the next five years mena pe - insead...2011 mena pe: the next five years7 following the boom years...

The next five yearsMENA PE

September 2011

2 MENA PE: the next five years 2011

3MENA PE: the next five years2011

This report was written by Pascale BALZE and Stephen MEZIAS from INSEAD Abu Dhabi, and Yousef BAZIAN from PwC.

PwC Private Equity Advisorywww.pwc.com/middle-east

INSEAD Abu Dhabiwww.insead.edu

This report was conducted during the first half of 2011.

For further information about the report, please contact:

Yousef BAZIANMiddle East Corporate Finance and Private Equity LeaderPwC+971 (0)4 304 33 [email protected]

Pascale BALZECase WriterINSEAD Abu Dhabi+971 (0)2 651 52 [email protected]

Stephen MEZIASProfessor of Entrepreneurship and Family EnterpriseAcademic Director, INSEAD Abu DhabiAbu Dhabi Commercial Bank Chair in International ManagementINSEAD Abu Dhabi+971 (0)2 651 53 [email protected]


Despite the political events that have taken place in several countries during the past months, the long-term outlook for the private equity sector in the Middle East and North Africa (MENA) remains positive because of the region’s robust macroeconomic fundamentals.

Most PE firms that participated in the PwC/INSEAD survey, continue to believe that the MENA region’s sound demographics and vast natural resources will spur economic growth in the next five years. This positive sentiment is largely driven by the growth propects of the Gulf countries, the economic engine of the wider region, which has remained largely sheltered from the political turmoil.

Private equity firms are especially optimistic about the prospects of sectors such as healthcare, education, consumer goods, oil and gas, which are likely to benefit from government spending plans and regulatory changes. PE firms will also seek to invest in industries such as railways, toll-ways, ports and utilities, which are set to attract billions in capital spending.

In terms of geography, the pioneering PE firms will seek to expand outside the region in places like Turkey or as far as India and Sub-Saharan Africa or explore riskier markets such as Iraq, respondents said in the survey. Within the region, PE firms say they are likely to invest more in Egypt, Saudi Arabia and United Arab Emirates.

Yet, the new industry dynamics may force PE firms to rethink their way of conducting business, from the way of sourcing companies to value creation, structuring controls and reporting. The political uncertainties affecting some MENA countries may also offer new chances to far-sighted PE firms in areas such as small and medium enterprises, Greenfield projects and distressed companies. Another opportunity which might be awaiting action from PE firms is the possibility of public to private transactions given the evolution of the stock exchange in the region over the past few years. Hidden value might be sitting in listed entities, but that would probably be the subject of a whole new thought piece.

One of the biggest challenges for PE firms is to proceed with exits that satisfy their investors. But most GP’s are planning to postpone exits of the majority of their assets until the second half of 2012 due to the lack of liquidity in local stock markets and the limited appetite among trade buyers. In addition, scarcity of investible companies and limitations on the ability of PE firms to obtain controlling stakes could continue to hamper deal flow.

The new realities of the MENA region and the current European debt crisis have created fresh challenges and opportunities for the PE industry and GPs will be required to rethink their current investment strategies and decision process in order to be successful in the future.

Foreword

Yousef BazianPwC Leader – ME Corporate Finance andPrivate Equity


Table of contents

Introduction................................................................................

MENA 2010: Key macroeconomics in a nutshell............................

MENA PE 2010: The facts............................................................Global PE looks up.................................................................................................MENA PE remains subdued.................................................................................... Fundraising on pause................................................................................... Investments depressed................................................................................. Exits delayed...............................................................................................

2011: The new realities...............................................................What has been the impact of the Middle East protests?............................................What to expect for the rest of 2011?........................................................................

Beyond 2011: What's hot?...........................................................Hot countries......................................................................................................... Hot MENA countries: Saudi Arabia, Egypt, UAE............................................. The new frontier market: Iraq....................................................................... Hot beyond MENA: Turkey, India, Sub Saharan Africa....................................Hot sectors............................................................................................................ Education.................................................................................................... Healthcare.................................................................................................. Consumer goods.......................................................................................... Infrastructure related services and industries.................................................Up & coming asset classes....................................................................................... Distressed companies................................................................................... SMEs........................................................................................................... Greenfield projects.......................................................................................

Challenges ahead.......................................................................Where to exit?........................................................................................................ The big issue: illiquid capital markets............................................................How to raise capital?............................................................................................. More demanding, more selective LPs.............................................................Where are the deal flows?.......................................................................................Untested value creation..........................................................................................A thinner & leaner competitive landscape...............................................................

Appendix....................................................................................Thoughts from insiders..........................................................................................Research & methodology........................................................................................Profile of the online respondents............................................................................Acknowledgements................................................................................................

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Following the boom years of 2007-2008, the global financial crisis curtailed easy access to capital while earnings suffered, eroding the valuations of many companies globally and also in the Middle East and North Africa (MENA).

The resulting decrease in opportunities for profitable exits from investments by Private Equity (PE) firms in the region further constrained the flow of investment capital.

This, along with the political uncertainty that began in 2011, created greater uncertainty for General Partners (GPs), which made them less willing to commit capital, even if the dry powder is already available. Besides the lack of willingness to invest, there was also the problem of finding quality deals.

The owners of the businesses that comprises the majority of investment targets in the region were largely unwilling to accept terms that reflected these difficulties. Thus, the financial crisis compromised the ability of the GPs to make deals: they became caretakers rather than dealmakers.

The financial crisis combined with the current political tumult has raised questions about the PE industry in MENA: What has been the impact of the Middle East unrest on PE firms? What is the degree of confidence of the industry considering the new regional realities? Looking ahead, what directions will GPs take? Where will they invest? How will they raise capital? When and how will they exit? What are the main challenges ahead? How will the competitive landscape develop?

This report, produced by PwC and INSEADAbu Dhabi, will attempt to answer some of these questions.

Introduction


MENA 2010Key macroeconomics in a nutshell1

1 In the following graphs, MENA only includes Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Egypt, Bahrain, Oman, Algeria, Morocco, Libya, Tunisia, Lebanon, Jordan and Syria.We have excluded Iraq, Palestine, Sudan and Yemen as there isminimal PE investment in these countries.


Common religions, customs as well as shared languages but large disparities in the size of the economies...

...demographics...

...and levels of GDP per capita.


MENA PE 2010The facts

Global PE looks up

There was some improvement in PE activity worldwide in 2010. As the world economy gradually recovered from the global financial crisis, deal flows and exits recovered in many countries.

Despite still challenging market and credit conditions, the number of deals in 2010 rose to 2,171, an increase of 38% compared with 2009. Similarly, the total value of deals reached US$204.9bn in 2010, an increase of 130% from the previous year. The number of exits almost doubled to 811, while the value of exits nearly tripled to US$203bn.2

2 2011 Prequin Global Private Equity Report, Prequin, p.54.3 Ibid., p.33.

5 The IMF definition of MENA includes the following countries: Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Egypt, Bahrain, Oman, Algeria, Morocco, Libya, Tunisia, Lebanon, Jordan, Syria, Djibouti, Iran, Iraq, Mauritania, Sudan and Yemen.

In spite of these developments, several statistics on the global private equity industry for 2010 suggested that fundraising activity continued to face challenges.

Total capital committed fell by 23% to US$227.8bn, and the number of funds raised diminished by almost 30% to 483.3 Yet, these decreases were largely driven by poor results in the developed world.

Indeed, funds based elsewhere significantly increased their share of the global PE fundraising market from 11% in 2009 to 19% in 2010.4

MENA PE firms began 2010 with renewedhope after the global financial crisis broughtan abrupt end to the meteoric rise of the nascent PE industry in the MENA region. Fundraising had become anaemic, with insufficient new capital flowing into the industry. Despite the sizeable amount of dry powder accumulated over the boom years, deals had stalled as acquisition finance became expensive and difficult to obtain. Additional problems resulted as companies’ valuations remained high, apparently notreflecting the new economic and financial realities. Meanwhile, equity market corrections and the limited appetite of trade buyers combined to render exits challenging. The attention of key players in the industry turned to managing a huge legacy of assets, mainly purchased when valuations were high and leveraged financingwas cheap and easily accessible.

As the world economy gradually recovered in 2010, PE activity began a slow recovery in many markets globally; however, the PE industry remained in hibernation in the MENA region throughout most of the year.

4 Ibid., p.34.

MENA PE remains subdued

In contrast to other emerging markets, the levelof fundraising, investments, and exits in the MENA region remained well below pre-crisis level despite the renewed growth of the regional economy.

According to the IMF, the MENA’s aggregate GDP (in real terms) grew by an estimated 3.8% in 2010, up from 1.8% in 2009.5 But neither the number of new acquisitions nor the number of exits exhibited much sign of recovery from the 2009 lows. Seamlessly, although GPs in our survey reported that fundraising remained a top priority, the actual amount of funds raised in 2010 also remained low relative to the years before the crisis.


Note: Respondents were asked to rank each of the above categories as “top 1”, “top 2”, “top 3” priority or “not a priority”. The categories ranked “ top 1” by respondents received a weight of 3, “top 2” a weight of 2 and “top 3” a weight of 1. The categories ranked as “not a priority” received a weight of 0.Total does not add up to 100% due to rounding.


Fundraising on pause

The fact that fundraising activity remained far below its pre-crisis level is best reflected by the statistics of the total MENA market in 2010: the number of funds rose modestly to eight from the historic low of seven in 2009 and remained well below the highs experienced before the crisis.

