Growthgate Capital : ‘Creating Value Not Amassing Stakes’

Deal making is sometimes a benchmark of success in the financial sector. From M&A league tables to total volumes of capital deployed, deal activity seems to gather pace and reflect the vibrancy of a sector or the temporary pole position of a firm. However, this does not seem to be the case when private equity operates in the Middle East. Arabian Business met with the principals of Growthgate Capital, a GCC-based growth investment company to understand why qualitative investments take priority over quantitative deployment of capital. The statement might seem self-serving in a region where entries, and more importantly exits, have been scarce. The company has itself completed eight platform investments and only one exit at the beginning of 2013, while tirelessly working on two additional exits in the near future. However, a closer look into the private equity landscape of the region gives more credence to the assertions.

The anatomy of private equity, as played out in the Middle East, seems to favor middle market companies (value of circa $50m to $150m) that eye private equity funds as replacement capital for bank lending. Such companies are typically owned and managed by individuals, family members or entrepreneurs, who have poured their life savings to build the business. To maintain home market share and grow regionally, mid-sized companies need additional capital whilst regional banks are loath to finance such plans except if hard assets or personal guarantees, or both, are pledged. Steps in the private equity firms that adopt, as Growthgate Capital does, a buy and build model. “Our approach of Growthgate Capital consists of acquiring sizeable minority stakes into mid-sized companies, by injecting growth equity capital and expanding footprint, both organically and inorganically, on the way to building regional champions” says Karim Souaid, General Manager of Growthgate Capital.

Does this strategy really work? Not to be mistaken, it is not just a desktop manifest that populates the company’s brochures or marketing propaganda. It has been successfully put to the test on several occasions. Within a cherry-picked portfolio of companies that has a reported NAV as of 2012 of circa $1.5bn, Growthgate Capital boasts ownership of several prized assets that have been nurtured under its watch in the past five years since its inception. Take for instance Averda, a waste management company that started in the mid 90’s in one Levant market. In 2008, Growthgate Capital acquired a minority stake therein, and accompanied its expansion drive both organically and via a series of M&A transactions. Today, Averda offers waste management services in Saudi Arabia, the UAE, Qatar, Oman, Morocco, Ireland, Angola and Gabon. As the largest regional player, it often competes and sometimes overtakes such giants as Suez and Veolia in the local markets. Another entity that has had a vertiginous growth path is Roots Group Arabia who presently is Saudi Arabia’s largest distributor and manufacturer of select building materials, from gypsum boards, to metal frames and power generators. Over the years, the company has built a sprawling footprint that covers Saudi Arabia, the UAE, Qatar, Egypt, Syria, Lebanon, Malaysia, and even parts of Africa. More recently, Roots Group Arabia has entered into a definitive agreement to acquire 40% of Ideal Standards’ manufacturing operations in MENA, with the balance being controlled by the global private equity firm Bain Capital.

What are the criteria of a successful investment? “Invest in quality and quality will sort itself out” is a living will that they follow with the stricter of disciplines. More precisely, the firm emphasizes the ‘3M’-investment approach that prioritizes: Management, Model, and Markets. Nothing deviates the company from such orthodoxy. This approach has undeniably born fruits of superior value to the company’s shareholders, who have seen their permanent equity capital of $200m almost double in value between 2008 and 2012.

What is perhaps more unconventional, is the fact that Growthgate Capital’s investment strategy is not sector based, as many in the private equity space profess. Rather it is geography biased, GCC being the priority region, and people-driven, owners-managers being the prized targets. The firm shuns leverage, heavy assets structures, and highly regulated industries including financial services. The ethics and ethos of the founders-managers of portfolio companies is key. Reputational capital is assessed as much, if not more, than physical capital prior to, and during the due diligence phase. A builder of a business, whose lifetime has been spent in developing its services or products, is by definition much more engaged and concerned than a hired executive. This comes with limitations such as centralized management, successional challenges and excessive caution in some instances. However, the flip side of the coin is an invaluable commitment to success and an uncompromising stance on quality deliverables.

Able Logistics Group is another portfolio company that has tripled its EBITDA between 2007 and 2012. The company, who originally operated out of the Sharjah International Airport, today has thriving operations in Jebel Ali, Riyadh, Muscat, Hong Kong and Kabul. It started out as an airfreight service provider, and then partly grew by acquisitions to become an integrated air-land logistics service provider for consumer goods and electronics multinationals serving the MENA region, the African continent and CIS countries. Able Logistics Group, true to the motto of Growthgate Capital, is owned-managed by its founders, has no material leverage, operates an assets-light model, and permeates contiguous market with least red tape requirements.

A star amongst its assets is undoubtedly Rubicon Holding, an animation and themed entertainment company founded and led by its mercurial CEO Randa Ayoubi, a prominent woman entrepreneur with impeccable business credentials. Rubicon’s original journey of developing educational content and cartoon series for the region, led it on an impressive path of industry milestones only dreamt of in Hollywood tales. In 2011, Rubicon co-produced ‘Pink Panther & Pals’ with MGM, winning the Kidscreen Awards in New York. In 2012, it partnered with DreamWorks to co-produce ‘Postman Pat’, the iconic British cartoon character that is geared for a European release in mid 2014, and most recently, Rubicon teamed with Unique Features to bring Sir Paul McCartney’s children’s book, ‘High in the Clouds’, to the screen in 3D. Rubicon has proven that the sky is the limit if your wings are made out of true quality.

“The deal pipeline has never dried with few targets looming on the horizon within a six months closing distance”, Karim Souaid added. Same investment criteria will apply for the new entries with no exceptions or compromises no matter how long it takes to reel-in the right target. Whether an exit is in the offing or is delayed surely worries the principals of the firm, like any other concerned private equity manager, it does not make them lose sleep. The jitters of the markets and the turmoil of the Arab Spring notwithstanding, exits, the firm’s principals assert, would be completed when optimal price meets sustainable value. Growthgate Capital’s focuses on the value proposition, leaving to the market the task of generating offers that meet the shareholders’ required returns.