Starting in the spring of 2011, the Middle East and North Africa (MENA) experienced a wave of protests, revolutions and even civil wars that continue to this day in some parts of the region. The Arab Spring has led to four governments being overthrown across the region, and many others offering political and economic concessions to their populations in response to growing disturbances and unrest. While uncertainty has grown for the entire region, many observers believe that greater stability will eventually bring about democratic governments and reform.

How has the Arab Spring affected the private equity (PE) industry in the MENA region, particularly in regards to investor appetite, investment decisions, fundraising, competition and global attitudes? What are the future investment prospects and what kinds of investors stand to benefit from the Arab Spring upheavals? Below are some insights.

A Time for Reform and a Time to Rebuild

Developing markets generally present PE investors with many challenges, including under-developed intellectual property rights protections, poorly functioning financial markets and a lack of public infrastructure. These issues, combined with the social and political unrest in the MENA region, would suggest a poor environment for private equity. According to data from consulting firm Geopolicity, unrest related to the Arab Spring is estimated to have directly wiped out billions of dollars from the region’s gross domestic product (GDP).

But surprisingly, MENA private equity practitioners have been cautiously optimistic. The Arab Spring was spurred primarily by the population’s disenchantment with the region’s autocratic governments, political policies and economics. Resulting political and economic reforms will require billions of dollars of public investment, which could potentially pave the path for a more private equity-friendly future.

The full cost of repairing the damage and instituting massive reforms in the Maghreb region alone is expected to be $300 billion over the next 10 years, according to a an article in La Maghreb Daily. Saudi Arabia has already enacted a wider public investment and transfer payment program that is estimated to have cost $30 billion, the International Monetary Fund (IMF) reported.

Substantial foreign aid is also expected: The G8 pledged $20 billion to Egypt and Tunisia during the May 2011 Deauville summit, and the oil-rich nations from the Gulf Cooperation Council pledged an additional $20 billion to help Oman and Bahrain. In addition, the IMF pledged $35 billion to emerging Arab democracies, and is already in the process of disbursing loans. Thankfully for institutional investors, the IMF money comes with strict terms about how these funds should be used, and these policies will likely benefit investors.

It is worth noting that while a large part of the investment opportunity stemming from the Arab Spring revolves around direct spending and aid increases, the political and social reforms are arguably more important. The MENA region represents a huge market with an aggregate GDP of $2.5 trillion that is comprised of many autocratic states where PE faced difficult conditions well in advance of the Arab Spring. Even without any direct spending increases, simply gaining access to these markets represents a huge win for PE.

For example, in Morocco, the monarchy gave up its divine rights and introduced a new constitution that better shields the country’s citizens — and investors — from autocratic capriciousness. In Egypt, the fall of former President Hosni Mubarak has opened up unprecedented personal and economic liberties that could potentially result in a better distribution of wealth and power, more reliable civil institutions and pave the way for growth in consumption and investment.

A key realization is that business opportunities in the MENA region were significantly depressed relative to developed markets because risk-takers could not reliably build businesses in the political climate that existed pre-Arab Spring. Furthermore, non-oil-rich MENA nations were relatively inaccessible and citizens were very poor, which is not ideal for investors. When starting from such a beleaguered base, the prospect of public investment, foreign aid and socio-economic liberalization paves the way for significant opportunities for patient investors. But how have PE investors fared thus far, and how will they participate in the MENA economy going forward?

The Arab Spring and Private Equity

Although there is no proof for causation, recent data from the Emerging Markets Private Equity Association (EMPEA) and the IMF seem to indicate that both economic growth and private equity investments in MENA decreased in the first year of the Arab Spring at a much faster rate than in developing economies that were not affected by such unrest.

IMF data shows GDP in 2011 in emerging markets grew by an average rate of 6% as opposed to only 3% in the MENA region. GDP growth was slowing in all emerging markets and developing economies at this time, but it was far worse in the MENA region.

Furthermore, according to the EMPEA, the capital invested in 2011 in the MENA region amounted to $385 million, down 52% from 2010. The number of deals that were closed, however, stayed relatively the same: 23 in 2010 versus 22 in 2011, which suggests that it was the size of the deals that ultimately changed. Indeed, the data shows there were a handful of investments in 2010 that exceeded $300 million, but no large deals in 2011.

Since 2011, the data points to signs of a recovery in the PE investment landscape. “After a subdued year for fundraising and investment activity in 2011, private equity in the MENA region exhibited signs of recovery in 2012, with new capital commitments and capital invested increasing by 29% and 303%, respectively,” noted a recent EMPEA report.