A similar conclusion can be drawn for the total value of funds raised: while 2010 showed an increase of 23% to US$1.4bn relative toUS$1.1bn in 2009, the figure remained farbelow the peak of US$6.5bn in 2008.6

The increase in 2010 also needs to be understood in light of the fact that two funds worth a total of US$640m and raised by EVI Capital drove this increase: EVI Capital Buyout Fund and EVI Capital Mezzanine Fund. It should be noted that these two funds will not only target the Middle East but also Africa. If these were not included, the total value of funds raised would have fallen below the level of 2009.

In addition, ten funds of an intended total size (ITS) of US$4bn where announced in 2010 but did not make a first close and of the eight funds announced and closed in 2010, the total amount raised represented just 52% of the overall ITS.7

Futhermore, 23 funds announced prior to 2009 had still not made a close.

6 2010 Private Equity & Venture Capital in the Middle East Annual Report, MENA Private Equity Association (MENAPEA). Note that MENAPEA’s definition of MENA includes the following countries: Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, UAE and Yemen.7 Ibid.

Total value of funds raised (US$m)

Number of first/second/ third close


Investments depressed

On the investment front, the total value of deals fell further from its historic low level of 2009. The total number of recorded transactions in 2010 represented almost half of its 2009 level (i.e. 46) while the known value of deals plunged by 84% to US$148m.8

During the interviews, GPs primarily attributed the absence of transactions to a lack of quality deals and the fact that valuations had not been adapted to the new economic realities.

At the same time, it was also clear that PE firms focused on existing portfolio companies rather than new transactions. Many of the GPs with whom we spoke reported that they were preoccupied with activities related to the management of companies already in their portfolio, using phrases such as “cleaning the mess”, “restructuring capital and management” and “adjusting boom time business models into more sustainable business models.”

However, a minority of GPs found a better investment environment in 2010 than in 2009.GPs resumed investing more confidently- at first indirectly, through bolt-on transactions and consolidation, and subsequently through direct investments.

As one fund manager recounted: “In 2009, there were companies that were trading far below their level, but we did not know where the fall would stop. In 2010, we became more comfortable with where the bottom was. Even if it was still a sandy bottom, we started to pull the trigger.”

Firas Nasir, Managing Director at The Carlyle Group, offered the following assessment:“In 2010, company valuations declined to more reasonable levels due to a subdued economic environment and less intense competition for assets.” Tony Hage, Principal, Private Equity at Arcapita noted, “Business owners became more willing to take on growth capital. As bank lending remained limited, a healthier pipeline of deals gradually emerged.”

8 According to the MENA Private Equity Association, about 30% of the announced transactions in the last decade (42% in 2010) have not publicly disclosed their size.

Total value of funds raised (US$m)

Number of transactions


Exits delayed

The number of exits in percentage terms seemed to exhibit a robust increase of 67% in 2010. However, in absolute terms, the increase was only to 10 from the incredible low of six recorded in 2009; this number remained far below the peak of 2008 when 24 exits were realised.9

When asked to explain this lack of exits, GPs reported a lack of interest from trade buyers, largely illiquid stock exchanges and the low multiples of portfolio companies.

Some GPs also felt that the timing was not rightto exit portfolio companies which had just begun to slowly recover from the global crisis.

9 According to MENAPEA, a significant portion of private equity divestment is either unannounced, or if announced, the value is often undisclosed. As a result, total value of exits is not available.


2011The new realitiesAs PE firms regained confidence towards the end of 2010, the beginning of 2011 brought renewed doubts as a result of the political and social protests that spread across the region. It started with Tunisia followed by Egypt. Unrest developed elsewhere in the region including Algeria, Bahrain, Jordan, Morocco and Oman, while the situation further deteriorated in Lybia, Syria and Yemen.

In reaction to this evolving political uncertainty, many participants in the regional PE industry halted their immediate investment plans in countries affected by the protests and exercised more caution before proceeding with investments elsewhere in the region.

Ongoing fundraising discussions with international PE investors faltered and exit plans were temporarily put on hold.

Yet, the industry remains confident for the remainder of 2011. This sentiment is driven by the fact that the GCC (Gulf Cooperation Council), which is the economic engine of the region, has been largely sheltered from the Middle East protests and prospects for its economic growth remain strong.


What has been the impact of the Middle East protests?

In the short term, the industry has put new transactions on hold in countries directlyaffected by the turmoil. Abdalla Elebiary, Managing Director at Citadel Capital, reported on the view from Egypt: “It is not the time to go and start shooting. Do your homework to get ready for the new investment cycle. Understand how the future is being shaped and where you will need to invest and adjust your existing companies’ business plans to the new realities.”

One fund manager articulated some of the uncertainties that resulted from the protests in Egypt: “Making investment decisions in the current context is also difficult. When considering an investment, currently I have no certainty, neither on the top line nor the bottom line. On which assumptions can I base my revenue growth forecast? On which tax regime can I calculate my net profit?”

Political uprising in the region has also affected plans for fundraising; immediate discussions with international PE investors have been postponed until greater clarity emerges. Amjad Ahmad, Senior Managing Director, Alternative Investments at NBK Capital contrasted his discussions with regional and international

investors as follows: “Unfortunately international investors tend to paint the region with one brush while regional investors take a more pragmatic view of specific country dynamics.”

The current political climate in the Middle East has also compromised the exit plans of PE firms, particularly as increased political uncertainty has exacerbated the lack of liquidity of regionalstock exchanges.

The widely divergent views on valuations from sellers and buyers, particularly those from outside the region, have also made deals more difficult in the current context. One fund manager has suggested that many firms may decide to postpone exits given the current events in the region: “Taking stock of where you are and how much growth you leave on the table when you start an exit process and in the context of what is taking place, one needs to ask if it is a good time to exit right now?”


What to expect for the rest of 2011?

Spreading unrest, rising sovereign risk premiums and elevated commodity import prices will undermine growth prospects in several MENA economies for the rest of 2011.10

In Egypt, the IMF anticipates a fall in the rate of GDP growth to 1% from 5.1% in 2010; given that this projection is based on the assumption that disruptions to tourism, capital flows and financial markets remain short-lived, it might even be regarded as optimistic. At the same time, inflation in Egypt will continue to hover around 10%.11

The IMF also notes that financial markets,more broadly, have not been immune from these difficulties. For example, credit default swap and bond spreads have widened throughout the region. If these trends persist, such financial market developments could translate into higher funding costs for governments and firms.

In addition, slower-than-expected recovery in advanced economies could further affect growth in the region as well as its fiscal and external balances.

These developments will not be conducive to the growth of PE in the region. Yet, the industry remains confident, particularly since the GCC, with the exception of Bahrain, has remained largely immune from the recent political unrest in the Middle East.

Additionally, the immediate economic outlook for the GCC remains broadly unchanged, and could be even boosted by rising oil prices and production. In Saudi Arabia, where sizeable public investments will drive much of the growth, the IMF forecasts an increase in the rate of GDP growth to 7.5% in 2011 from 3.4% in 2010.

Reflecting on this positive outlook and assuming a gradual political stabilisation of Egypt, GPs, responding to our survey, reported that they plan to continue their fundraising campaigns and resume investing as early as possible.

10 World Macroeconomic Outlook, IMF, April 201111 Ibid.

A report published by HSBC in the second quarter of 2011 quantified the impact of the recent political turmoil on the economic performance of each MENA country, assigning the value “0” to indicate no impact and the value “3” to indicate severe impact. The results confirmed that the GCC has remained largely unaffected by the recent social unrest in the Middle East and North Africa.

Investment to resume soon


Beyond 2011What's hot?The top priority of PE firms for the long term is to build a track record of investments and successful exits that will allow them to raise further funds.

Focus on more resilient sectors is now being made. Large and fast-growing geographieswithin and outside MENA will also attract regional PE capital.

Note: Respondents were asked to rank each of the above categories as “top 1”, “top 2”, “top 3” priority or “not apriority”. The categories ranked “ top 1” by respondents received a weight of 3, “top 2” a weight of 2 and “top 3” a weight of 1. The categories ranked as “not a priority” received a weight of 0.Total does not add up to 100% due to rounding.


Confidence over the long-term economic outlook for the MENA region runs high within the PE industry. Most believe that the macroeconomic fundamentals in the MENA region are sound and will continue to support regional economic growth over the next five years.

In the words of many participants in the interviews, “better wealth redistribution”, “greater transparency” and a “less corrupt environment” will pave the way for further foreign direct investment (FDI), entrepreneurship and job creation.

Saudi Arabia, where most PE firms anticipate greater and better targeted budgetary spending, epitomises these trends. Such dynamics will generate many investment opportunities for PE.

Nonetheless, GPs had mixed views on the timing of these beneficial trends in the region. Ahmad, of NBK Capital offered his opinion on how long this might take in Egypt: “True stabilisation is not a one or two year projectbut a 10 – 20 year one.”

Taking stock of the situation, 53% of GPs acknowledged that they would devote moreeffort in gauging political risk and carrying out more extensive due diligence when making future investment decisions. Taimoor Labib, Managing Director and Head of Private Equity, Middle East & North Africa at Standard Chartered described how evaluation of investments in his organisation had changed: “The Arab spring has brought much greater discussion on the geopolitics of the region to the forefront of the investment committee table.”

This increased attention to risks, is not limited to the evaluation of political risks for investments in the MENA region. Macroeconomic risks, such as “inflation”, “currency depreciation” and “interest rates” will also play a larger role in the due diligence process, particularly when regional PE firms consider investments outside the GCC.


