a wide geographical area.

Scope Of e Surveye survey briey examines the impact of the economic downturn and political instability in the region during the period 2011 to 2013, and aims to understand GP expectations and views around the outlook for 2014.

8.2 Respondent ProleForty-one percent of the respondents established their private equity rms within the last ve years, with approximately one-third being in their h year of operation. e private equity industry in the MENA region is relatively young by international standards. Fiy-ve percent of participating rms have less than USD 500 million worth of assets under management.

8.3 Survey ResultsWhen was the company established?

Egypt14%

UAE33% Qatar

5%Jordan5%

Lebanon14%

Saudi Arabia24%

Kuwait5%

More than 5 years59%

5 years14%

4 years14%

3 years13%

42 43

Ownership Of The Fund Management Company

Number Of Funds Managed To Date

While the private equity industry in the MENA region is still nascent compared to more developed markets, more than half of the participating private equity rms have been in operation for more than ve years.

e majority of the participating private equity rms (33 percent) are based in the UAE. However, while these rms are based in the UAE, their investment focus is regional.

Who owns the fund management company?

Eighty-six percent of respondents stated that management holds ownership in the fund management company, with over one-third (37 percent) of these being a majority share.

How many funds have you managed since establishment?

Given the relatively nascent nature of the private equity industry in the region, it is not surprising that 73 percent of respondents have managed between one and four funds to date.

Minority ownedby management

54%

Majority owned bythe management

32%

Management hasno ownership in

the managementcompany

14%

1-4

73%

14%9%

4%

5-9 10-14 Other

What is the total value of assets under management?

1-3

5%9%

23%

63%

4 5 > 5

Total Assets Under Management

How Many Companies Do You Have In A Typical Fund?

Fiy-ve percent of respondents have less than USD 500 million worth of assets under management. is is not surprising given the nature of investments in the region are oen small to mid cap, minority stake investments.

How many companies do you have in a typical fund?

With the increase in the proportion of private equity rms having been established for more than ve years (from 50 percent in 2011 to 59 percent in 2012 and 2013), it is logical that there will be an increase in the number of investments in a portfolio. is is a positive trend, as it shows that private equity rms continue to invest, despite global challenges.

Undisclosed9%

$51M - $100M23%

$101M - $250M9%

$251M - $500M23%

$501M - $1000M18%

+ $1000M18%

44 45

What are the main challenges in 2014 for the MENA private equity industry?

Main Challenged For e MENA PE Industry In 2014

e Most Important Attribute Required To Win A Deal Is:

Over half (64 percent) of respondents are more concerned about portfolio level issues (corporate governance, human capital, acceptance of private equity funds as partners, market regulations, lack of control over deals, and lack of bank nancing). About one-third of the respondents (35 percent) believe that nding the right deal at the right price (quality of deal ow and appropriate valuations) will be a key challenge during 2014.

What is the most important attribute for a private equity rm to win a deal?

A good network and proprietary contacts, combined with reputation (i.e. a proven track record), is seen by a large proportion of respondents (64 percent) as the most important attributes required to successfully complete acquisitions in the region. is is presumably linked to the challenges in sourcing deals as highlighted by many respondents. Management and operational expertise is considered by many others to be the most important attribute for a private equity rm to win a deal.

Network andproprietary contacts

41%

Accessibility tocapita9% Sector specialisation

[percentage]

Management andoperational expenses

18%

Reputation23%

Quality deal ow 18%

17%

13%

12%

11%

10%

9%

9%

1%

High valuations

Corporate governance

Human capital expertise

Market regulations

Deciency in bank nancing

Deciency in control ideas

Acceptance of PE funds partners

Deciency in intermediation

What types of entry deals are expected to take place in 2014?

Entry Deals Expected To Take Place in 2014

In Your Opinion, What Will Be e Average Deal Size in 2014

Approximately one-third of respondents (36 percent) believe that growth capital investments will continue to be popular in 2014. It is encouraging to note that 18 percent of respondents expect buyout deals to be popular in 2014, which indicates that fund managers do expect some comparatively higher value private equity deals to take place in the region.

What will be the average deal size in 2014?

Half of the respondents believe that the average deal size will be between USD 20 million and USD 40 million. is reects positive investor sentiment, but also continued prudence of investors.

Infrastructure5% Venture Capital

14%

Buyout18%

Real estate27%

Growth Capital27%

Less than $10M

14%18%

50%

9% 9%

$10M - $20M $24M - $40M $40M - $60M > $60M

46 47

Funds Expected To Be Launched/Raised During 2014

In Your Opinion, What Will Be e Average Size Of Funds Raised In 2014

e majority of respondents remain cautious about fundraising prospects for 2014 and believe that fewer than ve funds will be successfully launched.

What will be the average size of funds raised in 2014?

e vast majority of respondents (73 percent) believe that the average size of funds raised in 2014 will be between USD 100 million and USD 500 million. is reects positive investor sentiments and investment opportunities in the MENA region, yet the reluctance to make investments exceeding USD 500 million shows that sources will continue to exercise caution.

Less than 545%

Other5% None

9%

518%

More than 523%

How many funds do you expect to be launched/raised in 2014?

