- By Region
Amid the pre-financial crisis excitement that buoyed a swath of Middle Eastern private equity houses, Riyadh-based Amwal AlKhaleej was one of the earliest and highest risers.
Since its creation in 2004, the firm – whose board includes members of Saudi Arabia’s Al-Muhaidib merchant family as well as Mohammed Alabbar, the Dubai property executive – has been one of the most active, straddling sectors ranging from financial services to media and construction.
Now, in a much-changed financial world, it faces another big test: can it find a lucrative way out of investments made in the boom years when asset valuations soared?
“Today, and over the coming years, it’s going to be about these investments that happened in ’06, ’07 – is it possible to exit and are these exits profitable?” says Fadi Arbid, the company’s chief executive.
For Amwal AlKhaleej and other regional private equity houses, the years leading up to the financial crisis were a time of easy fundraising and abundant investment opportunities. The firm’s first fund closed in 2005, and fully invested its cash in 2007, at the height of the boom. The second closed in 2007 and began to invest after that.
Amwal AlKhaleej is not alone in being confronted now with pre-crisis investment decisions. In its 2011 annual review released last month, the MENA Private Equity Association said 50 per cent of fund managers it surveyed expected valuations to be lower in 2012 than the previous year, complicating the prospects for funds needing to sell their assets and pay returns to investors.
According to a 2011 report that Amwal AlKhaleej carried out alongside the Wharton School of the University of Pennsylvania, about 218 investments were made by regional private equity funds between 2004 and 2009, but just 14 had resulted in exits.
But while other regional players have struggled to sell assets bought at top-dollar valuations, the firm has sold several of its investments since 2004, including multimillion-dollar stakes in the Lebanese lender Bank Audi and Acwa Power, the Saudi-based utility company.
The most recent exit was the initial public offering of Al-Tayyar Travel Group, the regional travel company, in Riyadh. After a failed IPO attempt in 2010, Amwal AlKhaleej made 10-times its money back.
“Making returns in this environment is harder,” says Mr Arbid. “But for us this was a good indication, the magnitude of the returns is quite impressive.”
The offering was more than six-times subscribed and raised more than SR8.3bn ($2.2bn). The retail subscription amounted to SR1.64bn, viewed as a positive indication of liquidity in the Saudi market.
As a Riyadh-based firm, exits in Saudi Arabia should be easier for Mr Arbid’s organisation. With that in mind, Amwal AlKhaleej is planning another exit in the next six to 12 months on home turf.
But further afield, exits may take longer to come to fruition. Amwal AlKhaleej, like other regional funds, is exposed to Egypt through investments that include stakes in Arab Cotton Ginning, the cotton producer, and the Egypt Propylene and Polypropylene Company, an industrial group.
Mr Arbid says his fund received much interest in one of the Egyptian companies before the revolution. Now the firm plans to make a sale in 12-18 months.
Beyond the turmoil in Egypt, Amwal AlKhaleej was also affected by the Dubai real estate crash, whose repercussions went far beyond the property market. An investment in a Dubai media company went sour when it became clear that advertising revenue was strongly correlated to the property boom.
“We took a systemic risk on the Dubai crisis,” Mr Arbid says. “We didn’t use leverage, otherwise we would have been under more pressure.”
That prudent approach to debt has been a big factor helping the firm avoid the fate of other regional players that have been squeezed by the tough market for refinancing. It has helped the company survive a shake-out in the Gulf’s private equity industry, and be well positioned for the strong economic rebound under way in Saudi Arabia. After postponing plans to launch a new fund this year, Amwal AlKhaleej expects to start marketing one to investors in 2013.
Even in Egypt, where valuations have faltered, Mr Arbid remains optimistic. “Our companies are doing extremely well, their operations have not been affected,” he says. “The problem is the perception of the value of the company.”