Hot countries

PE firms have traditionally been opportunistic and have invested in a wide range of countries. This was partly explained by the limited breadth and depth of the MENA economies.

Over the next five years, while PE firms will remain opportunistic in their approach, larger economies exhibiting faster growth with a relatively stable political environment will lead the way in attracting PE capital.

Hot MENA countries: Egypt, Saudi Arabia, UAE

Egypt has historically attracted the most PE capital due to the maturity, depth and strength of its economy and its large population and will continue to do so. In fact, 52% of our respondents plan to newly invest or increase investments in the country.

Nonetheless, some PE professionals were concerned that the policies of future governments in Egypt could fuel further political and financial instability in the medium term. One fund manager offered this view: “The Egyptian government is expected to come under pressure to deliver on the expectations of the revolution. Public sector salaries and subsidies may increase significantly. In a challenging external environment characterised by rising commodity prices, such dynamics are expected to undermine already strained public finances, economic growth and job creation. Further political, economic and financial instability could be expected in the medium term.”

(2006 - 2010)

20%


Saudi Arabia has increasingly enticed PE capital. Indeed, by 2010, the country moved to second place in the region as a destination for private equity investments, measured in value terms, up from fourth in 2006.

Besides the country’s vast hydrocarbon resources and sound demographics, structural reforms spearheaded by Saudi Arabian General Investment Authority (SAGIA) have also contributed to create an increasingly attractive environment for investments. Reflecting on this, the Kingdom has gradually moved up the “Doing Business” ranking published by the World Bank. From being 67th in 2004, the country ranked 13th in 2010.

Note: We have used the IMF definition of MENA which includes the following countries: Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Egypt, Bahrain, Oman, Algeria, Morocco, Libya, Tunisia, Lebanon, Jordan, Syria, Djibouti, Iran, Iraq, Mauritania, Sudan and Yemen.

There was some speculation that Saudi Arabia might play an even more central role in PE investment in the years to come if Egypt failed to stabilise rapidly. Despite some internal tensions, fuelled by protests outside the Kingdom and instability in neighbouring Bahrain, most GPs remain confident and committed to investing in Saudi Arabia. The recent announcements of increased public spending further enhanced the positive sentiments about the country. Reflecting on this, our survey revealed that 80% of respondents were planning to “increase investment” or “newly invest” in Saudi Arabia.

UAE was in 2010 the second largest economy of the MENA region behind Saudi Arabia, accounting for 17% of the aggregated MENA GDP. Despite its small population, the UAE will remain a destination of choice for PE firms.

This trend is further fuelled by the relative sophistication of its economy, its high income per capita (estimated at more than three times that of Saudi Arabia and above 21 times that of Egypt in 2010) and its large tourism activity.


The new frontier market: Iraq

There was enthusiasm for investing in Iraq with 37% of the respondents in the on-line survey considering new investments in the country.

GPs in the interviews observed that the country offered “phenomenal” investment opportunities in a wide spectrum of sectors. After decades of wars, poor governance and international sanctions, the economy of Iraq is finally rebuilding. Ali Albazzaz, vice president at Northern Gulf Partners (NGP) stated the case clearly: “All sectors in Iraq need to be rebuilt, including basic services, infrastructure, industry, telecommunications and financial services."

Omar Syed, partner at Abraaj Capital, also shared this view: “Iraq is at ground zero.There is not even one private school or private hospital in Bagdad. The country is fertile, but all the food is imported from Kuwait. There is no manufacturing industry for a country of over 30 million people. Not one residential or commercial complex has been built in the last 30 years. Furthermore, there is no access to private capital.”

The country also offers vast natural and humanresources on which the PE industry could capitalise.

The ongoing oil programme - the world’s largest oil development - is expected to propel Iraq’s current oil production from 2.5 million barrelsa day to the level as that of Saudi Arabia, about10 million barrels a day, in what is hoped to bein a short timeframe.

Iraq’s demographics are also attractive with a young, fast-growing and educated populationof 32 million people.

However, “security issues”, “the lack of investable companies”, “corruption” and “cumbersome bureaucracy” represented significant entry barriers according to regional PE firms that we interviewed.

Syed of Abraaj Capital reported that his firm has been closely monitoring the operating environment, actively developing market intelligence and maintained a networkof contacts. They intend to move very quickly to deploy capital directly or indirectly through portfolio companies as soon as the security situation significantly improves.


23MENA PE: the next five years

In-depthIraq

2011

Iraq’s economy is starting to look pretty good.Its stock market grew substantially, it holds one of the largest oil reserves in the world, and the IMF estimates Iraq’s economy to grow by 11.5% in 2011, up by 2.6% from last year. Iraq is a post-conflict country experiencing the start of an economic boom.

The country’s present account and fiscal deficits are turning to surplus as oil production increases.

Foreign direct investment (FDI) into Iraq increased by 175% in 2010. It attracted 7% of total FDI to the Middle East region in 2010, up from 2% in 2009, bringing it from the 10th leading investment destination in the Middle East in 2009 to fourth position in 2010. With its FDI increasing 300%, Baghdad was the seventh leading city in the Middle East. According to the government, Iraq will require investments in 750 projects worth US$600 billion, where the housing sector tops the list with a requirement of US$100bn.

While the Iraqi Council of Representatives hadagreed to allocate US$72bn from the 2010national budget, the remainder has to comethrough FDI.

Iraq will need major investment acrossalmost all sectors, - in housing, education,transportation, logistics, healthcare, oil,power and financial services. This is goingto require significant capital investment intothe country, and it is counting on the privatesector, both Iraqi and foreign, to participate.A growing number of projects and enterprisesseek capital, with many projects demonstratinghigh IRRs for potential investors.

We are seeing a shift in investment focus with many players increasingly looking at strategiclong-term investments. According to theNational Investment Commission (NIC), FDIexceeded US$10 billion last year. Now thatthe country has formed a new government,private investment may triple in 2011 to US$30billion as energy, agriculture and housingprojects accelerate. Around US$4 billion ofinvestment will be in Iraq’s electricity sector.

As a sign of increased confidence in Iraq,the Trade Bank of Iraq announced plans toset up a US$500 million private equity fund.It aims to launch the fund this year, which willinvest in medium-sized projects in industriesincluding oil services, power and hotels.

PE transaction volume is expected to increaseand, attracted by opportunities, new playerswill enter the market. Undoubtedly, privateequity funds will enter and be an importantpart of how outside investors will takeadvantage of the opportunity that Iraqiinvestment offers. However, this has to happenwith recognition that bank financing continues tobe difficult. While leveraged buyouts provideattractive returns for PEs, the challenge will beto achieve target returns where only minimalleverage is available.

This could push PE firms to look at above average risk profiles to maximize returns; thus, risk management becomes a key issue for these investments. Limited financing for SMEs does provide an opportunity for PE firms to fill the gap. Key capabilities for success include market knowledge, access to players and in-depth legal and financial diligence. PE firms could bring great value to companies in Iraq, providing operational enhancement, hands-on steering and deepening of managerial capacity and growth capital to expand presence and distribution capabilities. To drive this value creation, which has been tried and tested inIraq, the most important issue is finding theright technical partners.

Iraq is currently experiencing the early stagesof an economic boom which is expected tosee half a trillion dollars of infrastructureinvestment over the next 10 years. Iraq’s GDPgrowth is expected to continue to exceed 7%,particularly if there is continued improvementin the political and security situation. If theGDP growth of over 12% seen in Kurdistan overthe past year is an indicator, then assumingpolitical and security stability continues, Iraqwill follow similar growth patterns.

By Ismail MaraqaPwC | Country Senior Partner, Iraq


Turkey's wealth of opportunities has been singled out by many participants in the regional PE industy. GPs in our interviews recounted many positive aspects of investing in Turkey, including claims that the country offers an “attractive growth level”, a “large and educated population of 71m inhabitants”, an “emerging middle class”, a “new industrial base” as well as being “stable” and “truly secular”.

In fact, one fund manager described Turkey’s environment as being as safe and developed as that of Europe “but with a growth component.” In 2010, Turkey was already the second most favoured investment destination of MENA based PE firms, accounting for 28% of their total value of investment, having increased from just 5% in 2008 to 13% in 2009. However, the high multiples being demanded by sellers, reflecting the increased attention from global and regional PE firms, will most likely present challenges for the PE industry in the years to come.


Hot beyond MENA: Turkey, India, Sub Saharan Africa


India is on the radar screen of many PE firmsand, as one fund manager observed, “India is such a phenomenon that it cannot be ignored.” GPs will seek to capitalise on the commonalities between the GCC and the subcontinent and invest in companies that planned to expand into the MENA or that catered for the needs of the large Indian community living in the GCC.

Phenomenal India


Sub Saharan Africa (SSA) has drawn the attention of PE firms in the MENA region for many reasons, including a strong growth ofits consumer base as well as its proximityto the MENA region reinforced by themovement of people.

Additionally, respondents to our interviews offered several other reasons for investing in this region, including “high returns”, “an underpenetrated PE market” and “interesting and reasonably valued investment opportunities.”

At the same time, GPs reported that perceived “political instability”, “corruption” and “currency fluctuation” required some caution, leading them to deploy several risk mitigating strategies which includes “incremental investing” and “co-investing with pre-eminent business leaders.”

They also favoured investments with a short lifeline and sought the financial supportof influential large internationaldevelopment banks.



