dnb pe report_17122008

UAE Private Equity 2008

D&BBusiness Insight SeriesIndustry Perspectives

2D&B Industry PerspectivesUAE Private Equity Report 2008

ForewordDun & Bradstreet (D&B) is the world’s leading knowledge provider, and is committed to providing its clients with the information they need in order to Decide with Confidence™.

As part of this commitment, D&B has established the D&B Business Insight Series. Produced by D&B’s team of senior economists, econometricians, industry specialists, business and financial analysts the D&B Business Insight Series provides timely, up-to-date, and insightful information and analysis of business issues related to industry, banking & finance, and the economy as a whole. The series includes regular business updates, industry analysis, country risk analysis, business indices, and thought leadership papers. Through these initiatives D&B endeavours to provide research-based, insightful information about industry structure, current trends, and future outlook to various stakeholders.

Industry Perspectives, part of the D&B Business Insight Series, is a collection of research reports that focus on business subjects relevant to a select industry at a time. These studies draw from the economic research expertise of the D&B Economic Analysis Group and the industry expertise developed by business consultants from D&B’s Research & Advisory Services team.

D&B is pleased to announce the first issue of the Industry Perspectives series. Industry Perspectives: UAE Private Equity 2008 which provides a detailed analysis of the private equity (PE) activity in the region, with a specific focus on the UAE. The report highlights the current status of PE industry in the UAE in a wider macro-economic context. It analyses the recent industry structure, growth trends and briefly examines the implications of the global financial crisis on the PE industry. It presents authoritative quotes from industry leaders and key decision makers of regional and international PE firms.In addition, the report outlines the future growth strategies that may be adopted by PE firms to capitalize on the opportunities in the region and to overcome the associated challenges. The report is based on extensive primary research done by D&B and thus gives an insight into what the industry leaders themselves see to be the future of the PE industry.

MethodologyThe findings that are presented in this report are based on a detailed study conducted by D&B business consultants during the period August to October 2008. The data was collected through in-depth interviews with leading PE firms located in UAE and the statistics are drawn from the D&B database, supported by industry research.

AcknowledgementsSpecial thanks to all the respondents for their co-operation and support: Al Futtaim Capital, Abu Dhabi Investment Company, Algebra Capital, Amwal Al Khaleej, Arab Business Angels Network, Baer Capital, Delta Partners, EFG Hermes, HBG Holdings, Global Investment House, Growth Gate Capital, Gulf Capital, Intel Capital, Ithmar, MENA Infrastructure Fund, Millennium Private Equity, Noor Capital, Ras Al Khaimah Investment Authority, Shuaa Partners, The National Investor.


Table of Contents

Key Perspectives from the study 4

1. GCC - Fundamentals of PE remain strong 5

1.1 FDI Attractiveness correlates to increased opportunties for local capital 61.2 M&A activity in GCC presents PE opportunities 71.3 PE activity in the GCC 71.4 Private Equity Synopsis in the GCC 81.5 Fund Raising activity in the GCC 9

2. PE Perspectives in UAE 10

2.1 Types of PE Funds 102.2 Present and future size of PE funds 112.3 Average investment/ticket size 112.4 Target investment country/region 122.5 Target investment sectors 122.6 PE investment opportunities 132.7 Target IRRs 152.8 Exit Route 152.9 Investment strategy 162.10 UAE Business Environment-Potential for PE Industry 17

3. UAE Private Equity Outlook 18

3.1 Challenges to the growth of the PE industry in UAE 183.2 Major opportunities for growth of the PE industry 193.3 Leading financial centre in the MENA region 223.4 PE Industry Optimism 2008-2011 22


Key perspectives from the studyPE industry in UAE is not completely invulnerable to the global credit crunch:28% of the respondents foresee economic slow down and 26% highlighted lack of developed financial markets as the key challenges that the industry will need to tackle. The global economic turmoil has made investors apprehensive about pooling their funds, thereby prolonging fund raising cycles for PE firms.Moreover, stock market volatility has delayed listing by firms, further curtailing exit routes and realization of returns for PE players.

In light of the financial crisis, banks reluctance to extend additional lending will allow PE players to obtain a greater piece of the investment pie:Stricter lending norms and reluctance to lend to new generation entrepreneurs by banks have presented PE firms opportunities to participate in the funding process. Further, the financial crisis has made banks apprehensive of lending to firms other than the time-honored companies and has made it difficult to provide collateralized loans to existing customers.

Regional Focus:UAE, KSA and Egypt are the most preferred markets for investment by PE firms on account of their macroeconomic potential and favorable business conditions.

Slow-down in deal flow and lack of quality deals:Lack of quality deals poses a challenge for PE players. This is attributed to the mindset of owners of large established firms who prefer to retain their stake in the company rather than selling their stake to external parties/investors.

Distinct shift in fund focus from ‘Opportunistic General funds’ to more ‘Specific funds’:The multiplication of funds in the region and presence of large number of fund houses both home-grown and foreign have led to intense competition among PE firms to garner

a large share of the funds. As a result many players have narrowed their focus to one or two specific industry sectors in order to develop relevant expertise. Further, generalist funds require an extensive knowledge base across sectors, thereby enlisting a large pool of resources from varied industry backgrounds. This has now narrowed to focusing on sectors in which the firm has experienced resources.

Shift in fund operations:Moreover, the trend of ‘raising funds first and then scouting for deals’ is also witnessing a reversal wherein PE firms are getting more specific on what and where to target their investments.

Family business present maximum opportunities:39% of the respondents have cited family businesses to be the single largest opportunity for PE firms. ‘Growth Capital’ funding has been the most common type of PE fund operated by PE firms to enable family businesses expand and restructure their operations. 23% of PE players believe that privatization in state-owned assets and Private Public Partnerships (PPP) are potential opportunities for PE investments in the region while 20% cited pre-IPO deals.

Consolidation is likely:Majority of PE players in UAE forecast a consolidation in the industry, given the rapid increase in number of PE firms (foreign & homegrown firms) and the lack of quality deals. Moreover, in light of the financial crisis the economy is also likely to witness consolidation among sectors like Financial Services, providing opportunities for PE funds to support such activities.

Overall, the PE industry in UAE is at its “turning point” moving from the limited exit options available (IPO, trade sales), mid-size deal involvement (USD 40–80 million), strategic minority stakes and lack of transparency to being on the growth trajectory with control buyouts, larger transactions (USD 100 million), sophisticated financial products (Islamic funds, structured products), growth strategy (willingness of family businesses), expert talent pool (from the West), and multiple exit options (secondary sales).

The report highlights each of the perspectives discussed above in light of the overall attractiveness of the GCC region as a hub for PE investments.