“The upswing in investment can largely be attributed to an $855 million equity infusion in Dubai-based Shelf Drilling by the consortium of CHAMP Private Equity, Castle Harlan and Lime Rock Partners. However, the total number of MENA investments doubled in 2012, with most of the increased deal flow in the venture capital and small- and medium-sized enterprise market segments,” stated the EMPEA.

According to data from business intelligence site Zawya, deals worth $362 million were closed in the first six months of 2012, compared to only $46 million in the same period a year prior, which was during the height of the Arab Spring revolutions.

PE professionals agree that a recovery has started. MENA-focused PE fund Amwal AlKhaleej has noted that, in the short term, the Arab Spring increased risk premiums and decreased liquidity and valuations, but now risk premiums are declining and liquidity is staging a recovery. It seems the region has also become more attractive to incumbent investors due to lower levels of competition. “We see Egypt as more favorable than before the revolution because the competition has backed off,” Romen Mathieu of the Lebanese fund EuroMena II, said in an interview with the Economist magazine.

Furthermore, a February 2013 survey by the Economist Intelligence Unit (EIU) shows executives have an overwhelmingly positive business outlook for the MENA region. “Executives in the Middle East and Africa are particularly upbeat. More than a third believe business conditions will improve during the next six months; almost two-thirds expect their firm to boost capital spending in 2013.” In addition, GDP growth in 2012 rose to pre-Arab Spring levels.

The data on increased PE investment activity coupled with the overall upbeat business and economic outlook are positive indicators of the industry’s recovery. But is new capital staying on the sidelines due to the Arab Spring?

Fundraising: Temporary or Permanent Impact?

In the MENA region, fundraising declined from just over $4 billion in 2007 to $1.2 billion in 2009, according to a report from Private Equity International. Since then the amount of capital raised for funds targeting the region has remained under $1 billion. In 2012, funds targeting the region had extreme difficulty raising enough to meet their capital targets.

Meanwhile, a private equity report by Grant Thornton found that only a small minority of MENA general partners (GPs) felt positive about raising new funds in 2012. Many investors pointed to a divided market where top-performing managers raised funds with relative ease, while the rest struggled. However, this is better than in the BRIC countries and in the Asia-Pacific region, where even more respondents thought it was challenging to raise new funds.

The contraction in the number of GPs active in the region has also contributed toward the decrease in capital raised, with a high number of firms not being able to survive due to harsh conditions. A large number of GPs also focused their efforts away from fundraising, instead working to ensure the success of their portfolio companies despite the difficult financial climate.

According to Deloitte’s 2012 MENA survey, two-thirds of respondents believed that the global limited partner (LP) appetite for the MENA area will remain at the same subdued levels due to continuing market instability and an uncertain political environment. There is a belief that the media exaggerates the regional uncertainty, keeping global investors at bay indefinitely.

By 2012, there were promising signs of a recovery despite the ongoing turmoil. Investors are increasingly looking at Egypt, Tunisia and Saudi Arabia as attractive hubs for investment. The smaller number of private equity firms in the region has also led to more favorable conditions because of lower competition for LP capital. There has also been a positive shift in the balance between capital raised and investment opportunities.

There are hopes that the Arab Spring could lead to positive changes in the way the industry operates. Investors anticipate the aftermath of the political unrest will bring greater transparency in deals and allow more investment opportunities to open up.

Concerns Remain

Despite this positive news, the consensus is that LPs are not confident that investments in the MENA region will be profitable. Political and economic risks are among the main factors LPs consider when deciding to invest in a MENA-focused fund. In an area heavily affected by political unrest, it is important for LPs to be able to rely on fund managers to have an excellent understanding of the investment landscape.

When asked about their investment appetite following the Arab Spring, one recent survey found the majority of LPs (58%) and GPs (85%) said they intend to keep their investments in the region unchanged as part of a longer-term strategy. Of those who responded that the Arab Spring would affect their investment in the region, LPs are more cautious towards investment in MENA, with 12.5% of respondents considering decreasing their allocation to the region. Meanwhile, no GPs indicated that they wish to do the same. However, a larger percentage of LPs than GPs are considering increasing their investment or newly investing in the MENA region, with over 29% of LPs responding positively as opposed to only 15% of surveyed GPs.