Hot sectors

Education

Rising public expenditure in the long neglected education sector, driven by the need to develop skills of a rapidly growing population in the MENA region offer considerable opportunities forPE investment.

The efforts of oil exporting countries to diversify their economies by developing knowledge-based activities will generate further opportunities in the education sector.

Despite the fact that no exits have yet been realised, since the regional PE industry started to invest inthe sector, many GPs believed that investment in private schools, adult education, and prep centres would offer attractive returns.

Sectorwise, PE firms will also remainopportunistic. According to our survey, 65% ofGPs plan to invest in a broader array of sectors in the near term while none indicate consideringnarrowing their sector focus. In the currentexternal context, a greater diversification will help PE firms reduce sector specific risks.

Yet, it is clear that many in the PE industry will seek investments in sectors set to benefit from the sound macroeconomic fundamentals of the region. Rising population and purchasing power along with greater aspirations for better products, services and infrastructure will drive theinvestment rationale.

Beyond policy driven choices, there will bea focus on fragmented and scalable industries where PE investment traditionally has added value. GPs also plan to search for nichemarkets and avoid direct competitionwith large regional groups andprospecting multinationals.


Healthcare

The sector attracted just 1% of investments (in value) in 2006 but has since increased to 43% in 2010.

Large government spending in healthcare, rising population, greater aspiration for healthcareservices, increased longevity, and the needto tackle the effects of unhealthy lifestyleproblems are key factors driving PE investmentin the health sector.

The anticipated divestment of the governmentfrom the sector will also open new avenues forprivate sector participation and subsequently forthe PE industry.

Respondents to our interviews characterised the MENA healthcare sector currently as “underdeveloped” and “very fragmented”.

Given this, most saw vast opportunities for PE investments that could contribute to growth and consolidation in the sector at both the national and regional levels. PE firms reported plans to invest in private clinics as well as companies servicing the health sector such as laboratories, pharmaceuticals and health insurance firms.

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In-depthHealthcare

By Simon LearyPwC | HealthIndustries Leader

Governments across the region are movingtowards creating the required infrastructure,both legal and regulatory, to allow sustainablegrowth in the sector. Many countries acrossthe Middle East have recognised the benefitsof drawing on the private sector to providethe managerial and operational expertiseto develop and run health care systems.

A small but increasing number of GCC states havecompleted the legislation to enable public private partnerships (PPP) between global private operators and local health systems while others are in the process of finalising such legislation.

Governments are also developing more mature national healthcare strategies that, from the investment point of view, are providing outside investors with confidence that there can be sustainable growth in the health sector. These include the introduction of mandatory health insurance systems in the majority of countries.

But substantial challenges exist, specificallyshortages of healthcare professionals, inadequate healthcare management capabilities and levels of automation, as well as insufficient primary healthcare provision.

These challenges present specific opportunities for private investors to either participate with the government in the operation of existing and planned facilities to improve the quality of care or to provide such facilities independently. We are currently seeing a growing interest from the private sector in the development of (a) primary care facilities often with a preventative care focus and (b) tertiary education facilities for medical and allied health programmes in an effort to deal with themanpower gap.

In addition to clinical facilities, other areas of significant opportunity include the development of local pharmaceutical manufacturing capabilities, pharmacy retailing, laboratories and diagnostic centres. In all of these areas, we are seeing a substantial upturn in M&A activity as well as inthe development of Greenfield facilities.

Finally, technology has been shown to be a key driver in the delivery of quality healthcare, but is an area that has seen little focus or investment in the GCC in recent years. This is changing as governments announce substantial investment in IT systems with the aim of developing integrated healthcare networks. This is another area of great potential opportunity for the private sector to participate in the much needed development of the healthcare systems of the GCC.

From an investor’s perspective, the healthcareindustry in the GCC currently representsan interesting opportunity. The industry is growing across the GCC with current 2010/2011 spending levels expected to reach US$24bn and growing to US$60bn by 2025. However, spending against GDP still lags the US (20%) and Western Europe (10%), with levels varying from as low as 2.4% in the UAE to 5% in Saudi Arabia. Although it is important to be cautious about these general indicators they do show that across the Middle East investmentin healthcare needs to increase.

The big opportunity in the Middle East is to look afresh at the models of care adopted. Countries have the chance to learn from international best practice and develop integrated and balanced care pyramids, with investments at all levels of care. Investment in prevention, primary and long term care is needed to supplement the traditional focus on large secondary and specialised hospital infrastructure.

The need for further substantial investmentin healthcare and developing more balancedand integrated models of care is being drivenby several key factors. The Middle East has a young and growing population, increasing life expectancy and an alarmingly high prevalence of cardiovascular disease, diabetes and obesity.

In the UAE for instance, it is predicted that thecost of diabetes will be $8.5 billion over thenext 10 years alone. It is clear that the MiddleEast is facing an escalating non-communicabledisease time-bomb which is only going toget worse given the common demographicprofile across the region. All of these areputting extreme pressure on existing systemsof care, which at present are underfunded and misaligned towards reactive hospitalised carerather than the preventative, primary andongoing managed care required.

2011 MENA PE: the next five years


Consumer goods

As regional consumers see their disposable income grow and become more sophisticated, the entire food industry supply chain - from farming to food processing, supermarkets, proximity shopping and restaurantswill be transformed.

The current “fragmented” state of the industry leaves room for consolidation. GPs will focus their search on targets offering “niche products” with “strong brands” and “good distribution network” to avoid direct competition with large groups such as Saudi Almarai and Kuwaiti Americana.

Most PE firms plan to stay clear of commodity-based wholesale models where traditionally, large corporations have better cost structures, buying power and supply chain.


Infrastructure related services and industries

Ancillary services and industries linked to vast government spending programmes on infrastructure will also attract PE capital.

The government of Qatar is set to embark on a US$50 billion investment programme to build stadiums and associated infrastructure ahead of the World Cup 2022. Regionally, an estimated US$2.3 trillion is required in infrastructure investment in the Middle East region alone for 2010-2015.12

Many GPs notably expect transport and logistics as well as building manufacturing industries to attract increasing amounts of PE capital. In 2010, transport came second after healthcare in terms of top investment sector, accounting for 30% of the total value of PE investment in MENA. PE firms also expect to take advantage of capital spending in the oil and gas sector. The world’s rising demand for energy will continue to boost prices and subsequently prompt an increase in production capacity. According to the Arab Petroleum Investment Corporation (APICORP), potential oil and gas projects in the Arab world over the period 2010-2014 are expected to amount to US$470 billion. Most of these investments are likely to take place in the Gulf, home to respectively 45% and 20% of the world oil and gas reserves. Within the sector, GPs will primarily seek to invest in the more resilient oil and gas services that are expected to grow alongside increased production capacity.

12 Private Equity in the Middle East: A Rising Contender in Emerging Markets, INSEAD/Booz & Company, 2010.


Up & coming asset classes

The new realities of the MENA region have created opportunities for the PE industry, but these will likely require GPs to rethink current investment strategies and investment decision processes; the willingness and ability to do this are still open questions.

Distressed companies

In the short and medium term, distressed investments are expected to emerge in Egypt, Tunisia and other countries directly impacted by the Middle East protests. As Stephen Murphy, Managing Director at Citadel Capital reported, “Companies that have been weakened by the global crisis are likely to get pushed over the edge by the Egyptian revolution.”

Distressed investments are likely to arise amongst companies with revenues in local currencies but costs in foreign currencies,notably the construction sector that hasbeen hit hard by recent events.

Yet, the PE industry has traditionally ignored distressed investing for lack of expertise or mandate to invest in such assets. Deals to purchase distressed assets are typically difficultto structure and are hard to source in the region.

As several respondents to our survey noted: “It is not part of the Arab culture to show that youare in a distressed situation.” Such investments also require the ability to move beyond the traditional ‘buy and build’ value creationmodel and a capability to execute quick turnaround strategies.

Currently, Sphinx Turnaround Fund is the only PE investment vehicle in the region focused on investing in distressed assets. This Egyptian fund, which was launched in 2009 by Citadel Capital and its partner Sphinx Private Equity Management, has an intended capitalisation of US$100m. The mandate of the fund is to invest in small and medium size distressed assets, such as firms that are in default or in need of restructuring. Despite being launched in the difficult financial environment of 2009, the fund received the support of the European Investment Bank (EIB) and the International Finance Corporation (IFC) and has currently raised 85% of its ITS. SMEs

Many GPs believed that, in the long term, the anticipated greater democratisation of the region would create a more conducive environment for entrepreneurship.

The speculation is that when this happens, the SME sector, which already contributes to almost 30% of the region’s GDP and more than 70% of its employment, will expand rapidly.

Despite the reality of limited access to bank loans, which makes SMEs in the region ideal candidates for PE capital, the PE industry has traditionally neglected this segment because it is considered as too risky. Small firms often sell just one product or service and rely on a handful of suppliers and customers, boosting theirfailure rates.


Respondents to our interviews also characterised SME investing as offering “disproportionately low returns”. This is particularly true in consideration of the time, finances and human resources required in sourcing, conducting due diligence and creating value in these small, relatively unknown companies.

Nonetheless, Tom Speechley, Senior Partner at Abraaj Capital and CEO of Riyada Enterprise Development said the sector presents interesting investment opportunities, providing that PE firms can develop a low cost model. Towards this end, Abraaj has developed a SME investment platform, Riyada Enterprise Development (RED). Ali Arab, Product Manager Private Equity at Zawya, also believes that investing in SMEs can create new investment avenues for the PE industry.

