Private equity firms such as Kohlberg Kravis Roberts & Co and regional heavyweight Abraaj Capital which benefited from Dubai's boom years are now looking to the emirate for reforms needed to revive the sector.
-- Sector needs eased foreign ownership rules, transparency
-- Reviving IPO market key for sector rebound
Easing foreign ownership regulations and reviving the market for initial public offerings (IPOs) are key steps, and analysts say private equity still needs more business from the powerful families, which dominate the region's wealth.
"We need to see some investments, we need to see the macro environment improving, we need to get the families on board," said Jeremie Le Febvre, partner-in-charge of Middle East and North Africa (MENA) at Triago, a private equity adviser.
"A combination of all these factors will make the Middle East quite attractive because right now the message to investors is quite blurry," he said.
Middle East private equity investment, once among the most promising sectors in the region, plunged by 80 percent to $561 million in 2009, Gulf Venture Capital Association data showed.
Deal activity has been slow in 2010 too, with investors backing out from capital calls, sellers still demanding more money than buyers are willing to offer and increasing competition from family groups hampering growth.
Before the global financial crisis erupted, iconic private equity firms from across the globe such as KKR and Carlyle Group set up shop, attracted by the region's petrodollars and spectacular growth prospects.
The risk now is that without reforms to spur the sector, such firms will go back to viewing the region mainly as a source of capital and not an investment destination.
"There is not much room for big internationals," Le Febvre said. "Over the next three years you may see some deals done by a select few, buying perhaps a mobile phone operator or a major pan-Middle East healthcare business."
Dubai-based Abraaj Capital, one the Gulf Arab region's biggest private equity firms, has cut the size of its fourth buyout fund by half, while shares in Egypt's Citadel Capital are down 15 percent this year.
"I think it's safe to conclude that the private equity market in the Gulf Cooperation Council (GCC) is much smaller than was originally expected," said Yahya Jalil, head of private equity at The National Investor in Dubai.
Easing foreign ownership limitations across the Gulf would have a double positive impact as it would allow investors to bid for majority stakes and obtain control of a business while also making the IPO market more attractive.
More IPOs would also mean better exit opportunities for local buyout firms.
"Relaxing the foreign ownership rules and permitting more flexible share structures would all potentially make PE investments more attractive to overseas investors and hence promote deal activity," said Isabella Roberts, a partner at law firm Simmons & Simmons.
Transparency and disclosure among family-owned companies in the region could also improve.
Damas, a Dubai-based jeweller with retail outlets across the region, is a case in point.
The family-owned business raised $270 million in its 2008 IPO and a local private equity firm took a stake. But earlier this year, the company's founders were accused of making "unauthorised transactions" valued at $165 million, resulting in management shake-up and financial trouble.
"There is limited history and a poor culture of corporate disclosure, and while this is improving, there is little precedent for the exercise of minority rights by investors," said a recent survey on Middle East private equity by INSEAD-Booz & Co.
Another concern for private equity has been the difficulty to exit investments due to the IPO market's sharp slowdown.
Cairo-based Citadel Capital, for example, has been looking for a while to divest the 34-percent stake in gas and electricity distributor Taqa Arabia which it bought in 2006.
"The exits happening today are all through strategic sales but unfortunately for a PE (private equity) player, strategic sales do not give the same value as an IPO," said Shailesh Dash, chief executive of Al Masah Capital, a Dubai-based alternative asset management firm planning to launch a private equity fund.
Limited partners (LPs) have become increasingly cautious in allocating funds and are demanding more disclosure and transparency from funds. Some have stopped honouring capital calls from general partners or fund managers, analysts say.
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