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$11bn Mideast private equity pot waiting for allocation

The Middle East private equity industry is sat on $11 billion in committed funds which are not yet invested, a conference at the Dubai International Financial Centre heard today.

At the same time, economic growth in the region is forecast at five per cent per annum for the next five years, second only to China at 7.8 per cent, according to the Economist Intelligence Unit. The key growth drivers will be hydrocarbon wealth, population trends and economic liberalization.

Professional interest

The logical conclusion is that there is a boom time ahead for private equity, and judging from the packed out conference room that is what the Dubai financial sector thinks too. However, there is just one problem: nothing is actually happening just yet.

Private equity, just like every other aspect of the financial services industry, has been pretty much dead since the financial crash last September. The fabled $11 billion private equity pot lies untouched.

It is not as though serious participants like Abraaj Capital have not selected target areas like education, healthcare and hydrocarbons, although in the case of this firm its biggest move has been an audacious bid for a stake in publicly-listed DP World, the global ports operator.

Yet something is still missing. And it is certainly not professional expertise either: the DIFC has the legal talent and globally qualified consultancies by legion.

What is missing is clearly a confidence that the market has bottomed out locally. Until that happens it is impossible to arrive at meaningful valuations agreeable to both parties for private equity transactions.

It could take even longer than that for transactions which require financing. The debt markets of the Middle East are as dead as their global counterparts, and will probably take just as long to recover.

Oil price recovery

On the other hand, the rapid recovery of oil from its December low of $33 is a reminder of how hydrocarbon based liquidity will support the growth of the region going forward.

Abraaj Capital pointed to the highest reserve-to-production ratio in the world as showing the potential for hydrocarbon investment, while 176 million people will join the workforce in the Middle East and North Africa region over the next decade.

But perhaps the financial markets still have a final shake-out to come this autumn before they reach a true bottom, and only then will private equity begin to pick up the pieces. For buying assets cheaply is the first stage in this value engineering process.