Private equity trends in the Middle East

Alternative investment firms considering domiciling a fund in the region should know that it comes with a unique set of challenges and opportunities. To understand these, and to take a look at some of the important investment trends in the Middle East, we interviewed two private equity experts who recently attended ALTSME, a prominent alternative investment event in Dubai.

Anna Coutts-Donald is a director in Vistra’s Global Funds business. She is passionate about sales and relationship building. Anna focuses on nurturing and expanding relationships with Vistra’s most prestigious private equity and real estate clients and attracting new business.

Rosemary McCollin is Vistra’s director for the Funds sector. Based in London, she is responsible for driving key client relationships and expanding commercial opportunities across multiple domiciles.

How would you describe the current private equity investment landscape in the Middle East?

Anna: The rise in investor interest in private equity in the Middle East has created an exciting and dynamic environment. Global private equity firms and local players are actively engaging in transactions. The governments of the GCC [Gulf Cooperation Council] countries and their regulatory bodies encourage engagement, making the region a very attractive place for private equity funds to invest. The rise in the number of global law firms specialising in M&A and fund formation opening offices in the Middle East is a testament to the region’s growth.

What are some of the primary reasons for the region’s growing popularity with private equity firms?

Anna: I think it comes down to four factors. The first is location. The GCC is uniquely positioned globally to act as a hub between the East and West. Europe-, US- and Asia-based private equity general partners [GPs] are increasingly finding new sources of capital from investors in the region. Funds that don’t already have a local presence are relocating their investor relations teams to gain traction with this new source of capital, especially when more established markets are struggling to offer the fundraising conditions of recent years.

The second factor is diversification. For decades, oil and gas have been the main industries on which the Middle East has depended. Private equity offers a great economic diversification away from these traditional sectors, and a chance for the next generation to create wealth differently.

The next factor is the region’s innovative governments and regulators, who as I mentioned are directly appealing to private equity firms. The region's hospitable business and investment environment is driven by low taxes and a genuine willingness to attract international talent. Abu Dhabi Global Market [ADGM] laws, for example, are written in English common law, providing a sense of ease and familiarity for many international parties.

The final factor is the region’s demographics. It has a young, growing population that has increased demand for various goods and services.

Rosemary: I’d add that, in the past, the region was associated almost exclusively with outgoing investments. What has changed rapidly in the last couple of years is that locally domiciled funds are being structured to attract both domestic and international investors into the region. This is being amplified by all the factors that Anna perfectly listed above.

What are the top fund domiciles in the Middle East for foreign investment firms, and are there any emerging jurisdictions that many aren’t aware of?

Anna: The first one I’d mention is Dubai. The Dubai International Financial Centre [DIFC] is the region’s most prominent financial hub and has world-class infrastructure and business-friendly policies. We have also observed a growing trend of international fund managers seeking liquidity in the region. This has led to an increase in the number of new structures established in the UAE.

The DIFC and ADGM offer very similar platforms in that they apply common law and have very proactive and responsive regulators. Dubai is consistently highly ranked in the Global Financial Centres Index (GFCI), which has been in existence for 14 years now. Many international and regional banks, asset managers, and investment advisors are established in the DIFC, making it an attractive jurisdiction for financial firms seeking to establish themselves in the region.

The ADGM is the newest regional financial centre that is an attractive jurisdiction for financial start-ups because its regulator is proactive and seeks to position itself as a dynamic, pro-business free trade zone. Both the DIFC and the ADGM have been creative in enhancing their private equity platforms. They offer diverse fund structures and licensing options, creating unique regional platforms to launch, distribute, manage, domicile and promote all types of private equity. They also support a domestic private equity structure as required by public-private partnerships, which is part of a regional trend supported by governments. Finally, they understand and have instituted a regulatory framework for Shariah compliance and Islamic finance, which addresses a need that the traditional offshore jurisdictions do not have.

The Kingdom of Saudi Arabia is also poised as an upcoming key jurisdiction in which to domicile. The local regulator and Public Investment Fund’s [PIF’s] rapid external investment program and diversification have really caught the attention of the finance world.

I'd say Qatar, Bahrain and Oman are the next contenders and are, more or less, at the same level. Foreign investment firms are drawn to the GCC because of their strategic locations, stable economies, business-friendly regulations, and efforts to diversify their economies.

Rosemary: To expand on some of those points, the DIFC and ADGM have gained international recognition as world-class regulators offering private equity structure options that are competing with the traditional global funds regimes. They are doing so by being proactive, cost-effective and extremely creative at meeting and increasingly exceeding the demands of private equity and fund managers.

Each regulator has created flexible fund structure options that are enhanced by the ease of marketing and promotion throughout the UAE through a passporting regime that has resulted in fund managers embracing the DIFC and the ADGM as jurisdictions of choice for MEASA [Middle East, Africa and South Asia]-based investors and investments. This enables investors to access growth opportunities with greater ease and efficiency. It will support the UAE’s economic diversification strategy and attract more foreign direct investment and new investors to participate and support the growth of the local economy and the development of the region.

Can you identify any emerging trends in the Middle East's private equity sector?