GCC GDP Current Price (USD billion)

163

349

53

99

16

36

193

376

68

111

20

40

240

464

98

145

24

51

UAE KSA Qatar Kuwait Bahrain Oman

2006 2007 2008

GCC Population (in ‘000s)

4229

2369

7

838

3182

.96

749 25

464486

2428

9

930

3310

764 25

704761

2489

7

1032

3443

779 25

95


2006 2007 2008

GCC Current Account Surplus as a % of GDP

22.0

27.3 30

.5

51.7

13.3

12.1

21.6

26.7

34.5

47.3

19.9

9.9

27.4 31

.2

44.6

45.2

20.3

11.6


2006 2007 2008

GCC GDP Per Capita, current prices (USD)

3861

3

1473

3

6291

4

3101

4

2112

3

1403

2

4293

4

1548

1

7284

9

3363

4

2573

1

1558

4

5038

3

1865

5

9516

7

4215

9

3130

2

1946

3


2006 2007 2008

GCC countries have been experiencing an economic boom characterized by wealth generated by oil price rise over the past few years, progressive government initiatives, diversification into non-oil sectors, rapidly developing financial sector and investments in infrastructure. Combined GDP of the GCC countries was around USD 807.5 billion in 2007 and is expected to double by 2012 in view of the continued efforts to develop the economies. The region has always been viewed as a ‘source of potential funds’, attracting the worlds financial powerhouses and large institutions and in the last few years, leading private equity companies. Local investment banks and financial institutions have also entered the foray and developed their PE businesses to direct capital flow to the growing sectors of the economy.

The availability of investible surplus has led to the emergence of Private Equity players as catalysts of growth to generate profitable returns on investment funds. Further, increased liberalization and privatization initiatives, favorable investment climate and presence of large family businesses have presented numerous opportunities for the development

of the PE industry in the region. PE has become an important mechanism for supporting entrepreneurs to source capital, to expand businesses as also to assist Government projects under the PPP route (infrastructure projects).

Development of the PE industry is due to fund support from local institutional investors, High Net Worth Individuals (HNWIs) and Sovereign Wealth Funds (SWFs). The PE funds not only promote employment and economic growth but also play a direct role in improving corporate performance. This could be through resolving process improvement/standardisation, succession issues, financial restructuring, facilitating infusion of technology /expertise or through reorganization of the businesses.

The macro-economic fundamentals provide a strong case for PE firms to set-up base in the region to draw upon its liquidity and channelize it into more progressive sectors of the economy.

1. GCC – Fundamentals for PE remain strong

Source: D&B, Zawya & IMFNote: 2008 estimates

The available investible surplus driving the economic sectors in the region is testimony to the growing number of foreign investors looking to source funds from and to the region.


The emerging economies of Asia and GCC have witnessed a larger portion of FDI inflows as compared to outflows in the recent years. Further the GCC region registered the highest growth in FDI (over 99%) during the decade.

The large foreign investments highlight the importance of the region as a FDI hub.

The share of each GCC country in the total FDI has been depicted in the following charts.

In 2007, KSA, UAE and Oman have been the top 3 recipients of FDI inflows within GCC accounting for 93% of the total GCC inflows. Being the financial hub of GCC, UAE has been successful in attracting a major portion of the FDI investments. KSA has been noteworthy, with a 3-year CAGR (2004-2007) for FDI inflows and outflows recorded at 132% and 452% respectively on the back of a liberal economy. Kuwait has witnessed an FDI outflow in the form of investments in infrastructure. It contributed to more than 34% of the entire GCC outflows in 2007.

In terms of FDI outflows, outside the GCC, USA has received the largest share of investments from the GCC. However, increasing number of GCC investors are targeting Asia (India and China in particular) to diversify their investment portfolio. GCC investors are also turning their attention to opportunities in North Africa. This is being driven by recent progress in liberalization and privatization among high-potential countries like Morocco, Algeria, Libya and Egypt. Given the focus on infrastructure development in the above region, sectors like real estate, banking and telecom are in prime focus.

Overall the heightened FDI inflow/outflow activity can be explained by several factors:

(a) availability of investible surplus,(b) large infrastructure projects announced and(c) improvement of business environment in GCC making businesses more transparent and conducive to receiving FDI.

1.1 FDI attractiveness correlates to increased opportunities for local capital

Global FDI Inflow, 2007

Source: UNCTAD

KSA56.6%

UAE30.8%

Kuwait0.3%

Qatar2.6%

Bahrain4.1%

Oman5.5%

1325

3

2431

8

1138

123 17

56

2377

6625

1313

9

5263

1420

3

1669

570


GCC 2007 FDI inflow and outflow (USD Million)

Source: UNCTAD

Global FDI (USD Billion)

Source: UNCTADNote: The values represent the total FDI inflows and outflows

201.6

489.0

146.21.1

546.7

1928.1

640.1

84.4

USA Europe (25) Asia GCC

1990-2000 2007

2007: 41%

59%

2007: 43%

57%

2007:56%

44%

2007: 51%

49%

The GCC region registered the highest growth of over 99% in

the last decade

Global FDI Outflow, 2007

Source: UNCTAD

KSA31.7%

UAE16.0%

Kuwait34.2%

Qatar12.7%

Bahrain4.0%

Oman1.4%

The enhanced FDI attractiveness of the region also correlates to increased opportunities for local capital. Overall, the macro-economic context in GCC is significantly favorable for PE industry and indicates strong growth over the medium-long term.


GCC is home to 88 PE firms and more than 63 are concentrated in the UAE alone. These firms have raised more than USD 2800 million worth of funds till date (Oct, 2008). Most of these funds are still in their fund raising stage.

The graph depicts the distribution of funds on the basis of their life cycle. 55% of the total funds are still in the fund raising stage. Of the total funds in the fund raising stage, more than 26% are in UAE alone. Only a few funds (3%), in MENA have been closed. The relatively large number of funds in the fund raising stage is witness to the prospects of PE investments in the region.

“A lot of deals here in the GCC are private deals, you need to build your own deals which is knowing a lot of people, knowing companies, working with them and showing the value that you can add. I think that companies are looking for partners that can help them grow and expand beyond a country or beyond the region. That is why we get approached by companies to see if we want to explore an investment opportunity, even though they don’t need the money that day. The value add beyond the money is going to become more and more important not only for the targets, but also for the fund managers if they want to assure superior returns for their investors”, Delta Partners.

1.3 PE Activity in the GCC

The value of M&A in the GCC region increased from USD 28 billion in 2006 to USD 46 billion in 2007, an increase of 62% year-on-year. Purchases accounted for more than 90% of the activity in most cases except Kuwait where most of the activity was concerned with large sale of businesses. UAE dominates the M&A activity in the region as depicted in the graph below. The growing importance of M&A in the region highlights the opportunities for PE firms to provide support in the form of expertise and finance for such deals. “The framework and regulation of the economy in general along with the health of the capital markets will help determine the opportunities in the future”, Shuaa Capital. Purchases dominate M&A activity in the GCC on account of:

(a) a consolidation trend in the industry, (b) in-organic growth strategy of firms and (c) the ‘buying orientation of the region’. The trend reflects opportunity for PE firms in the form of ‘acquisition financing’.

All the following investments point to a more resilient GCC economy and hence the growth of PE firms to direct the growth capital towards greater economic progress of the businesses and the economy as a whole.