Greenfield projects

As improvements in the regional regulatory and legal environments will spur, more Greenfield opportunities will arise. As with investment in SMEs, regional PE firms have often shied away from such ventures.

Indeed, many of those we interviewed, described Greenfield projects as “disproportionally hard work and expensive” when compared withmid-cap investing. Grahame Farquhar, CFO of Khaled Juffali Company (KJC) described the challenges well: “Everything takes longer in the region, from obtaining the right licenses, to recruiting the right management and to scale up the business. It is a lot of work and one is far better off to try, acquire and grow an existing business.”

Nevertheless, some PE firms have been more daring than others, notably in Iraq where thelack of companies in which PE firms can invest has made Greenfield projects more frequent despite challenges in the business environment.


In-depth Investing in SMEs

By Tom Speechley,Senior Partner at Abraaj Capital andCEO of Riyada Enterprise Development

Investment opportunities in SMEs exist right across the MENA region in pretty much every sector. In contrast with more mature economies such as Europe and the US, SMEs dominate traditional business sectors as well as new ones.

The relatively high barriers to free movement of people and goods across the region have slowed regional consolidation in most sectors. This means that SMEs in the region are still well placed to capture market share and perhaps even be market leaders. This presents an opportunity for private equity either to act as a catalyst for consolidation or simply to get into high growth SMEs and reach a dominant market position. As the markets mature, the successful SMEs may become market consolidators or be part of the consolidation plans of another company. In either case, early investors will see the benefit in terms of growth and exit.

Private equity can add value in SMEs in several ways. SMEs lack access to finance, especially in the early stages and private equity firms can help bridge this gap. Value can also be unlocked through several tried and tested techniques of the private equity industry. Good governance usually means good business as the quality of decision-making is enhanced, so having the right people in the right jobs and using established corporate structures and governance models, is one sensible approach. Another way to create value is facilitating access to a broader talent base or spurring existing talents through incentive programmes. Likewise, providing access to business networks including other portfolio companies or to industry experts can have a tremendous impact. Offering strategic input at the board level and access to back-office support - such as HR, legal and finance - can also prove valuable.

Investing in SMEs nonetheless does present challenges. In particular, sourcing deals requires a truly local presence. SME owners and entrepreneurs are not visible to outside investors. So having people on the ground is vital. Another issue is that,

generally speaking, the best opportunities are not those where the owner is seeking to sell the business and may therefore be looking for a buyer. When one seeks growth equity, the nature of the discussion with the entrepreneur is quite different. It tends to take place over a longer period of time and one needs to stay fully engaged with the entrepreneur right through that period until both parties are comfortable with each other. In essence, it is about building a partnership. So, being present, speaking the same language and respecting each other, is vital.

Investing in entrepreneurs and SMEs presents some of the best investment opportunities in the region today. There is very little competing capital and a plethora of companies with proven business models in traditional sectors that will prosper with the sound demographics of the region. Moreover, successful investing in this segment has the added benefit of contributing to positive change in the region.

Investing in SMEs fulfils an important developmental need in this region because SMEs are primary drivers of job creation. The lack of multinational corporations operating in the region - one reason why SMEs continue to be a good investment opportunity in traditional business sectors - means that the burden of responsibility in job creation lies with the SME segment or the government. Failure to act and invest now in this vital segment of the economy will deny economic opportunities to those most in need of it - the region’s youth.

About Riyada Enterprise Development: In 2009, Abraaj established Riyada Enterprise Development (RED). RED targets high-growth entrepreneur-led small and medium enterprises (SMEs) of a value of US$50m or less. Within this segment, RED seeks minority stakes in operationally well run, profitable enterprises with proven business models that are scalable and have a need for capital in order to expand in terms of product, service or geography. With a fund of US$500m, RED has currently invested US$30m in five companies. RED expects to complete a further 15 investments by the end of 2011 and up to a hundred investments in the next four to five years. Sectors that RED has looked at to date include pharmaceutical manufacturing and testing, education services, healthcare IT, food and agri-business, FMCG manufacturing, retail services, and Internet and telecommunications infrastructure, products and services.Country-wise, RED covers the entire MENA region.


In-depthVenture capital can fuel the PE industry By Ali Arab, Product Manager

Private Equity at Zawya

to the MENA Private Equity Association 2010 report, which surveyed several PE firms including the top ten PE houses, lack of quality deal flow was the second largest reason for the PE industry slowdown. Venture capital can capitalise on this situation and also provide the spark needed to get business activity into a higher gear. Conversely, the past two years has seen the VC industry gain momentum, with 19 deals in 2009 and 14 in 2010 versus an average of five deals in previous years. Moreover, 45% of the total aggregated amount raised since 2006 for venture capital was raised in 2010. This has raised the profile of the VC industry, despite a slowdown in PE activity during this time.

Clearly, it is an opportunity for venture capitalists and entrepreneurs to build sustainable businesses with solid growth potential to benefit from the next boom in the economic cycle. The VC investment life cycle is not less than five to six years. It is seen as a partnership with business owners, giving them value and support. VC firms can provide managements with more strategic insight and the tools to enable a business to become a world-class entity, thereby showing up on the radar of PE firms seeking quality investment opportunity that are of a larger size.

Start-ups and growth-stage companies are essential for the growth of the MENA region’s economy. For companies with high success potential, being able to access growth capital can be the engine that creates job opportunities and increases the consumer’s purchasing power. VC firms have a big role to play in reviving the economy and leading SMEs to success.

Venture capital is a fundamental asset class for the economy in general and the PE industry in particular. By assisting in growing world-class businesses, this asset class will be creating more job opportunities and preparing the grounds for a better private equity landscape in the years to come. VC firms need to be entrepreneurial in their nature to step forward and play a definitive role in the growth of the economy, thus setting the stage for a positive impact on the private equity industry in the years ahead.

Venture capital firms are fundamental to the growth of the MENA region’s economies. They can be not only a source of capital but also the bridge that helps businesses to move from start-up to mature, world-class entities. As the traditional forms for financing for small and medium-sized enterprises has dried up since the global financial crisis, VC funding is important especially for firms which have the potential to grow.

Companies with an enterprise value between US$ 1 million and US$ 10 million are facing difficulties raising capital from the private equity industry. Most PE funds in this region are buyout funds with an investment ticket size more than US$ 20 million or US$ 30 million, but for venture capitalists these businesses provide sustenance, where their investment ticket size is less than US$ 20 million or US$ 15 million. This is considered an opportunity for those seeking capital at a certain stage of growth.

The financial crisis played a major role in halting the growth of the PE industry. PE firms became cautious; the focus shifted from investing to maintaining and helping portfolio companies. Others, who were fund-raising, either closed shop, discontinued the fund-raising activity or re-evaluated their investment strategies. According to Zawya Private Equity Monitor, the total size of funds raised dropped from US$ 3.3 billion in 2006 and a peak of US$ 6.5 billion in 2008 to just US$ 1.1 billion in 2009 and US$ 1.4 billion in 2010.

Contributing to this slump is the lack of quality investment opportunities; the number of transactions decreased from 65 in 2006 and a peak of 97 in 2007 to 46 deals in 2009 and 24 in 2010. Even if we were to discard the peak years, we would still find a significant decrease in activity. According


Challenges ahead

Whether the plans of PE firms for the next five years will materialise is yet to be seen. The political uncertainty in many parts of the region only adds to the woes that begin with significant structural obstacles to PE investment.

Foremost among these is the difficulty of exiting regional investments, which continues to be a huge hurdle for the MENA PE industry.

The fundraising environment in the region has also weakened considerably, particularly in the wake of the global crisis, which has made regional investors increasingly selective and demanding. At the same time, international investors have become more cautious as they try to understand the changing political realities of the region.

In addition, the limited pipeline of investible companies will restrain deal flows.

Lastly, limitations on the ability of PE firms to obtain controlling stakes and the absence of a standardised regional regulatory and legal framework will continue to undermine the value creation model for PE in the MENA region. Against this background, a thinner and leaner competitive landscape for regional PE firms is likely to emerge.

Note: Respondents were asked to rank each of the above categories as “top 1”, “top 2”, “top 3” priority or “not a priority”. The categories ranked “ top 1” by respondents received a weight of 3, “top 2” a weight of 2 and “top 3” a weight of 1. The categories ranked as “not a priority” received a weight of 0. Total does not add up to 100% due to rounding.


Where to exit

The track record of exits of the regional PE industry has so far been lacklustre. As the data indicates, only a handful of exits have been realised in recent years. According to our on-line survey, the portfolios of more than a quarter of respondents are heavy with mature investments that are close to anticipated times of exit.

Since IRR normally declines as the holdup period of investment increases, PE firms will be pressed to proceed with exits that satisfy their investors in coming years. Despite this, the bulk of GPs are planning to postpone exits of the majority of their portfolio companies to the second half of 2012. Most of these investments have vintage dates of 2007 or earlier.

The illiquidity of the regional stock exchanges and the lack of appetite for these assets among trade buyers are the main factors holding up exit routes in the short term.

Large businesses, either in the retail, healthcare, or education sector, will better suit international trade buyers who are seeking to expand their global reach and are interested in MENA demographics or an IPO. Smaller businesses would be better tailored to fit into the acquisition strategies of local firms looking to strengthen their market position, grow their

regional base or diversify their portfolios. As the regional PE industry matures, the secondary market is expected to play a more important role in the next five years. Reflecting on this, some 65% of GPs surveyed admitted that the secondary market was important in exit strategy considerations. Nonetheless, management buyouts are likely to remain subdued or even non-existent.


