Start-ups in the Middle East and North Africa secured record funding of more than $1 billion in 2020, although the capital was spread across fewer deals sealed mainly in the first half of the year, according to data platform Magnitt.
The amount raised was a 13 per cent annual increase and was the first time that fundraising for Mena start-ups broke through the $1bn barrier, Magnitt's 2021 Emerging Venture Markets report showed. The capital was invested into 496 companies, which was 13 per cent fewer than the previous year.
Start-ups raised most of the $1bn in funding during the first six months of the year when they secured $725m, a 29 per cent increase from the $563m secured in the first half of 2019.
The second half of 2020 was more muted, however, as the Covid-19 pandemic took its toll on the global economy. Start-ups raised $306m during the period, down 13 per cent from the second half of 2019. The capital was invested in 198 deals, which was a 35 per cent decline from the same period in 2019.
“2020 was a rollercoaster year that highlighted the importance of leveraging data to make opportunities visible across borders,” Philip Bahoshy, chief executive of Magnitt, said. “Covid-19 rapidly accelerated the adoption of technology across emerging markets, creating larger markets and more opportunities to scale."
The Covid-19 pandemic has plunged the global economy into a deep recession, unleashing havoc on sectors from air transport, tourism, supply chains, manufacturing to shipping. On the other hand, businesses operating in key sectors such as healthcare and technology have seen an uptick in demand.
The pandemic has prompted investors to re-allocate capital away from early stage ventures to bigger-ticket seed and Series A investments ranging from $100,000 to $3m, Magnitt said.
Investors also opted to back industries such as e-commerce and FinTech, which saw increased demand during the pandemic and retained the two top spots by number of deals.
Together, e-commerce and FinTech garnered almost a quarter of all deals in 2020, according to Magnitt. Investment in healthcare start-ups more than tripled to $72m during the pandemic.
Within the region, the UAE, Egypt and Saudi Arabia accounted for 68 per cent of total deals disclosed in 2020.
The UAE, the Arab world's second-biggest economy, received the largest share of funds raised and ranked first in terms of the number of deals, the report showed.
Start-ups in the UAE attracted more than half of the total venture capital into the region and just over a quarter of the total Mena deals. Its total share of funding rose 5 per cent to $579m but its share of total deals dropped 17 per cent.
Start-ups in Saudi Arabia, the Arab world's biggest economy, sealed 18 per cent of the region's deals and 15 per cent of the total funding. The oil producer registered the highest increase in the number of deals, up 35 per cent year-on-year, and funding flows to the kingdom's start-ups rose by 55 per cent.
Bahrain recorded the highest increase in funding, with capital flows to its start-ups tripling year-on-year to $20m.
Lebanon, which is facing the worst economic crisis in its history, saw the number of deals drop by 64 per cent to 16, falling out of Magnitt's Top 7 Mena country deal ranking in 2020.
Topping the five biggest funding rounds in Mena, UAE-based EMPG raised $150m in its Series E round in April, followed by the UAE's Kitopi with $60m and Egypt's healthcare start-up Vezeeta with $40m.
Last year, a total of 243 investors participated in at least one funding round in Mena, with international funds accounting for 22 per cent of all active investment institutions, Magnitt said.
The number of international investors increased to 54 in 2020 from 51 a year earlier, while the number of active investors remained relatively stable – up 3 per cent at 243.
The impact of the pandemic was highlighted during the third quarter of 2020, when Mena start-ups recorded 91 deals, the lowest in eight quarters. The fourth quarter showed signs of a recovery, with a 57 per cent uptick in total funding.
Looking forward, Magnitt expects there will be no mega deals of more than $100m across the Mena region in 2021. It also expects Saudi Arabia will surpass Egypt in terms of both the total number of investments and total capital deployed in venture funding this year.
Ten tax points to be aware of in 2026
1. Domestic VAT refund amendments: request your refund within five years
If a business does not apply for the refund on time, they lose their credit.