1.2 M&A activity in GCC presents PE opportunities

PE Funds in GCC & MENA - Distribution by Life Cycle

Source: Zawya

A developing market for Mergers & Acquisitions (USD Million)

Source: D&B and UNCTAD 2008S: Sales, P: Purchases

1

2

6

8

8

63

Oman

Qatar

Kuwait

KSA

Bahrain

UAE 14 F

2F

49 L

6 L

6 L

8 L

2 L 2005: There were 23 PE firms2008: There are about 88 PE firms

UAE outpassing all other countries in number of PE Firms

Source: ZawyaF: Foreign Companies, L: Local Companies

21788

1257

127

18832896

6

1842913264

5613 5721

1879

630


2006 2007

P P P P

P P

P

P S

S

P P

P

S

S

S

S

S

S

0

10

20

30

40

50

60

70

80

0

2

4

6

8

10

12

14

16

18

20

22

24N

o. o

f fun

ds

Size

of f

unds

in U

SD b

illio

n

Size of funds Number of Funds

70

159

28 17

1


1.4 Private Equity Synopsis in the GCC

BAHRAIN-Target : MENA and Libya-Equity Raised: USD 1,178 M-Total number of funds : 8

QATAR-Target : Qatar-Total number of funds : 2

UAE-Target : MENA and GCC-Equity Raised: USD 2,800 M-Total number of funds : 63

OMAN-Target : MENA and Libya-Total number of funds : 1

KUWAIT-Target : MENA and Maghreb-Equity Raised: USD 1,535 M-Total number of funds : 6

KINGDOM OF SAUDI ARABIA-Target : MENA, Tunisia and Syria-Equity Raised: USD 1,252 M-Total number of funds : 8

INDEXNo. of firms:

< 5

5-10

>10

Source: D&B, ANIMA and Zawya

“We look at the whole GCC, we believe that there is a custom union, a monetary union almost with a very close peg to the dollar, there is a cultural union and anything that sells in Saudi Arabia would sell in Dubai. So for us, we don’t look at these markets as being separate entities we look at them as being one”, Growth Gate Capital.


The ratio of Fund raising/GDP indicates the level of PE development in a given country relative to its GDP. In the developed markets of US and Europe the ratio ranges from 4% to 5% in 2007, however in GCC (except Bahrain) it ranges from 0.30% to 1.17%. In Bahrain the high ratio is on account of low levels of GDP in the smallest country in the GCC. This highlights the fact that there is significant potential for growth in PE in GCC in the long term as these economies mature. The PE industry in countries like India and China account for 0.43% and 0.24% of the GDP respectively in 2008.

The D&B country rating underlines UAE as the most favorable destination over a 2 year time horizon. The rapidly growing economy is characterized by high per capita GDP, advanced infrastructure and a business-friendly government. Its economic success can also be gauged by the number of international businesses and the large base of qualified Western and Asian expatriates settled in the country. UAE has also been successful in establishing itself as a hub for financial services and PE firms.

However, effects of the global financial crisis are being witnessed on the banking sector of the economy and have marginally affected the D&B rating.

The level of exposure of the UAE’s banks towards ailing financial institutions in US / Europe remains unclear. The sector is becoming vulnerable to rapid expansion in mortgage lending, which has been accompanied by a booming real estate market. A downturn in the market would lead to a substantial increase in non-performing loans. The sector is coming under increasing stress as a result of high inflationary pressures and low short-term interest rates. Negative real interest rates are causing deposits in local currencies by domestic savers to drop significantly.

The impact of the financial crisis will also affect project funding and rights issues, which had been booming over the last few years. Infrastructural development was the key driver of the double-digit real growth experienced in 2006 and 2007. However, with the costs of borrowing increasing for project finance, this could slow down new developments from Q4 2008, impacting on real growth.

However, despite these new factors/developments, the GCC region, and UAE in particular is rated relatively high, on account of strong macro-economic fundamentals. The large number of PE firms, raising funds in UAE is testimony to the health of the country. The following pages detail the study conducted by D&B to identify the potential challenges posed and the opportunities due to the financial crisis for the UAE PE firms.

1.5 Fund Raising Activity in GCC

Source: D&B, IMF and Zawya

Note: D&B Country rating:The 'D&B' risk indicator provides a comparative, cross-border assessment of the risk of doing business in a country and encapsulates the risk that country-wide factors pose to the predictability of export payments and investment returns over a two year time horizon. The 'D&B' risk indicator is a composite index of four over-arching country risk categories: Political risk, Commercial risk, External risk and Macroeconomic risk.

The D&B risk indicator is divided into seven bands, ranging from DB1 through DB7. Each band is subdivided into quartiles (a-d), with an 'a' designation representing slightly less risk than a 'b' designation and so on. Only the DB7 indicator is not divided into quartiles.

Private Equity Fund Raising

DB1d DB2a DB2a DB2d DB2d

D&B Country Rating - October 2008

2.8

1.25

0.28

1.53

1.17

1.17%

0.27% 0.28%

1.05%

4.80%

0

0%

2%

4%

6%

0.0

0.5

1.0

1.5

2.0

2.5

3.

UAE KSA Qatar Kuwait Bahrain

PE fu

nd ra

isin

g (U

SD b

illio

n)

(USD billion)Fund raising/GDP, 2008

“Credit crunch has already affected the market, but just because this market is equity driven and not debt driven, we haven’t really felt it”, HBG Holdings.


2. PE Perspectives in UAE

D&B conducted an extensive research among leading PE firms across the UAE to understand their current & future growth plans and focus

sector areas. The respondents were top managers at these PE firms – including CEO, Managing Director, Vice President and Fund Manager.

The study was conducted from August to October 2008, and as the global financial crisis unfolded, the respondent’s views on the main challenges of the industry changed correspondingly. The respondents interviewed during the month of August till mid September were concerned about the lack of talent

in the industry while the respondents interviewed by the end of September and during the month of October were concerned about the overall impact of the financial crisis.

The sub prime crisis has resulted in a shift of talent pool from US/Europe to the GCC. The credit crunch has affected the GCC financial markets and the investor behavior thereby creating limitations for banks and presenting new challenges & opportunities to the PE industry. The report emphasizes the prospects and opportunities for the industry.

2.1 Types of PE fundsResearch highlighted that 64% respondents follow a generalist strategy for investments while the remaining 36% adopt a more sector specific approach. The PE investment strategy is ‘event driven’ i.e. respondents of generalist funds feel that if there is good impetus for them to get involved in subject businesses, they capitalize on the opportunity irrespective of the sector. The need for such involvement could be due to various reasons: help business expand in another country, help in acquisition, provide a different kind of banking facility, or assist in structuring professional management and financial expertise.

Creating a sector specific fund will enable the institution to develop a certain expertise, specialization within the fund and to identify its needs thereby servicing it more efficiently. Some sector specific funds were also created since they represented a niche in the UAE market.

Moreover, the industry is very new to the region and does not have an established track record making PE firms cautious in their approach through ‘opportunity driven investments’. In future, most respondents believe that there will be more sector specialization as well as geographic specialization as the market matures and PE firms adopt competitive strategies to garner a larger share of the investment pie.

“Being a generalist fund is going to be tougher. A generalist fund works very well in an environment where the markets are booming, because all the funds follow the markets and everyone does well. But now specialized funds are expected to become more popular with people being aware of what they are going to invest in, and fund managers using their industry expertise to be closely involved with their portfolio companies,” Delta Partners.

