Given the political uncertainty in the Middle East, many anticipated that investors would shy away from the region. However, the Middle East has continued to attract international investors in the last 18 months, and evidence suggests that the region will provide significant opportunities in the upcoming years.
A key characteristic of the investment market in the Middle East is the huge amount of liquidity many big institutions hold—cash, or assets that can be quickly and easily converted into cash. However, there is such a thing as too much liquidity. By putting assets to work, investors can generate real, long-term value for their portfolios.
One asset class that holds significant untapped potential is the Middle East’s private equity market. Private equity firms buy companies, make them more efficient—and more valuable—then sell them at a profit. For many institutional investors, now is a good time to include private equity in their allocation of assets; many have already done so, but statistics from the industry suggest that their allocations have considerable potential to expand. According to the Private Equity Association in the Middle East & North Africa, the total of private equity funds under management in the region was $23.2bn in 2011, up from $8bn in 2006
This industry has been lucrative during periods of uncertainty and turmoil, when the very best private equity managers have been able to achieve strong returns compared to public markets. Yet private equity funds tend to be longer-term investments and are characterised by lower liquidity. The average life of a private equity fund in mature markets is ten years, while the average life of funds in the Middle East is four to five years. This makes private equity funds a great fit for large institutional investors in the Middle East who can afford to take a long-term perspective.
There are also ways of investing quickly in private equity—for example, an investor might buy into a preexisting fund. The benefit of this approach is that money can be put to work straight away with a high degree of visibility and clarity.
Whether investing in private equity directly or through a fund, it is very important to diversify holdings: by geography, strategy, or by type of industry. Diversification is important not only to increase the chances of return by exploring a wide range of opportunities, but also to reduce risk.
Finally, choosing the right private equity manager remains critical, especially when operating in emerging markets and the Middle East, where transparency and information flow is limited. Regional market experts estimate that between 10 and 30 per cent of private equity investments in the region are unannounced. There is also a huge disparity of returns in these investments, so doing due diligence on your managers is very important.
With the ongoing slowdown of more mature markets, private equity investment opportunities in the Middle East are set to grow—particularly as investors in this region are in a strong position to take advantage of their current liquidity.
