$11bn of PE dry powder to revive regional M&A boom

The region is set to see a revival in a private equity (PE)-backed mergers and acquisition drive as regional PE players are sitting atop a $11bn pile of dry powder, or investible capital, according to experts.

Imad Ghandour, Chairman of Gulf Venture Capital Association (GVCA), told Emirates 24|7 that, despite the fact that some investors may be rethinking their commitment to private equity funds, regional PE funds, with huge investible capital, are expected to “restart their investment programmes soon” to capitalise on the improved sentiment and market conditions.

“The official estimate of ‘dry powder’ as per GVCA Report for year ending 2009 is estimated to around $11 billion. However, it is becoming apparent that the amount of dry powder is less, as some investors are rethinking their commitments to PE funds,” Ghandour told this website.

“With regard to PE funds, it is expected that PE funds restart their investment programmes soon and take advantage of the favourable market conditions,” he added.

The record amount of capital, most of it raised during a three-year boom that ended with the financial crisis, coupled with fewer and smaller purchases, means most PE players across the world and also regionally haven’t been able to make decent returns for their investors in the past few years.

The lack of investments so far could in fact reflect badly on the funds’ potential to raise capital in the future. “The result is that the funds’ performance will be poor, and this will hinder their future capacity to raise more funds,” he said.

However, with the recent improvement in markets and investor sentiment, there could once again be a deluge of PE money chasing the few opportunities available locally. With the dry powder lying idle for a while now, all of this capital needs to be invested or returned.

Since equity firms don’t really like to release investors from committed capital, chances are that we could see a flurry of activity on the part of equity groups in the near future. With this much committed capital to invest, equity groups will be forced to be more aggressive in looking for buyers.

“So many PE funds have been freezing investments since the crisis end of 2008, and got only active once again in 2010; the result of which is that so many funds targeting MENA region are simultaneously looking for investments as a large portion (30-60 per cent) of their funds have not been invested, and time is ticking as they have already lost of couple of years with few investments,” Alaadin Rady, FULL TITLE, told this website.

As far as M&A is concerned, Ghandour is hopeful of a pick-up. “We have seen many large transactions amongst strategic investors in 2009 and 2010, and this is a global trend. I believe that this trend will continue into 2011.”

Rady, on the other hand, believes strategic acquisitions rather than PE funding are responsible for the recent revival in M&A. When asked if M&A is expected to pick-up in 2011, he said: “I think the answer would be yes, but driven by strategic acquisitions rather than PE. I think PE will face issues with the poor performance of the last couple of years, that lead to power shifting from general partners to limited partners, dictating their own terms now. I personally know of numerous funds under establishment that are not able to raise their target closing amounts (even for first close, or dry close).”

Both Ghandour and Rady agree that the pace of PE investments needs to pick up for sustainable returns.

“Despite the lack-of-commitment issue, there is enough dry powder in existing active funds to invest in the region at a greater intensity than the first half of 2010,” Ghandour said.

 “I have heard of very few PE investments first half of 2010… I think the issue is that most PE funds are still perfectionist in their approach of looking for sizeable, sophisticated, developed companies, with a high degree of corporate governance, clean books, profitable, looking for expansion capital,” Rady noted.

“As an investment bank, we have been successful in closing three transactions so far in 2010 (one in the Czech Republic, one in Egypt and one in KSA, but all related to strategic parties rather than PE),” he added.