Given the atypical structure of the UAE market characterized by numerous mature family businesses of different sizes, growth capital funds are the type of funds which are best suited to the needs of these businesses. 52% of the respondents said that their company was operating growth capital funds. 10% of the respondents who had venture capital funds were specialist in investing in new ventures (women led businesses, innovative business concepts) and elicited a high degree of risk-return investment strategy. 19% of the respondents who operated buyout funds were obtaining minority stakes in target investments.

Growth Capital52%

Buyout19%

Venture Capital10%

Other*19%

A dominating number of 'Growth Capital funds'

Other*: Project financing, Acquisition finance etc.


In 2008, majority (64%) of funds ranged between USD 100 million and USD 500 million and very few (7%) had funds between USD 500 million and USD 1 billion.

However, by 2011 respondents have projected an increase in fund size with augmented focus on funds ranging from USD 500 million to USD 1 billion. Number of respondents forecast an increase from 7% in 2007 to 20% in 2011 for fund size of USD 500-1 billion and number of funds greater than USD 1 billion would rise to 33% in 2011. The increase in overall fund size is reflective of the optimism and maturity of the markets in the medium-term.

Further, 50% of the respondents have forecasted a consolidation in the PE sector. There are more than 63 firms in UAE with a large corpus of funds; most of these funds are not yet closed. Hence, there is high probability that most of the small local firms might be bought out or get merged; the ultimate scale of investments will determine the leaders. The deals will get larger because of greater agglomeration of

capital with fewer firms. Till date the GCC has been successful in raising USD 7.04 billion which is 0.87% of its total GDP. This is very low as compared to the matured markets of US and Europe where the PE fund by GDP ratio ranges between 4 to 5%.

Some of the UAE PE firms with large funds (greater than USD 1 billion) based in GCC are as follows;

The top 10 global PE firms individually have raised more than 20 times the capital as compared to GCC firms;

2.2 Present and Future size of PE funds

Research reveals that as the PE market develops in UAE, the average ticket size is likely to increase, to finance mega projects. Presently, majority of the average investment sizes are USD 40 million. By 2011, they are estimated to increase to USD 70 million. Moreover few large PE firms have also stated their ticket sizes to reach approximately USD 1 billion by 2011 (in certain cases).

In 2007, in the USA, there were 1700 PE firms. They managed more than 3700 funds with an average fund size of USD 180 million (excluding the large funds setup by the top 10 PE leading companies). On the other hand, in UAE the average fund size ranges between USD 40 to 80 million for the 63 PE firms in the region. As the market matures, PE firms in the region will aim for larger buyout deals and hence the ticket size is expected to increase in the short-medium term.

2.3 Average investment/ticket size

USD 20 mn22%

USD 40 mn22%

USD 60 mn22%

USD 80 mn17%

USD 100 mn6%

Less than USD 20 mn11%

Average ticket size is expected to increase from USD 40 million...

…to more than USD 70 million by 2011

Source: Zawya

Source: Private Equity International Note: Firms are ranked by amount of capital raised for direct private equity investment between 2001 and 2007

29%

64%

7%

13%

33%

20%

33%

< USD 100 mn USD 100-500 mn USD 500-1 bn > USD 1 bn

2008 (Present) 2011(Future)

A bulk average Fund size of USD 100-500 million… …that will reach USD 1 billion in 3 years

PE houseTotal Size

(USD billion)Status

Dubai Islamic Bank 3.0 Fund Raising

Abraaj Capital 2.0 Investing

Ithmar Capital 1.0 Announced

Millenium Finance Corp. 1.0 Fund Raising

OriginCapital raised (USD billion)

The Carlyle Group Washington DC 52Goldman Sachs Princ. Invest. Area New York 49.1TPG Fort Worth 48.8Kohlberg Kravis Roberts New York 40CVC Capital partners London 36.9Apollo Management New York 32.8Bain Capital Boston 31.7Permira London 25.4Apax Partners London 25.2The Blackstone Group New York 23.3

USD 20 mn7%

USD 40 mn31%

USD 80 mn15%

USD 100 mn31%

More than USD 100

mn8%

Less than USD 20 mn

8%


2.5 Target investment sectors

Most of the PE firms currently have a diversified sector portfolio indicating a ‘generalist approach’. Their portfolio mainly comprised the following recurrent sectors: Real Estate (15%), Services (15%), Energy (13%), Retail/trading (11%), Education/Healthcare (11%) and Infrastructure (9%). These sectors are likely to continue to be a part of the future investment strategy (Services: 20%, Real Estate: 16%, Manufacturing: 13%). However, in the coming years, sector specific funds are likely to be more pronounced as compared to the present day generalist/opportunistic funds. Presently specialist funds are found in high performing sectors like Real Estate, Technology Media & Telecom and Oil & Gas.

“The two major growth sectors are utilities and transport. The growth in utilities will be driven by tremendous demand for Power and Water not just in the UAE but throughout the GCC as the economies seek to expand their industrial base, whilst the growth in transport reflects both an element of catch up to compensate for many years of underinvestment and the increasing mobility of the fast growing regional population”, ADIC.

“We are active in the consumer space. It is defensive yet continues to see strong growth supported by regional population dynamics”, HBG Holdings.

PE investment breakdown by sector

Healthcare11%

Infrastructure9%

IT2%

Manufacturing7%

Oil, Gas & Energy13%

Real Estate14%

Retail &

Trading11%

Services*15%

Telecom9%

Transport4%

Other*5%

*Other: Construction, Utilities, Airlines, Logistics, etc*Services: Financial services

Healthcare10%

Infrastructure10% IT

3%

Manufacturing13%

Oil, Gas &

Energy10%Real Estate

16%

Retail & Trading7%

Services*20%

Telecom6%

Other*6%

Real Estate, Services and Manufacturingto be the priority investment sectors in the future

Other*: UtilitiesServices*: Financial services, etc.

2.4 Target investment country/region

Most UAE based PE firms are targeting investments within UAE (22%) and the GCC region mainly KSA: 20%.

“Saudi Arabia is the most powerful, dynamic, liquid and viable market in the GCC. If you are in KSA you are already half way to being a regional company. That is why we are concentrating our next acquisitions in Saudi Arabia and using the launch to go and buy in UAE, Kuwait, Qatar or Bahrain”, Growth Gate Capital.

By 2011, respondents have envisaged UAE (20%) and KSA (16%) to continue to

be the preferred investment destinations. The preference was cited mainly due to the high-pace of economic growth in UAE which is expected to continue on the back of infrastructure investments and economy diversification initiatives in Dubai and Abu Dhabi. Further, the Northern Emirates have also shown increased development activity in the form of advancement in tourism destinations, free zones and industrial hubs.

The growing importance of KSA is primarily on account of its large market size (largest in GCC), growing population, economic diversification, availability of vast expanse of land and the relative ease of doing business in the Kingdom.

From a broader point of view, KSA, India, UAE and Egypt are the countries which are likely to receive maximum PE investments from UAE. In 3 years, UAE is likely to receive 20% of the investments of the PE industry, while KSA, Levant and India will receive 16% each.

