In an exclusive interview with Banker Middle East, Campbell Steedman, Managing Partner and Chris Skipper, Partner, both at Winston & Strawn highlight that the private equity and venture capital landscape in this market is largely dependent on diversification agendas and international events across the region.
What were the striking private equity (PE) and venture capital (VC) trends in the Middle East last year and how do you see this developing in 2018?
Chris Skipper: Perhaps the most striking trend is the increase in secondary buyouts. Such transactions demonstrate a growing market maturity and should give investors additional comfort when considering exit options. It’s all well and good investing in a company, growing it and making it more profitable but if there are limited exit options, investors are going to be wary about deploying capital. A maturing secondary buyout market gives greater optionality and increases appetite.
Campbell Steedman: While recognising the growing number of secondary buyouts, a key concern for private equity in the region remains the lack of deal opportunity at realistic valuation levels. As is the case internationally, there remains considerable “dry powder” in the market, which in a competitive environment can lead to an escalation of already inflated expectations of value. Hopefully 2018, and the growth of the secondary markets, may see more opportunity for deploying capital and a more realistic level of valuations.
There was a struggle in finding Series B funding last year. Why was this so and what does it mean for the sector this year?
Steedman: Although the Middle East PE market continues to grow, and although there are an increasing number of investment opportunities, the market is still relatively young. As such, investors focusing on Series B funding, and having the skill set to support the build out of a product or business, remain scarce. In addition, the talent pool of suitably qualified, high quality management talent remains limited, restricting the ability for Series B funders to make their investment work. As the market matures, and perhaps with the growth of secondary opportunities, it is to be expected that series B funding will grow in the coming year.
In terms of investment, what kind of untapped opportunities do you still see available in the MENA market at the moment?
Steedman: With Dubai Expo 2020 imminent and following both the announcements and discussions that took place at the Saudi Future Investment Initiative conference (which we attended by kind invitation of the Saudi Public Investment Fund), there is clearly a regional focus on new technologies whether that be Hyperloop, drone taxis, driverless cars, fintech, medtech, legaltech, telecommunications, artificial intelligence, blockchain or other emerging technologies. We see continued and, indeed, accelerated growth in these sectors. Connected with this focus, we are also seeing increased investment from the region into the tech sector internationally (for example, in Silicon Valley), with a view to securing IP and technological know-how to migrate back to the region.
Skipper: Renewable energy will continue to present interesting opportunities. For example, Dubai has a vision to have 75 per cent of its power requirements provided by clean energy by 2050 and that will only be possible by new and improved technologies, and competitive price points. The renewable energy market has taken huge strides forward in recent years, with things like improved efficiencies on solar panels and battery cells and continued investment will be required to make the shift from carbon fuels cost effective. There will also be opportunities down the line for decommissioning and recycling facilities.
Based on the deals that you’ve closed thus far, what do you identify as the major issues PE & VC face in this market? And what does this mean for foreign investors?
Skipper: The biggest hurdle to foreign investors continues to be the foreign ownership restrictions—particularly for new entrants unfamiliar with the market. While there are very good local partners in the region, a common concern is the inability to hold 100 per cent of the legal interests in certain entities. The UAE Minister of Economy, HE Sultan bin Saeed Al Mansouri, has been quoted stating that the proposed new UAE investment law (allowing foreign investors to own 100 per cent in certain sectors) is expected to be published during 2018. Oman, Saudi Arabia and Qatar are also expected to publish similar legislation. Such legislation should allay concerns relating to ownership and lead to a greater influx of foreign investment. The other significant issue (affecting both foreign and local investors) remains an unrealistic expectation of valuation from sellers.
What are your projections for 2018?
Steedman: We have a very positive outlook for 2018. As indicated above, there is perhaps a fair bit of ‘dry powder’ to be utilised in the PE/investment space. After a bumpy 2016/2017, and with the continued regional diversification away from oil, there will be a number of investment opportunities in the private equity space—some being driven by the opportunities likely to be afforded by Saudi’s drive for commercialisation and privatisation. In addition, the region’s diversification away from oil—coupled with the continued recovery of the oil price – is likely to present opportunities in both the exploration and services sectors.
Skipper: Perhaps the key message is finding the right opportunity for the right price. There is an old saying ‘there are no bad investments, just bad pricing’, and there are a number of things both investors and sellers can do to demonstrate value in a competitive environment. If they can achieve that, 2018 bodes well for the PE sector.