5%

41%

32%

13%9%

$501M - $1000M$251M - $500M$101M - $250M $100MNone

In your opinion, what will be the main source for new funds to be launched in 2014?

Main Source For New Funds Launched In 2014

In Your Opinion, What Will Be e Type Of Funds Raised In 2014

In line with last years survey, the majority of respondents (73 percent) expect funds to come from within the region through high net worth individuals, institutional investors, and sovereign wealth funds. International institutional investors are also expected to provide a prominent source of funding (18 percent) for funds to be launched in 2014.

What will be the type of funds raised in 2014?

Respondents believe that the majority of funds will be growth capital (23 percent), buyout (18 percent) and venture capital (16 percent).

RegionalInstitutional

investors32%

Regional SWFs9%

Regional high networth individuals

32%

Other9% International

Institutional investors18%

Growth Capital23%

Buyout18%

Venture Capital16%

Infrastructure11%

Pre-IPO9%

Real Estate12%

Mezzanine3%

Distressed (SpecialSituation Funds)

3%

Secondary Investments5%

48 49

Do you plan to launch a new fund/new funds next year?

Do You Plan To Launch A New Fund/New Funds in 2014

Reasons To Get LPs To Commit To A Fund

Interestingly, while 45 percent of respondents believed fewer than ve funds to be launched in 2013, the vast majority of respondents (86 percent or 18 fund managers) are planning to launch a new fund in 2014. Fourteen percent of respondents state that they have no plans to launch a fund in 2014.

In your opinion, what are the main reasons to get LPs to commit to a fund?

irty-four percent of the respondents believe that a fund managers track record is the key reason behind getting LPs to commit to a fund, with expected returns being the second most popular motivation. ose funds that have been in the region for a period of time and can demonstrate a proven track record of deal execution and exits are likely to be in a strong position to attract capital.

No14%

Yes86%

Fund expectedReturns30%

Fund managerssector focus

9%Fund managers

investment strategy10%

Fund managertrack record

34%

Transparency15%

ManagementFees2%

Fund Type Target Market

Holding Period of Investments

Similar to the prior years survey, growth capital funds continue to be the preferred type of fund for over one-third of respondents.

Similar to last years survey, over 10 percent of private equity rms in the region perceive international institutional investors as the target market for funds to be launched (18 percent in 2012). In 2012s survey, international institutional investors were considered by 35 percent of private equity rms as the target market for new funds. is decline in the past two years may be attributable to ongoing uncertainty in the European and US markets. Regional investors and high net worth individuals are expected to contribute the vast majority of capital.

e majority of respondents (82 percent) believe that funds will hold investments for at least four years. While traditionally private equity rms have had a three to four year investment horizon, there is an increasing willingness to hold assets for a longer period.

To regional HNW32%

No specicMarket18%

To internationalinstitutions

18%

To regionalinstitutions

36%

Buyout18%

Venture Capital14%

Infrastructure5%

Real Estate9% Mezzanine

9%

Growth Capital36%

Not planning tolaunch funds

this year36%

If you plan to launch a new fund, what would be the fund type and target market?

In your opinion, what will be the holding period of PE investments?

2 years

0%

18%

32%

50%

3 years 4 years > 4 years

50 51

What Are e Most Important Benetsat e PE Brings To Its Investee Companies?

Target IRRs In 2014

64%

4%9%

23%

What are the most important benets that PE brings to its investee companies?

Consistent with last years survey, PE rms see strategic planning as the most important role to provide to portfolio companies, followed by nancial and operational advice and support.

What will be your target IRR in 2014?

Despite the challenges in the global economy, the majority (73 percent) of fund managers still target an IRR greater than 20 percent. is is in line with responses received during the last two years (74 percent from the 2012 survey).

20-29%15-19%30-39%10-14%

Strategic planning 41%

22%

18%

14%

5%

Financial advise and support

Operational advice and support

Business development

Restructuring

What will be the most attractive exit routes during 2014?

How many exit deals do you expect in 2014?

Most Attractive Exit Route - 2014

How Many Exit Deals Do You Expect In 2014?

In line with last years survey, trade sales continue to be the most attractive exit strategy amongst fund managers while nancial sales and private placements are considered less attractive or more dicult to execute.

e majority of respondents (59 percent) believe that there will be fewer than ve exit deals in 2014.

Trade sale (to other companies) 63%

23%

9%

5%

Initial Public Oering

Financial Sales (to other funds)

Private placements

Less than 5

59%

5%

18% 18%

None 5 to 10 More than 10

52 53

Will valuations in 2014 be lower than in 2013?

Regions of interest

Valuations in 2013 Were High In 2014, Valuations Will Be Lower an In 2013

Regions Of Interest

Although the majority of respondents (68 percent) believe that valuations in 2013 were high, the majority (73 percent) also believe that valuations in 2014 will in fact be higher. is represents more favorable exit opportunities for investment in the region.

Despite the impact of the economic challenges and recent political uncertainty, the GCC region and Egypt continue to be the focus of private equity rms in the region. is is primarily because of the regions large and growing population, growing middle class, increase in per capita income, continuing demand for infrastructure, and high government spending budgets.

N/A18%

Disagree14%

Agree68%

N/A23

2013 annual report2

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