“Algeria and Libya have been a closed economy for a long time and are now opening up to foreign investment. The legal and operational challenges to do business in countries like Libya and Algeria remain significant and PE firms that are able to navigate those efficiently will develop a strong competitive advantage”, EFG Hermes.

Egypt16%

Europe4%

India7%

Levant9%

Morocco, Tunisia,Libya11%Rest of the GCC

11%

Saudi Arabia20%

United Arab Emirates22%

Current PE country targets: UAE, KSA and Egypt

UAE and KSA will continue to be the preferred investment destinations along

with India by 2011

Africa7%

Egypt10%

Europe3%

India16%

Levant16%

Morocco, Tunisia,Libya3%

Rest of the GCC10%Saudi Arabia

16%

United Arab Emirates19%


2.6 PE Investment Opportunities

Sector FocusGCC

KSA Qatar UAE

ConstructionLabour camps and residential properties

Residential properties and luxury accommodation

Residential properties and luxury accommodation

Consumer Goods

Retail outlets for consumer goods

Retail developments

Retail developments

EducationPrivate education in the form of schools and colleges

Universities and campus

EnergyElectricity generation

LNG exploration and distribution GTL distribution

Upstream petrochemicals exploration and production

Electricity generation

ServicesDevelopment of the financial sector (health insurance)

Logistics and financial services

Food and Retail

Health Hospitals Healthcare services

ICTE-commerce development

E-commerce development

Infrastructure Railway projectsRoad building programme

Contracting firms and supplier of machinery and equipment

ManufacturingIndustrial Base (metals, food processing)

Industrial Base (metals)

TourismResorts and cultural sites

UtilitiesWater and power projects

Independent Water and Power Production (IWPP) projects

Water and power projects

The table summarizes potential sectors for PE investment in select countries as recurrently mentioned during the study. The opportunities represent different sectors within the MENA region as potential target countries by the UAE PE firms.

Source: D&B, ANIMA, UNCTAD and CIA


Sector FocusNorth Africa Levant

Algeria Libya Morocco Tunisia Egypt Jordan Lebanon

ConstructionResidential properties

Residential prop-erties

New man made cities

Manufactur-ing building materials

Tourism and commercial properties

Consumer Goods

EducationSchools and professional colleges

Energy“Upstream - Oil ex-ploration”

“Upstream - Oil exploration Power projects”

Powerprojects

“Upstream - Oil explora-tion Downstream - refining”

Miningprojects

ServicesDevelopment of the services sector

Develop-ment of the financial sector

Food and Retail

Agriculture and Agro food pro-cessing

Agriculture produce de-velopment

Food process-ing and can-ning industry

Food manu-facturing and processing

Agro food processing

HealthHealthcare services

“Pharmaceutical manufacturing Healthcare ser-vices”

Pharmaceuti-cal manufac-turing

Pharmaceuti-cal manufac-turing

ICT

Software develop-ment, back office ser-vices, call centers

InfrastructureTransport infrastruc-ture

Transportinfrastructure

“Transport infrastruc-ture - road net-work”

“Civil aviation - rehabilita-tion, devel-opment and upgrading of the country’s airport plat-forms”

“Transport infrastructure - railways”

ManufacturingTextiles and clothing

Chemicals, Textiles, Met-als

Textile and clothing indus-try

Furniture, Jewellery and gar-ments

Tourism

“Desert land-scapes Cultural heritage sites”

Tourism locales

Tourism locales

Tourism locales

UtilitiesHydraulics related projects

Water projectsWater proj-ects

The table represents the opportunities as cited by PE firms. Utilities and Consumer Durables sector appear to be the favorite sectors/areas and are concurrently occurring across all the countries.

Source: D&B, ANIMA, UNCTAD and CIA


2.7 Target IRRs

Research shows that the average annual IRRs range from 20-30% for UAE PE firms.

The PE industry has diversified from the real estate sector which had high IRRs to targeting Infrastructure and Energy sectors which have relatively lower IRRs. Most of the respondents investing in Energy, Infrastructure and Utilities expressed that mega projects announced by the government, with longer gestation periods lower the IRRs; however the returns will be more secure in the long term. In 2008, the average holding period ranged from 5 to 7 years and most of the funds are still in their holding period given the relative newness of the funds/investments.

The global financial crisis is likely to prolong gestation periods for PE firms. This is because the route of exit through IPOs looks difficult in the short-term due to depressed stock market conditions. This has a knock-on effect in lowering the target IRRs. However, respondents continue to maintain a stable or even higher target IRRs inspite of the recent events. This is mainly because of opportunities to partner with family businesses and exiting through trade sales.

In 2007, the average annual IRRs in USA were 12.3% while in Europe it was 11.6%. The IRRs of the GCC region are twice that of its global peers, partly explained by the risk premium attached to regional markets. However, the wide gap in IRRs between US /Europe and that in GCC would imply that there exists potential for foreign PE firms to enter the region.

12%

41%29%

12%

6%

< 20% 20-25% 25-30% 30-35% >40%

IRRs target of 20% - 25% in 2008

2.8 Exit Route

Though several respondents mentioned a lack of developed financial markets, IPOs remain the preferred exit route as seen in the pie-chart wherein 56% respondents have highlighted preference of using IPOs followed by trade sales (25%). The preference for IPOs is on account of easy regulations by the financial market regulatory authority and access to the stock markets.

Trade sales are the second common route which enable exit without compulsory financial disclosure favored by established family businesses.

Given the nature of PE industry in the region, secondary sale is not the most popular exit route; however it is projected to be more frequently used in the near term by most of the respondents as consolidation sets into the industry. Less than 2% of the total funds invested in the MENA region have been exited and hence the pie-chart represents the estimates of the preferred route of exit. Further, many funds which have been exited from have either not been publicly reported or have been negotiated trade deals.

In the light of current events: high stock-market volatility and relatively poor performance of the regional stock markets on the back of real estate price meltdown speculation, many regional firms have delayed their IPO plans, effectively blocking private equity's exit plans.

“Historically, IPO’s have provided very lucrative exits for investors and have accounted for most of the exits in the region. However, one has to be wary of over reliance on IPO’s as an exit mechanism, especially in emerging markets. Going forward, changes in laws around foreign ownership levels will increase M&A activity with international trade buyers, and sales to other regional financial buyers will continue to grow”, The National Investor (TNI).

IPO56%

Cannot comment13%

Trade Sale25%

Other*6%

IPOs: estimated to be the preferred Exit route

Other*: Secondary sales


Buyout is usually the most common strategy for PE funds to invest in any business.

However, the buyouts are more of a ‘strategic minority’ rather than a ‘complete buyout’. D&B research shows that 66% of the respondents use strategic minority as the investment strategy as compared to controlling buyouts (27%) or LBOs (7%). This is mainly due to family businesses which do not prefer to give up all their management control to external shareholders. The businesses in the GCC / MENA region are cash-rich and generally do not look for PE firms to invest as a source of cash but rather as a rich source of industry know-how and expertise. As a result most of the PE firms adopt the strategic minority strategy.

“Often family businesses want to expand through cross-border acquisitions but do not have the requisite expertise and therefore need a private equity partner,” HBG Holdings.

