Market Conditions

Much has been said about the emerging market growth story, but whether one adheres to it or not, there is a fundamental reason for emerging market outperformance: the higher volatility makes it a riskier asset class. Investors should be compensated for taking risk, and with emerging markets they have been over the long term. Emerging markets have a tendency to go through dramatic and often prolonged busts, but over the long term they have outperformed developed markets by an average of 1.5 percent annually since 1950.

Since 1995 the annualized volatility on the MSCI emerging markets index has been roughly 25 percent, in contrast to about 15 percent for the MSCI world index of developed countries. However, the quantitative easing of the recent past has damped volatility as investors have been forced into riskier asset classes in their hunt for higher yields. With quantitative easing now coming to an end, at least in the US, we are returning to a more normal environment. Still emerging markets offer to asset managers the combined benefits of diversification, lesser correlation with developed markets, and a value-accretive proposition that is not tainted by excessive leverage.

Closer to home, the GCC markets remain stable with high liquidity reserves and sustainable growth levels. Lower energy prices are predicted to have a lesser impact than originally feared due to committed public spending on core projects (housing, health, and infrastructure), healthy business environments, and the gradual rise in non-energy related services. These factors combined have kept enterprises afloat and growing, consequently fostering a favorable investment environment for private equity firms with sufficient ‘dry powder’ and growth-orientated strategies. The dry powder of private equity firms (reportedly $6.4 billion) is poised to stimulate a wave of IPOs for long-awaited exits and spur M&A activity with managers under pressure from LPs to deploy or return capital.


The GCC and other select markets of North Africa such as Egypt and Morocco hold most of the investment opportunities for private equity in the MENA region. The receding effects of the Arab Spring coupled with growing demographics, and a reinvigorated trade activity render enterprises operating in such markets prized targets for investments. An increase in transactional rate of both entries and exits is anticipated, assisted by available capital for deployment and better market conditions.