In a region that stretches from Morocco to Kuwait and covers terrain from mountains to desert, the range of economic activity in the Middle East and North Africa (MENA) is as varied as the geography. The rich diversity of economies provides numerous sectors primed for private equity (PE) investment. “In terms of sectors, each country has its own sweet spot,” says Fadi Arbid, chief executive officer of Amwal AlKhaleej, a leading Middle East-focused private equity and alternative investment firm and the first to be headquartered in Saudi Arabia.

Investors are now scrutinizing each sector in the wake of the global economic downturn that swept through the region in 2009, and the Arab political unrest that erupted in 2011. Funds are focused on markets where economic growth is driven by solid fundamentals and sectors that are resistant to the fluctuations in the global economic cycle. “The sectors are defensive and less speculative,” notes N. Bulent Gultekin, professor of finance at Wharton and a former central bank governor of Turkey. “There are the same shifts in the U.S. as well.”

Targeted MENA sectors include health care, education and consumer-related businesses that offer growth or turnaround potential. Funds polled by Deloitte’s MENA Private Equity Confidence Survey 2010 cited the following as the most likely to see deals over the next 12 months:

·         pharmaceuticals, biotech and health care (17% of respondents chose this)

·         power, oil and gas and mining (13%)

·         infrastructure and education (tied at 12%).

The choices are wide throughout the region. The United Arab Emirates (UAE) offers offshore oil and gas opportunities, for example. Qatar and Kuwait have seen PE investment in real estate. Algeria’s key sectors are oil, gas and housing, while tourism-related businesses such as hotels, spas and transportation are attractive in Morocco. Lebanon and Jordan host opportunities in banking, pharmaceuticals, medical laboratories and technology-related business. Iraq has the potential for infrastructure investment.

Still Sector Agnostic

With so much to choose from, at least theoretically, many funds view themselves as “sector agnostic” and scan the investment horizon for the most promising values. “We are opportunity driven,” says Amwal senior vice president Hani Halawani. “We are sensitive to value expectations, which is why we don’t pursue a lot of the opportunities that we see.” However, he notes, most of the opportunities that Amwal identifies come from sectors such as education and health care that the firm is actively monitoring.

“We have not seen so much of a sector focus so far,” says Bassam Yammine, managing director and co-chief executive officer of Credit Suisse in the Middle East. “Most funds are opportunistic. They look at a deal to see if it makes sense and then proceed.” Firms tend to be more country-focused, Yammine says.

But investors throughout the region may increase their focus on individual sectors as industries consolidate, he adds. Such a sector-oriented approach could also help firms identify opportunities that lie beyond industries that are already congested with investors.

However, Amwal’s executives tend to disagree with an outlook that favors specialization for PE funds today. Given the current business environment of deal scarcity and capital abundance, many of the general partners that launched specialized or sector-focused funds six years ago have reversed direction and broaden their mandate to become more opportunistic. Very few, if any, industries in the region warrant a specialized fund. “Funds have struggled to be asset-class specific — private equity or otherwise — let alone to be sector- or geography-dedicated,” says Halawani.

Government-dominated industries are another factor that investors must contend with. This is particularly true for major infrastructure projects such as road and transport schemes that largely exclude private partners. “The need is big [for infrastructure projects] and the funding needs are significant. Infrastructure could be an area where PE could invest substantially,” says Yammine. “But that requires a consortium, which you don’t see much of in the region.”

Private equity deals appear most attractive in countries where growth is viewed as assured, most notably in Saudi Arabia and Egypt, the region’s first and third largest economies. Both countries have diverse economies, domestic industrial bases, government spending programs and large and growing populations that include an expanding middle class. “Although limited, most PE transactions that have closed during the past 12 months or so have been in either Saudi or Egypt,” says Chadi Hourani, partner at Hourani & Associates, a regional law firm that has worked closely with Amwal AlKhaleej. “What PE needs is volume and mass, and those two economies provide that.”

As a reflection of the potential seen in these markets, Egypt and Saudi Arabia are home to the likes of Amwal, The Carlyle Group and Axis. “First funds do a deal [in a market] and then they open an office to do more deals,” says Maged Ezzeldeen, a partner at PricewaterhouseCoopers in Cairo. “The investment community is small, and they tend to follow the big players and look at the same sectors.”

Here is a look at key investment sectors in Egypt and Saudi Arabia.

Saudi Arabia

The Saudis boast the region’s strongest economy and Amwal is the leading Saudi-based fund. “Following the collapse of the global and regional markets, investors have realized that not only does Saudi Arabia exist, but it is the only legitimate and self-sufficient economy in the region,” says Hourani. “Its current local population has basic education, infrastructure and health care needs. It’s not about building for tomorrow, it’s about today. It’s not about building housing and cities to lure people in the future. Those houses are desperately needed to satisfy today’s demands. It is the same with education, health care and infrastructure.” And even if the economy takes a downturn, he notes, the population still needs roads, housing, schools and desalination plants.

Saudi Arabia has also proven relatively insulated from the surge of political discontent that has swept the Arab world. Moreover, Riyadh plans to spend US$130 billion on housing, infrastructure and other projects over the next few years to ward off unrest and further boost the economy.

Investors have taken notice. “There’s been a surge of interest in Saudi during the past 12-18 months,” says Hourani, “significantly more so than during the regional boom” that preceded the 2009 recession. “Businesses are now in the process of shifting the excess capacity left from the golden days in the region — based in the UAE and to a lesser extent other GCC [Gulf Cooperation Council] countries — to the kingdom.”