Low debt levels in the region do not consent PE firms to operate any LBO deals. Even if such deals are executed, the level of debt does not increase beyond 50%. Equity participation is the most preferred investment strategy among PE firms in UAE.

Research shows that most of the investments are equity investments in GCC with not more than 50% usage of debt. In US, Europe and Asia the investment trend has a debt to equity of 2:1 times, whereas in GCC, debt to equity ratio is generally 0.5:1 times. The low debt in the region has helped the home-grown PE firms sustain inspite of the global financial crisis.

“Until now the regional PE industry has been primarily driven by growth capital and growth investments. I think that the next phase is going to see more ‘transition capital’ requirements driving the PE activity. Family businesses that are reaching the succession phase, where the next generation would want to exit the business or monetize part of its investment to diversify its economic holdings is a good example of such transition capital requirement. There are also large conglomerates in the region that have historically grown out of their core business to cover an increasing number of business lines during the growth stage of their respective markets. With these markets maturing, competition will increase in each of those business lines and the conglomerates may need to refocus their strategy by divesting some of their subscale businesses to remain competitive. There will be consolidation and restructuring and these represent attractive buyout opportunities for the PE industry”, EFG Hermes.

However, the trend is changing as the new generation of family business owners are more willing to share their stakes and allow private equity players to guide their business in areas of restructuring, expansion, M&A and internal-dispute issues. The PE firms help channelize the necessary know-how and expertise along with equity to the companies.

“The 3rd generation family businesses are found to have the least chance of succeeding and that is where firms can start losing focus, some grand sons will start entering in ventures that the father would never have entered into, leading to disagreements between family members. And that is potentially where the market switches to ‘control buy-outs’ versus ‘minority investing”, Shuaa Capital.

PE firms in UAE also prefer to focus on established companies with high growth potential rather than start-up firms. To diversify their risks they adopt sector and geography diversification strategies. A few seed capital oriented PE firms invest in new business ideas after thorough due diligence.

40% of PE respondents believe that in the coming years, as the market matures, the PE industry will see more controlling buyouts with family businesses willing to sell majority stakes in some of their large network of businesses to PE firms. Leveraged buyouts will still be scarce and Islamic funds will gain popularity.

“The growth of Islamic finance is one of the biggest stories over the last 5 years. There are private equity investors in the region who will only invest in Sharia’h compliant funds and this trend is likely to continue into the future”, HBG Holdings.

2.9 Investment strategy

LBO6%

Controlling buyouts27%

Strategic minority67%

Pursuant to Growth Capital Funds a Strategic Minority strategy is used...

LBO10%

MBO10%

Other*11%

Controlling buyouts40%

Strategic minority30%

…as the PE market matures in 3 years we will see more controlling buyouts


2.10 UAE Business Environment – Potential for PE Industry

Following the surveys’ insights, the following table summarizes the opportunities and challenges for PE firms and their requirements to service the opportunities in the current scenario in UAE. The survey highlights the growth of PE in UAE. It helps to identify the nature of the industry in UAE which is complemented by the characteristics of the region.

The business environment of the country makes it very congenial for PE firms to thrive by sourcing HNI funds and deploying them in the progressive sectors of the economy. The table represents the potential of UAE as a prospective PE target as well as a hub.

The favorable business environment adds to the overall attractiveness of the country as a PE base. Growth opportunities in the economy and availability of skilled professionals contribute actively to overall moderate optimism for the PE industry in the UAE. This optimism is reflected in the chart “PE industry optimism for the period 2008-2011” of the study described later in the report.

Note: The indicators are based on D&B assessment of the business conditions and their impact on development of PE industry. The indicators outline those parameters which are strong and favoring PE growth in UAE versus other parameters that are less favorable (as per the scale given above)

Source: D&B, UNCTAD

INDICATORS

The indicators represent the relative intensity of the parameters on PE growth.

Very High Impact

Medium Impact

High Impact

Low Impact

Very Low/Negligible Impact

NA - Not Applicable

UAE Business environmenton PE growth

Prospects for the industry

Family businesses

Need to Restructure

sectorssales) represented 27.7% of total revenues in 2007. Further, investments in real estate,

process.

Private Sector Development

USD 1,740 million and M&A purchases were: USD 16,689 million. The growth in M&A

Sharia’h Compliant Islamic Finance

Source for the industry

Pool of liquidity availableHigh oil revenues have contributed to an enhanced pool of liquidity in excess of USD 542 billion in the GCC (2002-2006). However, the oil prices have fallen in the current wake of events causing concern on overall oil revenues of the region

Requirements for the PE industry

Pool of capitalThough liquidity is high in the region, the recent global economic turmoil has made investors apprehensive to invest and they prefer to hold on cash.

knowledge

Research showed that during August – September availability of skilled professionals was

professionals from the USA and European markets. However, the funds rely on extensive

Comprehensive corporate/industry research

Intermediaries networkThe PE industry is dominated by industry and key investor’s networks. Hence, the PE

Legal framework

Local stock markets

Sales to strategic buyers NAnot available publicly.


3. UAE Private Equity Outlook

3.1 Challenges to the growth of the PE industry in UAE

Though the financial crisis has not had the same impact in the UAE PE market as in the USA, some respondents mentioned that the crisis has altered investor behavior and is likely to create a situation leading to consolidation within the industry. However, recent moves by the government to guarantee deposits have increased confidence in the banking system overall.

A slow down in the investment cycle - Historically PE funds have invested from their balance sheet. In the GCC, the homegrown PE firms have been off-shoots of large investment houses or conglomerate businesses. Moreover, high liquidity in the region has led to the growth of foreign PE firms seeking investor funding. On one side the numerous PE houses are sourcing funds and on the other side uncertainty in the global and regional stock markets during October 2008 amidst gripping fears of global recession and dropping crude oil prices has increased investor apprehension of making any investments. Investors prefer to retain liquid cash thereby prolonging the fund raising for most of the PE firms.

Research highlights that to counter the extended fund raising activity PE firms have resorted to ‘second closings’, a more pragmatic way of spreading fund raising. If a fund raising firm announces it has reached first or second closing it may mean that it is still seeking further investments. While fund raising, a firm will announce a first closing to release the money rose so far so that it can start investing. The usual number of closings for a fund is about three and between each closing there will be a re-valuation of the portfolio. Only when a firm announces a final closing it is no longer open to new investors.

“Typically it will take you between 6 to 9 months to raise funds, given the current market environment this could slip to 12 to even 18 months,” Delta partners.

A mismatch between liquidity and quality of deals available - Though the region has abundance of liquidity there are not enough opportunities to invest the surplus. Delayed privatization initiatives of the Government and limited opportunities in the family owned private sector have made deal sourcing difficult. The key factors for success in the region rely on proprietary access and extensive business networks. However, regional dynamics have not allowed intermediaries to play a significant role in maturing deal flow, and hence made the deal sourcing process a competitive edge for some and frustrating issue for others.

Further, most of the PE firms in UAE invest in established companies which have a huge potential to grow and prefer to avoid new ventures (unless they complete a thorough due diligence on new ventures), making deal sourcing more difficult. Moreover, established family businesses are apprehensive to obtain PE funding.