The big issue: illiquid capital markets

According to most GPs, the lack of liquidity of the regional stock exchanges remains the major challenge for the PE industry in the MENA region.

The financial crisis has exacerbated the liquidity difficulties in these markets. In 2010, the exchange turnover ratio, defined as the annual traded volume as a percentage of market capitalisation, dropped throughout the region. The ratios for Saudi Arabia, Kuwait and Dubai were around 70-75% below their 2008 level at respectively 57%, 37% and 35%. By contrast, the NYSE’s turnover ratio declined by just 29% during the same period, standing at 98% in 2010.13

In addition, foreign investors continue to face many local restrictions and the absence of standardised proprietary systems, such as trading platforms and settlement and clearing systems, that largely prevent cross listing of companies.

There were hopes that the global crisis would prompt MENA governments to consolidate, if not integrate, the fragmented regional capital markets and make them more open to global investors; unfortunately, few real measures have been implemented. While the acquisition of Nasdaq Dubai by Dubai Financial Market (DFM) and the decision in mid 2008 by Saudi Arabia to allow indirect foreign ownership are promising, they represent, at best, a very slow start. In fact, participants in the regional PE industry argued that the more stringent regulations put in place in some regional stock markets after the global crisis have made the listing process even more complex and lengthy.

13 Harvesting Strategies for Private Equity Investments in the MENA Region, Harvard Business School, May 2011.


How to raise capital?

Traditionally, MENA investors have long favoured raising capital through deal by deal investing, as it better suited the region’s long tradition of trading among family businesses. One indicator of this is that high net worth individuals (HNWIs) in this region, traditionally represented the majority of LPs as opposed to 13% in other markets.14

Furthermore, considering the nascent stage of the PE industry, regional investors have been reluctant to invest in blind pools.

Hage at Arcapita explained the challenges connected with raising a fund: “From the moment you raise a fund, the clock starts ticking. You need to hire a large team, source investments, build trust, make investments and realise exits. Deals in the MENA region take more time and effort than in other regions, such as in the US or in Europe, where the ecosystem is more mature. Deal by deal investing allows greater flexibility.”

As the regional PE industry matured and regional investors grew more familiar with PE firms, GPs started to raise funds to access longer-term capital and diminish the lifeline of their fundraising cycles.

While only 13 funds have been raised between 2001 and 2004, a total of 90 were raised between 2005 and 2008. These funds have also given regional PE firms access to Western institutional investors, who have long been absent from the regional PE landscape. Indeed, the rise of these funds helped regional firms engage in the lengthy and complex funding process required by institutional investors from developed economies.

Karim Ben Salah, Director Private Equity at Swicorp recalled: “In 2006 and 2007, the region was flushed with liquidity. One could see no reason to comply with the complex and lengthy funding procedures required by Western institutional investors when a handshake with a regional investor down the road just suffices to raise capital.” Yet, the lessons of the experience among fund managers that have courted institutional investors have been valuable according to Ben Salah: “Regional PE firms can learn to improve their operations from complying with the stringent fundraising procedures of Western institutional investors.” In addition, these LPs have been “less volatile” than regional investors in difficult times and this has not gone unnoticed; a recent survey by MENAPEA in collaboration with Zawya indicated that international investors will provide 29% of funds raised in 2011.

Looking ahead, regional GPs plan to continue to strengthen relations with international investors. In particular, Development Financial Institutions (DFIs) and International Financial Institutions (IFIs), which have a mandate to foster sustainable economic growth by supporting private sector development and mobilising private capital, are expected to play a pre-eminent role in the next five years as the PE firms from MENA industry expand their reach to Sub-Saharan Africa.

At the same time, GPs are offering co-investment opportunities to regional investors increasingly reluctant to invest in blind pools since the global crisis. Emad Mansour, Chief Executive Officer at Qatar First Investment Bank, described the preference well: “Regional PE investors like to invest in deals that they can feel, see and touch.”

14 Knowledge@Wharton (2009).


More demanding, more selective LPs

Yet, to use the words of some of those interviewed, the fundraising environmentwill remain “very challenging” if not “brutal”.

Regional investors, who traditionally make up to 60% of the investments in MENA focused funds, have become “increasingly sophisticated” and “selective” since the global crisis.

At the same time, international investors have been reluctant to make additional capital commitments in the region until they have greater clarity about the political landscape.

An indication of the tough fundraising conditions and uncertainty ahead is provided by a recent Prequin survey, which was conducted before the Arab uprising.The results of the survey indicated that respondents believed the Middle Eastwas the least attractive emerging market.

The results of our survey confirmed that the experience of PE firms in the region were consistent with this finding; in addition to expecting lower availability of funds, half of the fund managers anticipated less favourable terms for obtaining funds in the near term.


Recent events constituted a perfect storm of factors that have created further concern among investors for the region, including perceived lack of alignment of interests and transparency as well as unsatisfactory returns.

Ahmad, of NBK Capital offered the following comment: “Since the global crisis LPs are demanding increased transparency and robust reporting on each portfolio company. They want to understand not only the good but also the bad results. They want to understand the controls fund managers have on their portfolio companies through contractual affirmative and negative rights.”

Yet, there has been little adaptation of the way that PE managers try to make money from managing funds. For example, the “2 and 20” model continues to dominate. However, one change that may be imminent is that management fees for the largest funds may be reduced in response to a growing perception among investors that some MENA PE firms have obtained management fees without generating the promised returns.These reductions may occur in two ways: new entrants may offer discounted management fees, while the largest PE firms may agree that management fees will be accrued until exit.

In the end, it seems clear that most industry participants believe LPs will select GPs principally on the basis of their track record of investments, exits and returns. GPs will need to demonstrate that these track records have not been generated “by luck” but by their expertise.

A recent report by researchers at the Harvard Business School,15 who focused on the analysisof the regional PE industry, confirmed the view that many exits over the past five years werequick flips. These were pre-IPO companies that were listed hastily within one to three years of the initial investment date in response to the continued rise of regional stock prices. Returns were generated by increases in valuation multiples rather than operational changes to improve cash flow.

15 Harvesting Strategies for Private Equity Investments in the MENA Region, Harvard Business School, May 2011.

Note: Respondents were asked to rank each of the above categories as “top 1”, “top 2”, “top 3” criteria. The categories ranked “ top 1” by respondents received a weight of 3, “top 2” a weight of 2 and “top 3” a weight of 1. Total does not add up to 100% due to rounding.

Note: Respondents were asked to rank each of the above categories as “top 1”, “top 2”, “top 3” challenge. The categories ranked “ top 1” by respondents received a weight of 3, “top 2” a weight of 2 and “top 3” a weight of 1. Total does not add up to 100% due to rounding.


“We have a preference for distressed assets and operational turnaround. Other than that, we are completely opportunistic when it comes to where we invest, be it country-wise orsector-wise. The MENA region offers good investment opportunities for PE firms willing to approach the market with an innovative investment strategy. The region shares the same sound demographics of other emerging markets. Though corruption and lack of transparency present challenges, these are not any more so, than in most emerging markets.”

“We invest in PE funds that can show a compelling reason to exist. We like funds that can add value with a specific sector expertise or a positioning in an undercapitalised market. We have not found such funds in the region. In fact, there is a lack of proven deal flows and proven managers. Yet, the potential of the region is really interesting.”

In depthLPs’ perspectives

What the international LPs sayabout MENA

“In the short and medium term, I would find it easier to invest in sub-Saharan Africa or Turkey rather than the MENA region. I am optimistic that Egypt will more or less follow the Turkish model. However, the outlook for other North African countries, such as Tunisia and Libya, may be less positive because of their weaker political structures. “We are investing 20% of our capital in emerging markets; and we can choose from countries in Latin America, Asia, MENA, Africa and Russia. Why would we invest in the MENA region where there is a lack of deal flows and uncertainty in the political climate, when we have better options of finding a fund manager with a solid track record in a more stableemerging country?”


What the regional LPs say about MENA

“We believe in vintage investing and focus on a few funds, and at some point we know that we will make money. Yet, when it comes to the MENA region, we prefer picking our investments rather than investing in blind pools. In recent years, we have invested in some leading regional funds but have seen no exits and are expecting mediocre toaverage returns.”

“When we invest in funds, we look for individuals who have been in the company for a significant amount of time and know how to add value to their portfolio of companies. This is difficult in the MENA region, because most general partners only have a financial profile without the right operational skills.They lack strategic vision and do not know how to exercise control or do follow ups. They are also volatile and often move from one PE firmto another.”


Where are the deal flows?

The pool of mature, sizeable and profitable companies with a solid track-record is seen as limited in the MENA region.

The purchase of publicly listed companies by PE firms is difficult. With the exception of Egypt, regulatory structures in the region are not conducive to prospective buyers and hostile takeover bids are nearly impossible.16

In the meantime, state-owned companies are rarely listed or available for sale and much of the anticipated privatisation programmes across the region have yet to materialise.

Family businesses, which control over 90% of the commercial activity in the region compared to 65% to 80% in other parts of the world, have been unwilling to sell stakes to PE firms.17

In fact, large family groups have often behaved as competitors to the regional PE industry in purchasing other firms in the region. Given their in-depth sector expertise, capital, business synergies and vast connections to bring to the negotiation tables, they have beenwell positioned to snap up good regional investment opportunities.