2. E-invoicing in the UAE
Businesses should continue preparing for the implementation of e-invoicing in the UAE, with 2026 a preparation and transition period ahead of phased mandatory adoption.
3. More tax audits
Tax authorities are increasingly using data already available across multiple filings to identify audit risks.
4. More beneficial VAT and excise tax penalty regime
Tax disputes are expected to become more frequent and more structured, with clearer administrative objection and appeal processes. The UAE has adopted a new penalty regime for VAT and excise disputes, which now mirrors the penalty regime for corporate tax.
5. Greater emphasis on statutory audit
There is a greater need for the accuracy of financial statements. The International Financial Reporting Standards standards need to be strictly adhered to and, as a result, the quality of the audits will need to increase.
6. Further transfer pricing enforcement
Transfer pricing enforcement, which refers to the practice of establishing prices for internal transactions between related entities, is expected to broaden in scope. The UAE will shortly open the possibility to negotiate advance pricing agreements, or essentially rulings for transfer pricing purposes.
7. Limited time periods for audits
Recent amendments also introduce a default five-year limitation period for tax audits and assessments, subject to specific statutory exceptions. While the standard audit and assessment period is five years, this may be extended to up to 15 years in cases involving fraud or tax evasion.
8. Pillar 2 implementation
Many multinational groups will begin to feel the practical effect of the Domestic Minimum Top-Up Tax (DMTT), the UAE's implementation of the OECD’s global minimum tax under Pillar 2. While the rules apply for financial years starting on or after January 1, 2025, it is 2026 that marks the transition to an operational phase.
9. Reduced compliance obligations for imported goods and services
Businesses that apply the reverse-charge mechanism for VAT purposes in the UAE may benefit from reduced compliance obligations.
10. Substance and CbC reporting focus
Tax authorities are expected to continue strengthening the enforcement of economic substance and Country-by-Country (CbC) reporting frameworks. In the UAE, these regimes are increasingly being used as risk-assessment tools, providing tax authorities with a comprehensive view of multinational groups’ global footprints and enabling them to assess whether profits are aligned with real economic activity.
Contributed by Thomas Vanhee and Hend Rashwan, Aurifer
The National Archives, Abu Dhabi
Founded over 50 years ago, the National Archives collects valuable historical material relating to the UAE, and is the oldest and richest archive relating to the Arabian Gulf.
Much of the material can be viewed on line at the Arabian Gulf Digital Archive - https://www.agda.ae/en
THE BIO
Bio Box
Role Model: Sheikh Zayed, God bless his soul
Favorite book: Zayed Biography of the leader
Favorite quote: To be or not to be, that is the question, from William Shakespeare's Hamlet
Favorite food: seafood
Favorite place to travel: Lebanon
Favorite movie: Braveheart
Gifts exchanged
- King Charles - replica of President Eisenhower Sword
- Queen Camilla - Tiffany & Co vintage 18-carat gold, diamond and ruby flower brooch
- Donald Trump - hand-bound leather book with Declaration of Independence
- Melania Trump - personalised Anya Hindmarch handbag
Gender pay parity on track in the UAE
The UAE has a good record on gender pay parity, according to Mercer's Total Remuneration Study.
"In some of the lower levels of jobs women tend to be paid more than men, primarily because men are employed in blue collar jobs and women tend to be employed in white collar jobs which pay better," said Ted Raffoul, career products leader, Mena at Mercer. "I am yet to see a company in the UAE – particularly when you are looking at a blue chip multinationals or some of the bigger local companies – that actively discriminates when it comes to gender on pay."
Mr Raffoul said most gender issues are actually due to the cultural class, as the population is dominated by Asian and Arab cultures where men are generally expected to work and earn whereas women are meant to start a family.
"For that reason, we see a different gender gap. There are less women in senior roles because women tend to focus less on this but that’s not due to any companies having a policy penalising women for any reasons – it’s a cultural thing," he said.
As a result, Mr Raffoul said many companies in the UAE are coming up with benefit package programmes to help working mothers and the career development of women in general.
Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