“The challenge will continue to be the ability to find high quality deals. Valuations have come down, but the concern of fund managers is to invest in high quality companies with strong potential rather than just cheap companies”, Delta Partners.

A drop in valuations - GCC indices have on average lost 10 to 12% in October 2008 alone and 24.8% during the period of January 2007 to January 2008 weakening investor confidence. This is likely to impact the quantity of initial public offerings (IPOs) being launched in the region in the short term. On the other hand, lower valuations may attract PE firms to invest extensively in the region.

A network based industry -The PE industry is a relationship driven market and successful firms so far have been those with good relationships with partners, investors and target companies.

“The problem with family owned businesses wouldn’t be the percentage of ownership or the day to day management it would be the strategy for the future”, Growth Gate Capital.

“One of the main challenges is the fact that businesses are mostly family owned and families are very reluctant to sell. The mentality isn’t an exit mentality even if it isn’t a core business, it is more of acquire and grow mentality”, Al Futtaim Capital.

Lack of awareness of PE - Several respondents mentioned lack of PE education especially for the ‘media and business world’ which seems to be partly bridged over by the flow of talent coming in from the USA and UK markets.

3%

Global economic slowdown

28%

Lack of developed

26%

5%

Lack of talent to support the growth

15%

Oil price drop5% Possibility of

turmoil8%

Other*11%

PE industry in UAE is not completely invulnerable to the credit crunch

*Other: Lack of high quality deals, Lack of track record for the PE industry, Lack of PE eductation


UAE and the GCC overall are dominated by large number of family businesses. Hence, generation succession presents opportunities for PE. 39% of the respondents have highlighted the large opportunity presented by family owned businesses followed by pre-IPO players and privatization initiatives of the Government.

Family businesses - Most of the family businesses are originally built on an exclusive agency arrangement for products manufactured elsewhere. With greater intermediation between buyers and sellers of the world as a result of extension of GCC into the WTO trade agreements, the family businesses have realized that they could become distribution platforms and not just agency shops, selling more than one product on a non-exclusive basis. This is the most critical change in the landscape of the GCC economies pushing family businesses to think out of the box and seek private equity participation.

“80% of the businesses are owned by families and the acceptance of PE partners by these families is increasing”, Gulf capital.

Private sector developments - Some of the UAE Emirates such as the Emirate of Abu Dhabi have plans for economic restructuring with the aim of augmenting the socio-economic role of the private sector. Privatization is crucial for economic liberalization, pushing efficiency and redistribution of wealth, providing quality and competent public services, introducing new departments and upgrading technology. It is estimated that the governments of the GCC are planning extensive privatization programmes for the next decade. Private sector development initiatives present tremendous opportunities for PE players. The UAE is allowing greater foreign participation and the development of its non-oil sectors will provide greater PE funding opportunities.

Global financial turmoil - With the slower rate of closing deals in the USA and in Europe, the global PE industry will increasingly target the GCC / MENA region. The financial turmoil may also bring a wide pool of financial talent from the USA and Europe to the UAE.

“Prior to the turmoil, we were seeing acquisition finance that was leading to enhanced returns. However, credit has virtually dried up now, and investors will be forced to work harder to see the same level of returns”, TNI

Public Private Partnerships - The focus on building utilities, power plants, transportation facilities (ports, airports), water plants, buildings etc. will continue to form a key element of economic development. Most of these projects are Government privatization initiatives or capital seeking initiatives in Infrastructure, Health, Education, Transportation, Energy, Financial services and Water projects.

“On a macro level there is significant consolidation play in the region which will unfold in the coming years and private equity will play its role in facilitating this shift”, HBG Holdings.

Large scale M&A activity and consolidation trend will provide more prospects for the industry - The region is witnessing tremendous M&A activity in terms of cross-border sales and purchases. Further the Financial Services sector in the region is also consolidating. All these events are providing opportunities for PE firms to participate as knowledge and funding partners in the M&A process.

Geographic focus: The large opportunities presented by UAE are representative of the potential of its two emirates: Dubai and Abu Dhabi as a PE source as well as destination. The boom of PE industry in Dubai has been noteworthy, but Abu Dhabi’s progress as a potential source of HNWI funds is equally impressive. The following extract highlights the potential presented by Abu Dhabi as a PE source as well as destination.

3.2 Major opportunities for growth of the PE industry

23%

Family businesses40%

Pre IPO players20%

3%

fundamentals3%

development3% Other*

9%

Family businesses are still playing a dominant role


PE Perspective - Abu Dhabi

Macroeconomic overviewOnly 34% of Abu Dhabi is inhabited with the remaining vast expanses covered mainly by desert and arid land providing opportunities for Greenfield development. The emirate’s population increased by 4% in 2007 reaching 1.49 million and is expected to reach 1.75 million by the end of 2010. The GDP per capita of this emirate USD 71,200 in 2007 is one of the highest in the world and well above United States (USD 45,800) and Japan (USD 33,000) for the same year. Compared to 2006, the non oil sector increased its share in Abu Dhabi’s economy in 2007 reaching 41% of Abu Dhabi’s total GDP. The contribution of the non oil sector in the total GDP of Abu Dhabi is forecasted to increase and reach 60% by 2025.

The strong fundamentals of the region combined with excess liquidity through previously high oil prices are likely to create tremendous opportunities for investments as well as fund managers alike. The following table presents the opportunities the Emirate brings for PE firms.

Abu Dhabi - opportunities & challenges for PE

Research has revealed the following key sectors which will drive growth and investments in the region in the near term.

Abu Dhabi Sector Opportunities: Fundamental & Potential sectors

Thus, Abu Dhabi presents prospective opportunities for the PE industry to gather investible surplus and distribute it amongst the various progressive growth initiatives of the government and deeply rooted family businesses at large.

Macro Economic Outlook

Description Opportunities Challenges

Government Initiatives

• Relative low cost of doing business

• Special economic zones offer 100% tax exemptions

• 100% Repatriation of Profit & Capital

• Transparent Government Services

• Open door policy, liberal economy and reform programs

• Privatization plans and bigger role allocated to the private sector

• Series of bilateral agreements with foreign countries are being negotiated

• Restructuring plans to increase public-private partnerships.

• Sector diversification

Stable and strong macro-economic environment will encourage flow of PE capital.

• Interaction needs to be encouraged between the private and public sectors via economic planning

• Transparency

• Labor laws

• Sponsorship system

High Liquidity

• Previously high oil prices

• Diversified economy

• Network of HNI investors

• The SWFs are already active in large scale investments

These will provide opportunities for PE firms in the form of VC, seed capital, expansion finance, acquisition finance and Islamic funds

• Sharp Drop in oil prices may impact liquidity

Favorable Demographics &

Infrastructure

• Proximity to growth regions - Africa, Asia and Europe

• Heavy investment in infrastructure

• More than USD 136 billion projects are underway

• Opportunities in the consumer durables, utilities, transport and logistics sectorsThese will make available sectors for investments

• Abu Dhabi’s economy still depends heavily on the oil sector

Fundamental sectors Potential sectors

OilOil is part of Abu Dhabi’s most important local resources with opportunities in the upstream and downstream ventures.

