Most still assert that all is not lost and, according to a KPMG report, large players with established track records are set to bounce back. “Since historically the best PE returns have been from investments made during an economic downturn, strong funds will survive, while those without track records will disappear,” says its report, “Key Trends in MENA Private Equity in 2008.” “After a period of little activity and after the market settles, there will be decreasing emphasis on minority stakes and more focus on majority control transactions.”

Seifallah Zoghbi, vice president at the Investor Coverage Team of Abraaj Capital (a shareholder in the parent company of TRENDS), says the nature of the private equity and its strength in the Middle East largely remains uncompromised despite the crisis. “Private equity is all about creating value in partner companies and there isn’t going to be any fundamental difference in that approach,” he says. “However, the playing field has changed over the last nine months and managers need to have an increased focus on portfolio management during these turbulent times.”

Fundamental change. Tamer Bazzari, the deputy CEO of Rasmala Investments, says recent market conditions have made investing in PE more challenging and have brought about a change in habits. According to him, before you could put a bit of money into PE and do extremely well in a short period of time from the increase in general market valuations. The nature of PE in the region, he says, was also more of financial engineering. “So you buy a good company with good cash flows, add a bit of leverage, and as it goes up in value with increased market valuations you make a lot of money. That’s not going to be the case going forward,” says Bazzari, whose company announced the first closing of Rasmala MENA Private Equity Fund 2 in January, with $120 million in commitments received.

With the rules of the engagement altered, operational improvements are the need of the hour. This means understanding the business you are investing in, improving operations, enhancing corporate governance, expanding geographically and getting involved more actively. “It has to be more than just attending board meetings four times a year. A lot more integration, strategy and hand-holding is now going to be required to add value,” Bazzari says. The same trends are surfacing abroad, particularly due to the lack of leverage and scarce liquidity available from banks.

Industry players are in agreement over the new reality. They say there has been a lot of uncertainty since the last quarter of 2008, which trickled into the first quarter of this year. “There has been unwillingness to make new investments and a lot of focus on restructuring and cutting costs,” says the leading executive of a major PE firm in the region. “We are looking at transactions and we are reactivating the dossier put on hold in the last few quarters. So there are more announcements globally and more transactions are starting to happen again.” Focus has shifted to reestablishing platforms of existing businesses instead of going out and seizing new opportunities. That means time to think, reanalyze and discuss the setup of businesses will be crucial to the next phase growth for PE portfolios.

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