Local knowledge and global reach can be a dream team

Analysts say that global firms have technology and know-how but locals have relationships.

Flying high: Shuaa Capital's private equity investment portfolio includes the budget airline Air Arabia.

The revolving doors of the Dubai International Financial Centre continue to spin to welcome major players. In the past six months, executives from Commerzbank/Dresdner Bank, Credit Agricole, ING Group and the Royal Bank of Scotland have all pushed through the doors seeking to tap the promising growth of the region's private equity and asset management industries. They face competition from local firms that are launching regional funds and snapping up the small- to medium-sized deals prevalent in the region - drawing increased interest from regional and global investors along the way. Analysts concede that global firms have the technology and the know-how to penetrate the regional market, but local firms that are entrenched in the region are playing on their comparative advantages of long-term relationships with key clients and the capability to cater to small- to medium-sized deals. "Regional and local players are quickly coming on to the scene now; the competitive advantage they have is to go for the smaller deals, as typically a big international firm won't touch a deal below US$200 million (Dh734m) to $250m," said Dr Nasser Saidi, the DIFC's chief economist. He added that the cost structure of the larger firms was such that they would not be able to justify going after smaller deals. Shuaa Capital, a Dubai-based financial services firm with roots in the city dating back to 1979, completed such a deal in January by acting as lead manager on the sale of a 40 per cent stake of Multiforms, a subsidiary of Emaar Industries & Investments (EII), to the Saudi-based Arabian Company for Water and Power Development (ACWA) - a transaction worth Dh208m. Shuaa's chief executive says that global firms are not necessarily competing with regional firms because they cater to such different clients. "On the investment banking side, we are a mid-size company and our clients are not the big, large companies in the Middle East, so we don't really compete with the global firms," said the chief executive at Shuaa, Iyad Duwaji. Shuaa posted a loss of Dh371.1m in their third quarter earnings, however, which indicated that the investment banking business had been especially hard hit by the global financial crisis. The firm, which was the second-ranked lead manager in the region last year according to data compiled by the news and data service Zawya Dow Jones, did not make the top 10 list this year as unfavourable market conditions forced the delay of initial public offering (IPO) mandates, which included Al Qudra Holdings. Two more were put on hold in the fourth quarter. Mr Duwaji acknowledged that the IPO market was strained and said he was looking to develop other business lines, including the firm's private equity practice. "In the current environment, maybe one window will close, but others will open; mergers and acquisitions will pick up as consolidations happen in these conditions and we are active in that. Opportunities will also open up in private equity," he said. The firm's private equity investment portfolio includes the budget carrier Air Arabia and the jeweller Damas, and it is seeking further opportunities as the demand for private equity increases. As debt financing becomes more difficult to secure and financing through public listings grows less appealing in the short term, investors are turning to private equity houses for growth capital, and local firms are taking the lead. "Even though the economies are growing beautifully in this region, it's been harder for private equity to find a place to be because the best deals are kept by the local firms," said Steve Schwarzman, the chief executive of the private equity -powerhouse Blackstone Group, at a conference in Dubai. Abraaj Capital, the region's leading private equity operator, completed the largest private equity deal in 2007 by spending $1.41 billion on Egyptian Fertilisers. Last week, the firm announced that it had raised almost $11bn for its new buyout fund and confirmed plans to acquire a 50 per cent stake in KES Power, the biggest shareholder in Pakistan's Karachi Electric Supply, according to Zawya Dow Jones. EFG Hermes, another regional financial services firm, is also expanding its private equity business and has more than $1bn in assets under management in the sector. The firm's second quarter earnings report detailed that a "team from a renowned international investment bank was hired into private equity" in order to drive business. Plans are moving ahead for two private equity funds, including completed investments in the Horus III Fund and the launch of a tourism industry fund this year. Asset management and private equity accounted for 38.4 per cent of total consolidated revenues in the second quarter and EFG plans for the asset management business to be a core driver, according to the earnings report. The report stated that its funds outperformed peers in the Middle East and North Africa region, with the MEDA Fund gaining nine per cent while the MSCI EM and MSCI Arabia lost 13 per cent and seven per cent, respectively. The MENA Special -Opportunities Fund also outperformed the market with an increase in net asset value of about 6.5 per cent over the first half of this year. The firm is considering launching several more specialised funds targeting the Mena region and Asia. Foreign firms are taking note and considering strategic partnerships as the breadth of local knowledge offered by regional firms becomes more valuable to institutions -looking to tap wealth in the oil-rich Gulf region. "We would rather be in franchises like EFG Hermes that will benefit tremendously from the region's growth," said John Burbank, the chief executive of Passport Capital, a California-based firm that owns five per cent of EFG Hermes and has a 12 per cent stake in Shuaa Capital. "EFG was worried about competition from the likes of Goldman and Morgan Stanley and big US players, and now those guys are reduced to holding banks and EFG remains a top contender in the region." Unions between foreign and local firms, particularly in the booming private equity and asset management industries, have been on the rise in the past two years. In March of this year, Gulf Capital joined Credit Suisse to invest in regional private equity deals. In September last year, Franklin Templeton Investments acquired a 25 per cent stake in the local asset manager Algebra Capital to launch regional funds and serve a sub-advisory role. In June 2007, Prudential Asset Management bought a 39 per cent stake in a venture that will acquire the Takaful Ta'awani life insurance business owned by Bank Aljazira of Saudi Arabia, according to Zawya Dow Jones. "The interest [from global firms] is an endorsement of regional readiness and a testament to the regional potential we have believed in for a long time," said Faisal Belhoul, the founder and managing partner of Ithmar Capital, which has a strategic alliance with 3i, a UK-based private equity house. "The region is still underserved." There may be room for everyone, but with the unravelling financial crisis putting the credibility of the most stable banks to the test, local firms will need to be at the top of their games. [e-mail]