Private equity investors have piled over $14bn into a record 64 Middle East-based buyouts in a steady rebound since the pandemic-induced trough in 2020
Private equity investors have piled over $14bn into a record 64 Middle East-based buyouts in a steady rebound since the pandemic-induced trough in 2020
Fundraising worldwide is facing a slowdown as the era of cheap debt ends after a bumper 2021 (Fig. 1). However, the Middle East is defying the industry-wide chill in dealmaking. Private equity-backed deal activity (excluding venture capital) in the Middle East has rebounded since the pandemic-induced trough in 2020. So far this year, investors have piled over $14bn into a record 64 buyouts in the Middle East (Fig. 2). The deal value year-to-date would mark an all-time high if not for Aramco's $25.6bn IPO in 2019.
Growing investor interest in the Middle East
In a sign of renewed interest in the UAE, Canadian pension fund CPDQ's $5bn investment in Dubai-based logistics firm DP World, marked the second-largest buyout ever in the Middle East, three years after Aramco's listing. Another mega deal in the Middle East this year was US tech-focused private equity firm Joffre Capital's $2.2bn buyout of Israeli gaming firm Playtika. In addition, Emaar Properties PJSC, a portfolio company of sovereign wealth fund Investment Corporation of Dubai, announced during the summer that it had acquired Dubai Creek Harbour for $2bn.
IPO activity in the Middle East also defies the global listing slump, with a strong showing for first-time share sales this year. While global IPO volumes slumped 44% in the first nine months of 2022 year-on-year, Middle Eastern IPO volumes soared 288% in the same period, according to consultancy firm EY. On 14 November, Americana Restaurants International – the operator of KFC and Pizza Hut in the Middle East – had its IPO oversubscribed in what is set to be the year’s largest listing of $1.8bn in Saudi Arabia. The dual-listed stock is the first-ever joint listing in Riyadh and Abu Dhabi, and is expected to kickstart a trend of similar deals amid a vibrant exit market.
The growing investment appetite in the Middle East taps into robust economic growth in the region, which is benefiting from energy tailwinds. According to the World Bank's latest bi-annual report, the Middle East and North Africa (MENA) economy is forecast to grow by 5.5% this year – the fastest pace since 2016. In particular, Saudi Arabia is set to be the world's fastest-growing major economy this year, with real GDP expected to reach 7.5% in what would be the fastest rate since 2011.
Sovereign wealth funds turn toward buyouts
The AUM of Saudi Arabia’s sovereign wealth fund Public Investment Fund (PIF) has risen rapidly over the past few years, hitting $620bn as of November 2022. This has grown from $6bn in 2015, making it the third-largest SWF in the region, according to Preqin tracked data. With public markets shrinking and IPO markets falling off a cliff, PIF has, for the first time, significantly tweaked its investment strategy this year, moving away from venture deals to buyouts via direct and co-investments.
In its latest buyout co-investment, PIF is part of a private equity consortium led by KKR and Global Infrastructure Partners to acquire a stake in Vodafone Plc's Frankfurt-listed Vantage Towers, one of the largest tower businesses in Europe. Through the deal, Saudi Arabia will gain access to the critical European telecommunications network.
The deal shows how private equity groups are seeking well-heeled SWFs from the Gulf to fund buyouts, helping to offset higher financing costs. SWFs are also increasingly partnering with private equity groups that harness specific expertise across sectors. It's a win-win for both parties, as cash-rich SWFs typically take a long-term approach and, as such, have patient capital and a greater tolerance for the illiquidity inherent in private equity investments, making them more suitable than other institutional players.
On 24 October, Abu Dhabi sovereign wealth fund Mubadala and KKR jointly invested $1bn in private lending strategies across Asia-Pacific. The move taps into the rapidly growing credit market opportunities in the region amid market dislocations after years of loose monetary policy.
KKR has been cultivating fresh institutional relationships, including SWFs as new sources of LP capital in a bid to diversify its traditionally US-skewed capital base that’s currently grappling with private equity overallocation. In its third-quarter earnings call, co-chief executive Scott Nuttall said the buyout giant is “spending a lot of time with institutions we have never spent time with before”, including SWFs and family offices.
Sovereign wealth funds' buoyant coffers fuel deals
Buoyed by the energy sector windfall, the seven largest Middle Eastern SWF assets grew to a combined all-time high of over $3.2tn in 2022 year-to-date. This is as state coffers posted their first budget surplus since oil prices crashed in 2014 (Fig. 3).
As the sheer size of fresh capital managed by the regional SWFs far exceeds the needs of their domestic capital markets, their investment appetite for global alternative allocations has risen. Preqin’s analysis of SWF data shows that allocations to alternatives have doubled from 22% of total assets in 2021 to 44% this year as they continue to seek non-traditional assets to boost returns (Fig. 4).
Middle East-focused funds have outperformed peers deployed in North America, Europe, and Asia, achieving 27% IRR over 2010-2019 vintages, compared with a weighted average of 17.2% across those other regions.
Most active Middle Eastern SWFs
SWFs in the Gulf have reached 57 private equity deals so far this year, according to Preqin Pro. The dealmaking landscape is mainly dominated by SWFs from the UAE, including Mubadala (24), Abu Dhabi Investment Authority (ADIA) (15), Investment Corporation of Dubai (3), and ADQ (1), as well as Saudi Arabia's PIF (12).
The region's largest SWF, ADIA, which oversees $829bn, raised its exposure to private equity again last month to 7-12% from 5-10%. The move signals ADIA's broader ambitions to focus on private markets after two years of robust dealmaking in compensation for a weak and volatile public market. This year, global equities lost about a quarter of their value while bonds shed a fifth.
However, on the alternatives front, ADIA's private equity desk could not have been busier in terms of dealmaking. It struck a record 40 deals, up from 25 in 2020 and 18 in 2019, according to its 2021 annual review.
The world's third-largest SWF has been restructuring its business since the pandemic. It’s streamlined its internal and external equities teams into one, shutting down investment desks focusing on selected equities and outsourcing their mandates instead. As a result, the weight of public equities in its portfolios has gradually shrunk.
With its financial prowess, it shouldn’t be surprising that ADIA has been sealing the biggest-ticket deals among all SWFs in the Middle East over the past few years. This year, it co-invested in two US companies, Zendesk's $10.2bn take-private deal, and the $9.5bn buyout of Emerson Electric Co.'s Climate Technologies unit.
The current challenging global economic landscape has cast a shadow on fundraising and exits, but the spotlight on Middle Eastern SWFs remains bright as an increasingly new capital source, underpinned by stronger financial prospects than other parts of the world. The region's private capital sector is also set to benefit from favorable regulatory changes, including foreign investment and venture capital rules. Still, smaller fund managers will likely have a harder time attracting SWFs' commitment as they traditionally have a penchant for well-known large funds. Yet, this is also likely to improve as the ecosystem matures.