Private equity activity slumps in the Middle East, when will it pick up?

The value of Middle Eastern private equity deals slumped by 84 per cent to just $25 million in the first half of 2011 in comparison with the same period of 2010, according to the newly published Zephyr report on major capital deals. There were only seven private equity deals in the first half, the weakest result since 2007.

However, taken as a whole major regional capital deals held up well with a 54 per cent fall in volume to 222 transactions more than compensated by a 43 per cent increase in value to $10.2 billion.

State-run deals

The largest deal was a $3.5 billion rights issue by Qatar National Bank.The second biggest was the $1 billion purchase of a 40 per cent stake in UAE-based NMC Healthcare by Centurion Investments, a newly formed Abu Dhabi entity. Kuwait’s Health Insurance Hospitals was also in the top ten deals with its sale of a 50 per cent stake to the Kuwait Investment Authority for $566 million.

Of course much of this activity is really the states investing their oil revenues back into local business by a rather circuitous route. It is therefore not really as beneficial to the economy as private investment into fast growing companies which is what private equity represents.

Why the lack of confidence? Well, the Arab Uprisings of the past six months clearly add a fresh level of uncertainty to many deals and make accurate revenue projections very difficult, if not impossible.

If the Arab world calms down and reaches a new status quo for business activity then business valuations now will be shown to be at a low. It was like this after 9/11. On the other hand, if things get worse so will business and business valuations.

Boom times

Private equity firms are also left with damaged balance sheets from the collapse in business values after the 2008 global financial crash brought the regional real estate boom crashing down. Illiquid equity in non-performing businesses is a nightmare, especially if bought with leverage that adds to the cost of carrying it through the bad times.

Of course, imaginative private equity practitioners might find ways to participate in the consolidation of sectors in a depressed business climate, creating the market leaders of the next boom and revaluing their failing prior investments in the process. But clearly there has been little sign of this in the first half of 2011.

Perhaps if private equity firms can become more convinced about an oil price-fuelled recovery in the Gulf States then they maybe more innovative in the autumn.