16 Private Equity in the Middle East: Gathering strength as new opportunities unfold, Knowledge@Wharton, May 2011.

However, generational changes in these groups may open up new investment avenues for the PE industry in the coming years. Many of these firms were founded about 60 years ago; as a result, they currently face challenges as the number of shareholders rises and decision-making becomes more complex. In fact, research shows that more than 80% of family businesses fail to survive to the third generation.18

To avoid this fate, many of these firms, which have often accumulated a vastly diversified portfolio of companies over the years, may decide to seek the advice of professional investors. In the course of this, they may sell some of their non-core assets to external investors, allowing them to scale up their operations and improve their overall performance. But not everyone believes this will happen.

According to Labib of Standard Chartered, PE firms need to make a stronger pitch to family business owners communicating that they can offer strong strategic, financial and operational expertise, as well as better access to public markets. Labib offered the following explanation: “Mid cap business owners in the region are still often running the company and are focusing on day-to-day operations, strategy, HR, etc, and when a PE investor approaches, the owner will likely be very hands on during the due diligence process. It is not rare to see sellers walking away from a deal at the last minute due to deal fatigue, especially if they have not been through the diligence process before; as such deal teams need to be very commercial and focus on what is truly important during diligence. In the US, one will maybe consider 50 companies in a bid, to close two to three deals. In the region, we will need to screen perhaps 150 companies to complete the same number of investments.”

17 Faisal Alsayrafi, Changing Face of Family Business in the Gulf, Khaleej Times, February 2, 2010. 18 Harvesting Strategies for Private Equity Investments in the MENA Region, Harvard Business School, May 2011.


Untested value creation

The difficulty of investing in order to obtain anything more than a minority stake will continue to undermine GPs’ control over the scope and speed of post acquisition plans, which limits their capacity to create value.

Largely uneducated about the benefits of having PE investors, business owners have remained reluctant to surrender their shares and controlto PE firms or implement structural changes.

Unaccustomed to answering to anyone but themselves, they have also been equally unwilling to improve corporate governance, which is sought by PE firms and required to prepare the company for exit. As one GP says: “A business owner who has been growing his company for the last 20 years isn’t ready for the type of culture shock that a PE investor will want to implement. As a result, often only 50% to 80% of the acquisition plans are implemented.”

The different regulatory regimes and the difficulty in finding skilled management teams in the MENA region will also continue to undermine the implementation of the "buy and build" model. This is especially true in some sectors such as healthcare.

Nasir of The Carlyle Group explained: “Healthcare investments in MENA are complex. The availability and quality of human capital play an important role in the success or failure of a healthcare business, much more so than in other industries. Meanwhile, human capital is one of the most difficult variables to manage within the MENA region."


A Thinner & Leaner CompetitiveLandscape

It seems clear that as a result of these challenges, there will be a shakeout of firms in the regional PE industry; only the fittest players will survive.

As a respondent to the interviews observed, this also means there will be fewer new efforts. “First time team, first time fund” type of firms, will lack the track record of investments and exits in the current environment and be unable to make it to the next fundraising cycle.

PE firms that raised capital at the height of the markets in 2007 and 2008 with a restrained fund mandate also face bleak options - they can either make sub-par deals or return the capital totheir investors.

Furthermore, those who entered deals during the boom will also have difficulties achieving exits at a promised hurdle rate of 25% to 30% in thenext few years.

In the aftermath, however, survivors will benefit from more muted competition for capital and deals, as well as more realistic valuations, but this will not guarantee that all survivors will become long-term winners.

In an ever more challenging fundraising environment, GPs will need to prove to PE investors that they can create a sustainable track record of value creation and exits regardless of the external circumstances. Simply following the herd will not suffice to generate good deals. As for the first movers, they will need to develop distinctive capabilities to overcome the complexities of adding value in sectors such as healthcare.

PE firms will need to develop innovative models to overcome regulatory and legal regimes that do not support PE investments and grow existing portfolios across the region. Considering the limitations of the regional PE markets, the fund managers may also seek to venture into unexplored territories. If they can demonstrate an ability to add value compared to indigenous PE firms, investing beyond MENA could prove a winning strategy. Tapping into other investment segments, such as SMEs and distressed assets, will be more likely to pay off if GPs can rethink current business strategies and modes of operating appropriately.

The boom years of 2007 and 2008 are long gone; in a region witnessing its most fundamental changes for decades, the long term winners, as always, will be the PE firms who anticipate, if not influence, how the future is being shaped.


Appendix


Thoughts from insiders

Amjad AhmadSenior Managing Director, Alternative Investments, NBK Capital

“Iraq has been isolated from the rest of the world for the past 30 years and is just starting to reintegrate into the global economy. There are unparalleled investment opportunities, however there are also many challenges unique to the country, such as a paucity of existing companies that would be considered investable by financial institutions and professional investors and young public markets that for now cannot support IPO's. Bureaucracy, corruption and security are also issues but all are improving and have been doing so for some time now. That is why it is crucial to partner with an experienced on-the-ground investment firm with the extensive local knowledge and relationships required to successfully invest in this once-in-a-generation opportunity."

“The regional PE industry cannot compare itself to India, China or Brazil with regard to the number of investment opportunities. However, Saudi Arabia, Egypt and Turkey represent robust economies with solid investment depth but not without challenges. One common challenge is the strength of entrenched family groups who represent a significant part of these economies. Another is the limited access to financing for entrepreneurs and small companies, which limits the pool of potential companies. Based on a recent World Bank report, bank financing for SMEs is the lowest in the world, after sub-Saharan Africa. In spite of these challenges, PE players who can consistently demonstrate the ability to add financial, strategic and operational value to portfolio companies will succeed.”

Ali AlbazzazVice President,Northern GulfPartners (NGP)


“We will be cautious in the next five to six months in certain geographies but I think the medium and long term prospects of the region are positive. The economic fundamentals have not changed since the Middle East protests. The region has a large population, approaching the size of the European Union. Its oil & gas reserves account for 35-50% of the world total oil & gas reserves. In Egypt, the new political and economic environment that will emerge from the general elections is likely to come with flaws but it will surely come with a lot more transparency. A more transparent business environment will restore confidence of regional and international investors and boost growth. Concurrently, the GCC will continue to prosper on the back of large oil revenues and government spending in social sectors and infrastructure.”

“The story of bargain hunting and doing deals at very low prices at the time of crisis is theoretical. When cataclysmic events happen, the spread between buyers and sellers’ price expectations actually gets wider. Take Egypt today for instance, vendors continue to think highly of their business and want to hold on to pre-revolution valuations. On the buyers’ side, even if views on the growth of companies’ earnings remained unchanged, equity risk premiums have changed. CDS spreads in the country have increased and ratings in the market are lower in terms of multiple. As a result, the gap between buyers and vendors’ expectations has widened and a very limited number of deals will likely take place.”

Richard DallasManaging Director, Private Equity,Gulf Capital

Sherif ElkholyDirector,Actis


“The PE ecosystem of the Middle East is not as mature as it is in Europe or in the US. The region does not have very liquid public markets. Stock exchanges are fragmented. Listing requirements are not standardized across MENA. The region is also dominated by family businesses that may not have reached the same level of sophistication as in the Western world. For instance, requirements in terms of corporate governance are often below international standards. Business owners may also not be familiar with some legal matters, such as protection of minority rights. As a result, the time and level of effort involved in educating business owners, structuring a deal, institutionalizing, growing and exiting a company is very high in the region compared to western markets.”

Tony HagePrincipal,Private Equity, Arcapita

“Investing in China has many similarities with this region from a PE perspective. The personal relationship with your business partner is very important because one cannot rely on the legal procedures to solve a dispute. Going to a Sharia law court in Saudi Arabia, to enforce an English language contract against an Arab citizen in reality is almost impossible; likewise, in China. This is why you need to do your due diligence, know your partner well and maintain a strong relation with him - be it in China or in this region. The main difference is that in China, most investments are low margin export-based businesses operating in very competitive markets. Therefore, when you get something in China that works, it works remarkably well and quickly but equally when things go wrong, they go very bad very quickly. In this region, businesses are generally geared towards domestic markets and competition is less fierce than in China. Companies are slower to grow but failures are less common.”

Grahame Farquhar CFO,Khaled Juffali Company(KJC)


“Besides Egypt and Saudi Arabia, the UAE presents good investment opportunities. In particular, Dubai remains an interesting and fertile ground for mid-cap investments. Although companies have suffered during the global crisis, there are still solid businesses, with international -minded managers and with good potential to expand in the region. Qatar also presents opportunities, but more on the JV front than on the PE front. The economy is still dominated by large companies in the oil and gas sector but with rapidly changing diversification agents. The nascent mid-market segment will definitely present significant potential in the near term.”

Taimoor Labib, Managing Director,Head Of Private Equity, Middle East & North Africa,Standard Chartered

Paul KhouryDirector,Investment Management,Qinvest

“In all emerging markets, private equity is a tough business; with each region, country, and sector having its own unique issues. In MENA, the main challenges are straight forward but tricky to navigate as one needs to originate proprietary transactions, close them quickly while working with the various regulators, and win over management teams during due diligence along the way. You cannot come into this market with a New York type of mentality; but if you have a thick skin and are able to develop deep long term relationships with key stakeholders it is a market which you can be highly successful in and add real long term value to your clients.”