Simultaneously, some LPs remain concerned about financial stability following the Arab Spring and are increasingly demanding a “soft commitment” option that allows them to veto individual investments. It’s too early to tell what the lasting impacts of the Arab Spring will be, but these short-term consequences are certainly being felt in private equity markets. Over half of surveyed GPs felt that the short-term implications for fundraising were negative for launching new funds, fundraising for existing funds and reaching a final close. However, several GPs feel that there will eventually be a positive impact on investing in portfolio companies, earnings of portfolio companies and exit opportunities. This is mostly due to lower valuations and new sectors being opened up to private investors

The Future of MENA Fundraising

Changing Power Dynamics: The changes in the MENA region have contributed to shifting the power dynamic from GPs to LPs. LPs have increased their demands in the fundraising process and asked for more transparency, due diligence and lower management fees. This trend will likely continue into the near future as fundraising conditions remain challenging. Additionally, the increased LP demands will have another side effect — increasing the gap between winning and losing funds by exacerbating the already limited back-office resources of underperforming funds.

Sources of Capital: According to the Grant Thornton “Global Private Equity Report 2012,” roughly one third of the LPs who invested in MENA funds are domestic. Domestic investors have been the most active since they have critical local expertise and contacts. LPs outside of MENA will remain cautious about placing capital in the region due to several factors, including perceived political instability, attractive opportunities in other emerging markets and a lack of performance history from local fund managers. According to Deloitte’s MENA “Private Equity Confidence Survey 2012,” many experts believe that it could be 2014 before international LPs become comfortable with investing in MENA. Given all of these factors, a significant portion of capital is likely to continue to be sourced domestically.

LPs in the region are heavily weighted toward family offices since a single family can oftentimes be a dominant investor in the region. Given distributions of wealth in the region, this trend is likely to continue. Almost half of all respondents to the Deloitte survey estimate that family offices will be the most active investors over the next year.

The Rise of Sovereign Wealth Funds: The region will also likely see a rise in activity from sovereign wealth funds (SWFs), according to a paper by Private Equity International. These SWFs are increasingly looking to deploy capital to alternative assets with higher returns, and private equity is an ideal candidate. Global SWFs are also growing their assets quickly: In 2012, SWFs around the world had $4.62 trillion of assets under management, a 16% increase from 2011, according to a report from Financier Worldwide. Consulting firm Bain & Co. estimates that over the next few years, the 10 largest SWFs with private equity exposure will inject up to $60 million in the asset class. The increased interest in private equity from the largest SWFs could encourage smaller SWFs to follow suit.

Meanwhile, the majority of SWFs that invest in private equity are based in Asia and MENA, which could bode well for private equity in the MENA region since investors may be more confident to invest in their own backyards. It doesn’t hurt that MENA SWFs tend to receive steady streams of capital from oil resources and have relatively long investment time horizons.

“SWFs enjoy enormous flexibility as PE investors,” said Bain in its 2012 global private equity report. “Unlike conventional LPs, which try to match the duration of assets and liabilities in order to meet their need for liquidity, SWFs can patiently commit capital over long time horizons.”

Managing Regional Risk

Some recent global trends suggest investors are increasingly trying to mitigate the risk of local investments. First, it seems SWFs with private equity exposure are focusing more on investing in multi-manager vehicles. In 2012, a report in Financier Worldwide showed nearly one-third of SWFs said they preferred investing in PE equity funds-of-funds, up from 20% in 2011. Clearly, SWFs are hoping to minimize their risk by diversifying. Second, PE investors in MENA are beginning to prefer investing on a deal-by-deal basis rather than invest in blind pools of funds, according to Deloitte. Global investors also seem to have more stringent investment criteria, which could serve to increase transparency and decrease risk over time.


Unsurprisingly, the Arab Spring’s short-term impact on PE was negative. Both investing and fundraising activity fizzled out as the MENA region experienced unprecedented levels of unrest. But this reduced activity was followed by cautious optimism from those who were knowledgeable about the region.

Unrest has paved the way for reform and, in the process, a large region is now slowly being opened up for PE investment. The industry is already seeing signs of recovery from the 2009 and 2010 doldrums, and significant government and foreign funding, coupled with consumer markets that are poised to grow, set the stage for resurgence in private equity investments.

But the benefactors of this resurgence are unlikely to be outsiders and international PE leaders. Foreigners are more likely to view the Arab Spring as a cataclysmic event and less as an investment opportunity. Instead, insiders and domestic professionals could be the main beneficiaries.

PE players that already have a significant presence and experience in the MENA region will be best poised to benefit from any recovery. Meanwhile, fundraising is still at low levels, meaning that only firms with adequate “dry powder” can take advantage of the lack of competition and depressed asset valuations.

Thus, PE players who are in the know will disproportionally benefit from the Arab Spring as they leverage existing knowledge and funding resources to capitalize on what may be an unparalleled investment opportunity in the region.

This article was co-written by Mila Adamova, Rehi Alaganar, Alia Avidan, Jagan Pisharath and Terry Wang — members of the Wharton MBA Class of 2013.