FOCUS: Private Equity In Search Of Foothold In Saudi Arabia - WSJ.com
Private equity firms argue that Saudi Arabia is where the deal making action is in the oil-rich Persian Gulf, but corporate raiders arriving in Riyadh face a very different reality on the ground.
Delegates attending a private equity conference in Riyadh this week were given few reasons for optimism, with bankers exchanging small talk amongst themselves instead of pitching deals to wealthy Saudis.
"There aren't many big investors around," said one disgruntled investment banker attending the event held in a swanky Riyadh hotel.
Executives from Egypt's Citadel Capital, the founding partner of the conference, which was sponsored by a government agency tasked with increasing foreign investment in Saudi, were visibly absent. They couldn't get their visas in time for the event, illustrating the challenges facing the industry in the kingdom.
Only three private equity transactions were completed in the Middle East's largest economy last year, compared with 10 in the United Arab Emirates, according to data from Zawya.com's Private Equity Monitor.
Publicly, the private equity industry is upbeat on Saudi Arabia, and for good reason. The kingdom has the largest consumer and stock markets in the region, a large and growing population, and a government that is fiscally sound and willing to spend heavily to transform its economy.
"Saudi Arabia has long been overlooked as a destination for investment funds," Citadel Capital's managing director Hisham El-Khazindar said in an emailed statement.
Private equity giants like Kohlberg Kravis & Roberts and the Carlyle Group have expressed keen interest in acquiring companies in Saudi Arabia. One of the few bright spots is Carlyle's acquisition of a 30% stake in Saudi's largest lighting fixtures manufacturer and supplier for an undisclosed figure.
But a mixture of poor regulation, a shortage of deals and stubborn sellers with unrealistic valuations is making it tough for many private equity players to gain a foothold in the kingdom.
"There's too much capital chasing too few deals," says Tarek Kabrit, a principle at the Dubai-based Siraj Capital which has three portfolio companies in Saudi Arabia.
Kabrit said the private equity funds, while small compared to their global peers, are too big for the potential investments in the region.
A $500 million fund typically looks to buy a minority stake for a $100 million, he explained, which means the target company needs to be worth $600 million. "How many private companies are there here that are not government-owned, or a family business and willing to sell a stake?" Kabrit asked.
Siraj is eyeing smaller deals, as little as $5 million. But this business model has its risks because private equity firms will have trouble generating fees, which typically is a 2% annual charge on the fund and at least 20% of the profit when a portfolio company is sold.
"Deals we're seeing around in the market have been around for some time, and they are not the good deals," said Hadi Al Hakim, the director of private equity at the Bahrain-based Unicorn Investment Bank.
Al Hakim is working on a healthcare investment in Saudi Arabia worth around $20 million. His firm is now sourcing deals and offering it to small groups of investors rather than using a fund to acquire companies.
The shift is due to demand from wealthy investors who want to invest directly in companies rather than let the managers decide, Al Hakim said.
A call to tinker with the regional private equity sector's business model was also mentioned by one of the few Saudi investors at the conference this week. Muhammed Al Agil, the chief executive of Jarir Investment, was concerned that firms are generating fees comparable to their global peers but don't have the talent or track record needed to justify them.
"The investor is paying the cost of their learning curve," he said.END
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