Grahame Farquhar CFO,Khaled Juffali Company(KJC)


Basel Hussein RoshdyChief Investment Officer & General Manager,Nile Capital & IT Ventures

“In 2011, we will primarily seek to maintain the value of our current portfolio. We will also keep a close eye on the political and economic reforms taking place in the region and the investment opportunities that will arise from these new dynamics. In Egypt for instance, we expect new ideas and innovations to emerge from the opening up of the political system. This will create more room for VC. Thus, looking ahead, we plan to be more opportunistic when it comes to investing. We will broaden our investment focus, geographically, sector-wise and in terms of asset class. Diversifying our portfolio of companies will also help reduce our risk exposure, particularly to a specific country or sector.”

“Going forward, the PE industry will have to understand the risks related to the changing geopolitical and social environment of the region. The industry will also need to identify where these changes are leading to and position itself accordingly. The ability to foresee how the region will develop, will define the winners from the losers. The boom years added a lot of questionable names to the PE industry. They came in, riding the waves of the asset inflation bubble, without adding any value to portfolio companies. The global crisis got rid of many cowboys, and the few that still exist, are struggling and will not be able to survive very long as PE investors can now clearly see the difference between the alphas and the betas.”

Emad MansourChief Executive Officer,Qatar First Investment Bank


Stephen Murphy Managing Director,Citadel Capital

“We invest in naturally advantaged industries and in sectors benefiting from government liberalisation. Within target industries we tend to be opportunistic concerning our entry point, and our investment model is influenced by both industry specific and the general market investment cycles. For example, we are currently investing in sectors that will make MENA and sub-Saharan Africa economies more efficient, such as large-scale infrastructure and turning local companies into regional champions, which have the scale to operate to international best practice. We believe that these types of investments will help catalyse economic development and have a multipliereffect across the frontier regional economies where we are focused. The lack of mass transportation, for instance, currently holds up economic development in many countries. Investing in low cost mass transportation in an era of high oil prices can help unlock many economic activities in these regions. From a PE perspective, boosting economic growth creates even more demand for the mass transport service you are providing. If you are doing it right, it becomes a self fulfilling prophecy.”

“We try to focus on business fundamentals versus market sentiment and speculation. In 2007-08, valuation expectations were excessive, driven by abundant liquidity and overly optimistic end-market expectations. We were uncomfortable with market conditions at the time, and did not invest. The global crisis, however, put an end to this market dynamic. Valuations are more reasonable and business owners have adjusted their expectations. We are now seeing more interesting investment opportunities. In locating attractive minority investments in MENA, searching for companies with robust business models operating in large and growing markets is the first step. We also try to identify partners with values and principles compatible with ours. This is something we, as an organization, learned in other markets. We’ve been in China for over a decade and during that time made over 40 investments, all of which were minority stakes. In addition, our investment thesis in the region revolves around value addition. We look to leverage the vast experience gained by our institution over the past 24 years in making over 1000 investments worldwide. Coupled with a global network of industry and business relationships, we have the ability to add significant value to our investments in MENA.”

Firas NasirManaging Director,The Carlyle Group


“Closing a deal in the GCC can take up to a year of negotiation. Convincing family businesses to grow their companies through partner capital injection can sometimes be a lengthy and difficult process. You have to tell your story and show what you can add on the negotiation table: growth capital, expertise in institutionalising businesses and taking businesses to the next level and networking to help grow businesses across the region. Agreeing on companies’ valuations is also very challenging and takes time. Vendors’ expectations came down to more realistic levels in 2009 as companies ran short of liquidity. When the real estate market took a plunge, negotiations turned in favour of the buyers. However, valuations are up again in the Gulf. The Middle East protests did not affect most GCC based businesses and the growth prospects of these companies are good.”

Ahmed Abdul RahmanHead of Private Equity - GCC, Unicorn Investment Bank

“The political events currently unfolding across MENA have created a wealth of new investment opportunities. In Egypt, for instance, SMEs are starving for cash as banks stopped lending to the private sector and private capital investors have either been arrested or left the country. With almost no access to capital, business owners have reviewed their expectations downwards, in terms of company valuations and are now ready to forego stakes for PE capital. Yet, regional established PE firms are likely to remain on the sidelines as their mandate and structures are not suited to make investment decisions in times of heightened political and macro-economic uncertainties. To seize these new opportunities, PE firms would need to rethink their investment strategy and tools for assessing investments.”

Imad GhandourManaging Partner,CedarBridge


“In the region, business owners have prudently accumulated wealth for 20 to 30 years and do not want to take major risks in shuffling their whole business or putting a shock to their system to achieve growth. So naturally, they are holding back the potential of these companies. Our role in PE is to be an agent of change.”

Hazem ShawkiManaging Director,EFG HermesPrivate Equity

Tom SpeechleySenior Partner,Abraaj Capital&CEO, Riyada Enterprise Development

“SMEs present some of the best investment opportunities to be found in the region today. Attractive, investable SMEs can be found in pretty much every sector and in every country of the region.

In contrast with Europe or the USA, SMEs still pre-dominate most traditional business sectors as well as new ones. The relatively high barriers to the free movement of people and goods across the region have slowed business consolidation and the rise of dominant multi-nationals.

That creates an opportunity for private equity to act as a catalyst for SME growth and ultimately regional consolidation. So opportunities abound. But there is also responsibility because the absence of multi-nationals to soak up the growing working-age population means that SMEs – or governments - must step in. If we don’t invest in our SMEs now, the currently bad employment numbers, especially among the young, in many parts of the region will only get worse.”


“We have a disciplined approach when it comes to investing our clients’ money. We look at each deal independently. We also consider the diversification and the correlation among one deal versus another deal. We further assess the underlying country risk and any other macroeconomic risks that might impact the investment.

Our process does not deviate in any specific circumstances. It is a rigorous process that can be applied in good times and bad times. We have been investing for 28 years and have seen two Gulf wars, several economic crises, huge spikes of inflation and the dot.com crash. Yet, we have applied the same discipline year in year out, country by country, environment by environment.”

Other anonymous thoughts

“The global crisis has changed our value creation model. We know now that you cannot rely on perpetual growth assumptions. You have to go back to macroeconomic fundamentals. You have to identify the underlying macro trends and trust those. Mini trends like real estate in Dubai, was not going to hold on very long with unlimited supply of land and cement. So ignore the mini trends and go for the big picture.”

James TannerHead,Gulf Growth CapitalInvestcorp




“Closing a deal in the region is a challenge. Business owners tend to have emotional attachments to their assets. Also, most of them don’t understand PE. In USA, when a PE firm approaches a business, it has already been flipped once or twice, so the owner understands what PE brings to the table. In the region, it is still a new asset and it is difficult for business owners to understand the value of PE. Conducting the due diligence process is also demanding. There is little market information and data available on the region. Most of the time, PE firms need to start from scratch and conduct primary research when considering a deal in a new sector. The advisory network is also just developing. Furthermore, structuring a deal is difficult. The regulatory framework of some countries, such as Saudi Arabia, has many restrictions towards foreign ownership. Although the Kingdom is a member of the WTO, a lot of sectors are still heavily protected. Once the deal is signed, the next challenge is to find skilled management with relevant experience to run and grow a portfolio company.”

“MENA is part of our gateway-market which also includes Sub Saharan Africa, Turkey and Russia. Within MENA, we focus primarily on Egypt. The country has the most diversified economy of the region, with a significant domestic demand and a competitive workforce. Although smaller and less cost-competitive, Morocco is interesting for its domestic demand and its proximity to European markets. Tunisia is a small export based economy geared towards Europe but there are some good businesses there too eager to look beyond their internal markets. Despite a wealth of human and natural resources, Algeria has poor corporate governance. Uncertainty over the political outlook of the country is also an issue. In the GCC, Saudi Arabia presents the most investment opportunities because of its large population. The UAE is too small; its industry is energy intensive and labour is not cheap in comparison with Egypt.”


Research and methodologyIn the first half of 2011, we conducted 24 in-depth interviews in total, with General Partners (GPs) from leading PE firms investing in MENA. The interviews were mainly conducted face to face, with the exception of Bahrain and Iraq, where we interviewed GPs by telephone.

We conducted six interviews in Egypt, four in Qatar, nine in the UAE. The interviews covered a wide range of topics from the impact on PE firms of the global crisis and the recent Middle East protests to new dynamics of the PE industry over the next five years.

In addition to the interviews, we conducted an online survey in May 2011. It was sent to 113 leading GPs investing in the region. We collected and analysed 30 responses.

To further sharpen our analysis of PE landscape over the next five years, we conducted an additional six in-depth interviews with leading international and regional PE investors.All the interviews were conducted by telephone in May/June 2011. These included two regional family offices (with some PE investments in MENA) and four Western institutional investors (with no PE investments in the region).


Profile of the online respondents


Acknowledgements

We are grateful to all those who contributed their time and effort to make this report possible, in particular: Ali Arab, Product Manager Private Equity at Zawya and Jeanette Lepper, Manager of MENA Private Equity Association.

A special thank you also to all the participants of our in-depth interviews and respondents of our on-line survey. Their insights have been extremely valuable.

At INSEAD, we were fortunate to receive the assistance of Dezma D'Souza, who ran the survey and compiled the responses, Mohamad Fakhreddin, Research Assistant, who helped develop the interview protocol and conduct the interviews, and Mona Parikh McNichols, case writer, who provided editorial assistance.

We would also like to acknowledge PwC team members who contributed to this report, namely Inji Amer, Zina Janabi, Clemence Mouterde and Salim Meraouna.


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