Rosemary: From a local fund-launch trend standpoint, managers are looking for local providers — such as law firms, audit providers and fund regulatory experts — that have a long-established presence and a commitment to continue growing and supporting the market.

Anna: From an investment standpoint, the key is effectively dealing with family leaders. Private equity firms must ensure family leaders are comfortable with selling a stake in their business and have the right approach when working with them.

Do fund managers typically domicile in the Middle East primarily for access to investors or to directly invest in Middle East-located assets?

Anna: I would say for both reasons. Proximity to investors definitely helps, especially among the SWFs [sovereign wealth funds] and their associated family members. There are also an increasing number of institutional investors that appreciate appropriate client coverage. Domiciling in the region is encouraged by regulators and brings investment opportunities that otherwise wouldn’t be available. Local people must also be employed. Engagement in the local ecosystem facilitates familiarity with the wider community, which can spur local investment as well as attract local investors.

Which industries in the region offer attractive private equity investment opportunities?

Rosemary: I’d highlight education, ESG, healthcare and technology. Also, while real estate has been the known key investment opportunity, this has widened to include infrastructure generally and, where not solely funded by the government, can provide great returns and low risk. The younger generation, both local and expat, has now created a growing entrepreneurial community in many regions. This means more opportunities for seed and early-stage investments in fintech, life science, media, general tech and online startups.

Is there a typical investor profile in the Middle East, such as family offices, pension funds, etc.?

Anna: The most well-known are SWFs, which originate from the Middle East region. They are existing major investors in many global investments, which often include an increasing allocation to private equity assets. I’d also include family offices and high-net-worth individuals [HNWIs]. Many HNWIs based in the region are looking to private equity to diversify investments from traditional investment sectors such as oil.

How do fund managers successfully attract and retain investors in the region?

Anna: Fund managers in the region can attract and retain investors by having a local presence, offering Shariah-compliant investment strategies, transparency, a performance track record, robust risk management and alignment of interests. More managers are entering the Middle East region. The acceleration in GP demand for limited partners’ capital is due to the rest of the globe being capital constrained. 

Investors have also become much more sophisticated and have been open to diversification in asset class exposure. Also, the ticket size of commitments is much larger than in other regions, which is why there has been an increase in GPs setting up operations. The SWFs don’t just back the more established GPs, they also want to encourage first-time funds and emerging managers, as investors like to become strategic partners to these as the GP develops.

Are there any cultural factors that new fund managers should consider when marketing to and communicating with investors?

Anna: First, adhering to Islamic Finance Principles is critical to ensure that a fund aligns with Shariah-compliant investment practices. Second, it is important to be patient while building business relationships, as this process takes time and requires gentle persistence. Finally, I would advise new fund managers to understand that the significance of personal relationships is as important as presenting compelling investment opportunities.

It is also important to recognize cultural values, such as respect for hierarchy and a traditional approach to work. This highlights the importance of respecting authority, longevity, and adherence to cultural norms. Flexibility in meetings is also essential, with informal discussions and relationship-building considered a vital part of conducting business.

Rosemary: I’d add that it is crucial to demonstrate a firm commitment to the region by having a comprehensive understanding of it. Ensuring your fund or firm has a local presence, acquiring a deep understanding of the diverse cultures within the region, and building strong relationships with regulators are all essential to navigating the complexities of the market successfully.

How is technology changing the private equity landscape in the Middle East?

Anna: AI seemed to be the number one topic at the ALTSME conference Rosie and I attended. A discussion of data analytics was part of the keynote speech. Fintech in the region, like anywhere in the world, is driving improved fundraising and investor-relation processes along with operational excellence. Fundraising for fintechs has gained traction, and some of the largest deals have been in the “buy now, pay later” sector. An example is the UAE shopping platform Tabby, which raised $58 million from Sequoia Capital India IV and Saudi Technology Ventures in early 2023. Sanabil Investments has also recently raised $340 million for Saudi Arabia’s Tamara following a similar-sized investment earlier in the year. Food tech is also expanding and attracting more investors.

While there are nuances and exceptions, the importance of ESG tends to vary by region. Have Middle East-based investors embraced ESG investing?

Rosemary: Yes, there is no question. The region is very keen to demonstrate its diversification away from oil and gas in both investments and reliance on GDP and is committed to the cutting edge of new ESG ideas and solutions.

Anna: The excitement of hosting COP28 in the UAE has given ESG matters huge significance. The increased awareness of the topic has ensured that investors and asset managers are incorporating ESG into their strategies. The region will play a critical role in global efforts to mitigate climate change and should generate deal-making opportunities in areas such as solar power, recycling and energy storage. 

What are the top considerations, or common pitfalls, for fund managers new to the region?

Anna: It is crucial to be aware of the cultural differences when conducting business. The UAE is still a developing player in the global market, which makes it important to comprehend the local market dynamics and understand how to navigate them effectively. This highlights the importance of having local expertise, associating oneself with the right networks, and navigating them to succeed.

What are the top regulatory concerns when domiciling a fund in the Middle East?

Anna: Engaging with the local regulator is arguably the most important aspect, and it’s vital to find an experienced fund administration provider to help navigate the diverse licensing requirements. If targeting Islamic finance, one must also consider Shariah principles.