Saudi Arabia’s need for more economic development provides targets of opportunity. “In Saudi, for example, high quality health care services are hard to come by,” notes Hourani. “For a population that is nearing 30 million people, there’s the possibility to develop this and other sectors en masse across the country. The country is still quite underdeveloped relative to the neighboring economies, and that is what is so enticing.”

Also topping the investment list are post-high school and adult education, English language teaching and information technology. In addition, opportunities exist in construction-related industries such as building materials and cement, and in industries where growth is driven by rising consumer spending such as the retail, food and beverage, and leisure and entertainment sectors.

In the consumer space, Amwal has a minority stake in cosmetics retailer Zohour Al-Reef (a local version of the Body Shop store), which in 2010 opened its 100th store in the region, up from 56 stores in 2007, the year of Amwal’s investment. Amwal also has a majority stake in a local chain of gyms under the Body Masters brand name, which is now among the largest gym chain in Saudi and has opened locations in other cities in Saudi Arabia since Amwal’s investment in 2008.

Amwal’s significant minority stake in Gulf Insulation Group is an example of an investment in construction-related business. And realizing the tremendous opportunities in education, Amwal acquired a controlling stake in Rowad Schools, one of the leading K-12 schools in the Saudi capital, and then used the company as a platform to conduct add-on acquisitions. Between the acquisition in 2008 and 2010, the number of students grew from about 5,400 to over 13,000.

The kingdom displays a mixed attitude toward foreign investment. It is one of the most open in the Gulf, on the one hand, allowing up to 100% foreign ownership in sectors that include information technology, contracting and real estate development. And the Saudi Arabian Investment Authority continues to shorten the list of sectors from which foreigners are excluded.

On the other hand, the key growth markets of health care, education and some wholesale and retail segments are restricted to Saudi and GCC investors, which the kingdom and other GCC markets view as local players. Foreign investors — unlike local partners — are also subject to a 20% corporate income tax on profits.

Policies are similarly mixed with regard to the kingdom’s crucial energy sector. Investment in oil and gas services and downstream industries like refining is permitted, but oil and gas exploration and production remain strictly off-limits to all private investors. “From a national perspective, there are strategic interests that governments are more comfortable controlling, and Saudi Arabia is perhaps the most guarded,” says Stephen M. Sammut, a senior fellow and private equity lecturer at Wharton. He compares the situation to China, where the growth of the private sector also is relatively new. In China, however, there is “a huge landscape of state-owned enterprises (SOEs), or those that existed originally as SOEs, which have been taken 100% private or spun off.”


Egypt, the most populous Arab country, has been rattled by the widespread unrest that toppled former president Hosni Mubarak in February. But the Egyptian economy remains highly diversified, and the breadth of opportunities available to investors is far wider than in Saudi Arabia. Attractive Egyptian sectors include food and natural gas production, packaging, real estate, housing and telecommunications. Also beckoning investors are textiles, petrochemicals and other related downstream industries. “It’s anything that works on the basis of mass,” says Ezzeldeen. “Anything related to the population is a good investment, and that has proven to be the case even in the bad times.”

Foreign ownership laws are significantly less restrictive in Egypt than in Saudi Arabia. Foreigners can own 100% stakes in the banking and insurance sectors, brokerages and asset managers and manufacturing companies. There are no restrictions on management or repatriation of profits. Off-limit sectors include aviation, commercial importing and commercial agencies that help foreigners penetrate the Egyptian market. “Egypt has been opening up to foreign investors for the past 20 years,” says Mohammed Ghannam, partner at Helmy, Hamza & Partners in Cairo.

Whatever government finally emerges in Egypt will likely continue to encourage outside investment, given the country’s reliance on that source of capital rather than oil receipts, which fund Saudi Arabia’s huge projects.

Egypt has revised its tax regime in its effort to court investors. New provisions include an exemption from the capital gains tax when companies are listed and sold on exchanges which should grab the attention of PE firms considering an exit. Ghannam expects initial public offerings to come back into favor as partners seek higher valuations.

The low cost of skilled labor and energy remains a key attraction for new investors. A case in point is Amwal’s investment in Arab Cotton Ginning. Working through Amwal Al Arabia, one of its subsidiaries, Amwal is in talks with European textiles manufacturers who seek to relocate their facilities to Egypt to take advantage of Egypt’s abundant cotton, low energy costs and cheap yet skilled labor. These factors contrast with the rising labor and energy costs in Europe that are leading to the extinction of the European textiles industry. Amwal also has an investment in Cairo-based Egyptian Polypropylene Company, which benefits from a readily available feedstock (natural gas) and a production complex in Port Said at the doorstep to Europe, all leading to a low-cost competitive end product.

Also inviting is Egypt’s fertile land, which makes agriculture a major contributor to the country’s economy. Agriculture accounted for 13.6% of Egypt’s GDP in 2009, according to The Economist, while manufacturing accounted for 16.2%.

Meanwhile, the upheaval that ousted former president Hosni Mubarak in February could ultimately benefit investors, says Wharton’s Gultekin. Egypt “is not going to change that much economically,” he says. While most investors “may sit tight and see what’s happening, those who take a longer view should be able to do well.” This is particularly true for local companies “that may be able to assess the risk much better than outsiders. Like everywhere else, changes provide opportunities.”

Overall, PE firms are starting to take an operational as well as a financial approach to investments in the region. The Deloitte MENA Private Equity Confidence Survey 2010 found that respondents were evenly split at 47% each between those who expected to become more operationally involved and those who did not, with 6% unsure. This may reflect the preponderance of minority stake investments, in which PE funds mainly provide financial support. But should more PE money flows into the region’s varied sectors, targeted industries may increasingly turn to the firms for operational help as well.