Early in October it was reported that two large Western private equity firms, CVC and KKR, had teamed up to buy Americana, which operates fast food franchises in the Gulf and which is controlled by the Kharafi family. At $4bn, this would be the biggest private equity deal so far in the region.
It is part of a growing trend for Gulf families to bring in private equity. Other recent high-profile deals include Abraaj Group’s announcement that it is close to sealing a deal for fast food operator Kudu, whose chairman is from the powerful Saudi Al-Yahya family.
Investcorp, a Bahrain-based private equity firm which was founded in 1982, is said to be close to selling 20% of Gulf Cryo, a family-controlled manufacturer of industrial gases with a value of up to $800m. The family, which is still involved, is also said to be looking to sell 10% of the firm.
Gulf Capital recently sold 32.9% of Metito Holdings, a Dubai-based utilities business, to the Mitsubishi Corporation, which left the founding Ghandour family with 35% of the business. Away from these headline-grabbing deals there have been many mid-market ones.
This love-in between private equity, with its leverage and desire to flip businesses, and long-term families might seem counterintuitive. Why is it happening?
One reason is that capital markets, debt financing and growth capital have “gone into hibernation”, says Muhannad Qubbaj, managing director of private equity at Gulf Capital. “For a lot of family businesses that want to expand their core businesses, possibly divest some of their non-core businesses or to institutionalise them, they probably need to look for smart and active capital, usually provided by private equity funds,” he adds.
Another reason is that so many firms in the Gulf Cooperation Council countries are family-controlled: 85% of all businesses, and 40% of non-oil ones, to be precise. So by default if you are working in the region you will mostly be working with family firms.
But it also helps that private equity has evolved in the region to be something very different from leveraged buyout firms. In the GCC, private equity is seen as a way for the second or third generation to professionalise a business, but for the family to keep control. Families often negotiate special minority rights, for example having a veto over when and how an exit takes place.
That is because they often want to improve the business, not sell it. “Families that have operated a business for several generations may be emotionally attached to the business and enjoy the regular stream of income, and therefore are not necessarily looking for a liquidity event,” said a report by Growth Gate, a Dubai-based private equity firm.
“There are possibly some pride issues in some situations,” says Qubbaj. “People don’t want to sell parts of their businesses openly.” Keeping some control probably helps them make the decision to go to private equity.
There are other peculiarities. For example, under Shariah law, only a third of the enterprise value of a business can be leveraged. Also, some banks still require borrowers to put up a piece of land as security for a loan.
Regulatory decision-making in the region can sometimes be opaque, or unpredictable, which makes listings less appealing. For example, a government can decide to push a listing into the next quarter. For this reason listings are unpopular and trade sales are preferred. That said, exits of all types can be tricky – there were just five in 2013.
For all of these reasons, only a handful of firms are doing private equity well in the Gulf. They tend to be local, because they best understand the local issues. Carlyle, a big American private equity firm, recently ditched plans to raise another Middle East and North African (MENA) fund.
A decade ago over 100 PE firms were trying to get a foothold in the region, but only around 20 are doing so today. Over $6bn, much of it raised before 2008, remains uninvested. Westerners are unlikely to come into the region in great numbers any time soon. Not only is the track recod poor, but marketing MENA after the Arab Spring and the rise of ISIS is tricky.
So the rise of private equity in the Gulf is because this is not private equity as we know it. Far from being about loading firms up with debt and cashing out as quickly as possible, Middle Eastern private equity is about growing them and making them more secure.
Private equity is evolving – at least in the Gulf – into a way to embed family ownership. This could just be the start of a beautiful, if somewhat surprising, relationship.