August 2014 - Private Equity as Agent of Value: Myth VS. Reality

Following a period of contraction and consolidation, the private equity (Private Equity) industry in the MENA region is beginning to show signs of a recovery, both in terms of deal volume and size. The total number of investments increased from a low of 23 in 2009 to 48 in 2012 and 38 in 2013, with an increasing focus on non-cyclical sectors such as oil and gas services, healthcare, and education. However, with a large amount of “dry powder” in the hands of general partners (GPs), fundraising continues to be challenging. Part of Private Equity’s challenge has been the perception that Private Equity investors focus excessively on short-term cash flows, and have a negative effect on job creation and the long-term health of the companies they fund.


In this white paper, we seek to debunk some of the myths surrounding Private Equity, by reviewing how these firms have been able to add considerable value to portfolio companies and the broader economy. Drawing on evidence from a number of recent academic studies, in Part 1 of this paper we show how Private Equity funds globally have improved performance of target companies by reducing constraints for companies in need of external capital, focusing on investments in innovation, increasing capital expenditures, and instilling better corporate governance and operational practices including productivity boost and surge in employment.


In Part 2 of this paper, we track the evolution of the Private Equity asset class in the MENA region. Through extensive interviews with a cross-section of limited partners (LPs), GPs, advisors, and portfolio companies, we highlight some of the unique constraints faced by Private Equity firms in the region: the existence of large family offices that compete for deals, the difficulty of sourcing proprietary deals, the lack of management talent, and the challenging regulatory environment. To overcome these challenges and succeed in the region, Private Equity firms need to innovate in their funding model, market their expertise and capabilities more effectively, be creative in terms of deal sourcing, and most importantly focus on improving portfolio company operations and governance.  


In Part 3, we review Growthgate Capital’s investment in Roots Group Arabia, which we believe can serve as an effective template for how a Private Equity firm can invest and create value in the region. With the help of Growthgate Capital, Roots Group Arabia has successfully transitioned from being a regional wholesale distribution company to a global, vertically integrated construction company. Through a minority investment model, Growthgate Capital has been able to add considerable value in terms of financial expertise and advice, bringing in best-in-class corporate governance practices and sourcing management talent to scale the company.


We believe that long-term secular macroeconomic trends such as GDP growth and favorable demographics, coupled with company-level factors such as the need for patient external capital for growth, will drive the growth of Private Equity in the MENA region. Evidence from Private Equity investments globally and some early examples in the region show that Private Equity firms have considerable ability to add value, provided they pursue the right investment model and engage with portfolio companies effectively. 


See full report enclosed.