TourismThe creation of the Abu Dhabi Tourism Authority (ADTA) will drive demand for infrastructure development

InfrastructureBoth high population growth as well as high pool of liquidity available increases demand in transport, water and power generation facilities

IndustryThe Abu Dhabi’s diversification policy will push the development of petrochemicals, iron and aluminum.

TradeThe liberalization of Abu Dhabi’s economy will expand trade relations with rest of the world.

Financial servicesAbu Dhabi’s new regulations and the improvement of its business environment will enable it to be a financial powerhouse in the Middle East

Abu Dhabi real GDP estimates (USD billion)

Source: DPE2010-2025*: estimates

46 61 6685

135 1203244

54

85

95

180

2005 2008 2010* 2015* 2020* 2025*

Non oil sector GDP Oil sector GDP

5 year CAGR Non Oil sector of 54%


Sector Focus:

Respondents have cited water along with the power sector to be an emerging PE target for investments. The following abstract on the Water industry studies the various dimensions of the industry and assesses the future prospects for the sector from a PE perspective. D&B has given a brief snapshot of the Water Industry as a potential sector for PE investments in the region. The industry profile is an extract of D&B research and is provided as an overall outline of opportunity in the sector.

Power and water projects are the backbone of any industrial or infrastructure development which determines sustainability of business and habitat in the region. The Arabian Gulf, a desert

and arid land lacking permanent surface water resources has heavily relied on desalination of water for its consumption requirements.

Water is the most scarce commodity in the GCC, with the water availability per person at 1,200 m3 compared to a global average of 7,000 m3. Hence the emergence of desalination plants in the region on account of: rising demand for water and lack of natural supply sources, rising marginal cost of expanding water supply makes it too difficult to reach areas and easy availability of desalination technology.

PE perspective - Water Industry

The large scale investments in the water sector in the region are a result of the strategic initiatives of the government to increase water capacity in the region. The threat of water scarcity has ensured investment in water projects is a priority in the region.

D&B has conducted an extensive research on the water industry in Dubai to estimate the total demand for portable water through 2008 and 2010. Requirement has been calculated on the basis of major sectors (construction and labor camps) which constitute 90-95% of the total water demand. Additional capacity required by 2010 to cater to the water demand in Dubai is estimated to be 4537 million imperial gallons per year.

In light of the development of the Water sector and opportunities for investments in mega projects, PE firms are likely to gain from the initiatives in the medium-long term.

Fundamental sectors Potential sectors

Large-scale infrastructure projects in the region

•The expenditure on infrastructure projects is stated to exceed USD 360 million by the end of 2008.

•Utilities (IWPP) top the list of projects with USD 120 billion to be invested over the next decade

•Desalination capacity across the Middle East will have to double by 2015 to meet demand

• Global economic slowdown might delay projects in the region, effecting IRRs and elongating gestation periods

•Complexity of the Public-Private partnership

Privatization on the anvil

•Most of the water desalination plants are government owned and likely privatization of the plants presents opportunities for investment

•Private sector companies are now able to construct power generation and water desalination facilities in the UAE

•Delayed privatization plans of the government


3.3 Leading financial centre in the MENA region

Dubai is seen as the center of private equity in the GCC. Abu Dhabi & Riyadh according to their economic and demographic profiles and business development activities are estimated to be the upcoming PE centers. Qatar which is developing and advertising its financial center is named by respondents but appears to have one generation lag compared to its peers. 90% of the respondents have ranked Dubai as their preferred destination followed by Abu Dhabi and Riyadh.

“Financial centers are built around talent and human capital”, EFG Hermes.

The DIFC is recognized as the regional financial hub but other cities are also working hard to create similar platforms. Dubai has already grabbed the first mover advantage by being the world class centre for global talent pool. Most of the global players have already set-up offices/ Regional head offices in Dubai and more then 90% of the PE meetings, conferences and investment related regional and international events are held at DIFC.

Interestingly, Abu Dhabi has been mentioned by several respondents in the study as being one of the future financial centers in the GCC. Abu Dhabi contributes 44% of UAE’s GDP

and represents 31% of its population. Abu Dhabi is attempting actively to diversify its economy through investments in the financial and tourism sector. All these factors make it an attractive target for PE as well as a rich source of funds for PE activity.

“Abu Dhabi is definitely to be watched very seriously and they are impressive, they are really doing the right things now. Abu Dhabi is learning from Dubai’s shortcomings concerning infrastructure and planning”, Al Futtaim Capital.

Abu Dhabi19%

Bahrain7%

Dubai34%

Qatar20%

Riyadh20%

Dubai in PE, has the 1st mover advantage amongst its peers

3.4 PE Industry Optimism 2008 – 2011

59% of the total respondents are optimistic about the prospects for PE industry in the coming years with respect to increase in average fund size and greater investments. However, 7% who were definitely less optimistic highlighted concerns: investor apprehension, low levels of liquidity available in the banking sector, stock market volatility impacting exit routes, among few others.

“Currently everyone is hanging on to their cash as in the short term; people just want to see what will happen with the markets. This can be expected to change in the new year. Yet this will depend on how quickly or slowly financial markets will stabilize,” Delta partners.

The optimism for the industry stems from continued investments being made by the government in economic diversification on the back of strong oil revenues. Even with oil prices dropping over the last 3 months, the medium-long term outlook on GCC oil revenues is positive. Further, the economic development programmes are now seen as being less dependent on oil prices. In fact, most of the oil economies make their budget with a USD 45-50 per barrel assumption.

Further it should be noted that US / European industries are more reliant on debt, whereas in GCC, equity still emerges as the primary source of funding. As a result the PE sector in GCC has been relatively secure from debt burdens as compared

to its US or European peers. It is also important to note that the GCC markets do not have any correlation with other asset classes or the developed markets making them less immune to the financial crisis faced by the world.

More than 66% of the respondents have projected growth of the industry (in terms of fund size) by more than 20% by 2011. Only 17% have projected a decline. The growth in fund size is on the back of a resilient economy fostering growth of businesses which require external expertise (cash and knowledge resources) to manage their growth plans.

59%

Somewhat more

27%

Somewhat less

6%

7%

PE Industry optimism for the period 2008-2011


About Dun & Bradstreet

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Disclaimer: The information contained in this report is of a general nature and is not intended to address the circumstances of any particular individual or entity. All information contained herein is obtained by D&B from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided ‘as is’ without any warranty of any kind and D&B, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion and D&B shall not be liable for any loss incurred by users from any use of this report or its contents.No part of this document may be reproduced, copied, distributed or made available in any form whatsoever to any person without express prior written permission of Dun & Bradstreet (“D&B”).

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Contacts:Pawan Bindal Pooja Rami Alienor BaudessonAssociate Director Consultant Business AnalystDubai International Financial Centre, Dubai International Financial Centre, Dubai International Financial Centre,PO Box 506511, Dubai, UAE. PO Box 506511, Dubai, UAE. PO Box 506511, Dubai, UAE. Tel: + 971 4 3695700 Tel: + 971 4 3695700 Tel: + 971 4 3695700Mobile: +971 50 2803900Email: [email protected] Email: [email protected] Email: [email protected]

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