Saudi Arabia expected to retain popularity in private equity investment

Saudi Arabia will remain a favoured destination for private equity investment in the coming years in spite of volatile oil prices and instability in neighbouring Yemen, investment professionals said yesterday.

Lower oil prices in the past year are unlikely to affect the growth in consumer-facing sectors such as health care and retail, making companies operating in such sectors attractive targets, according to Huda Al Lawati, a partner with Abraaj Capital in Dubai.

“Oil supply is always up and down, but that doesn’t have an impact on consumer trends in terms of underpenetrated sectors such as health care, education, consumer goods, food and beverages and so on. So I think they won’t be significantly affected,” she said.

Ms Al Lawati was speaking on the sidelines of the Middle Eastern M&A and Private Equity Forum, held yesterday in the DIFC.

Her comments came the day after Amanat Holdings said that it had signed a sale and purchase agreement to acquire a “significant stake” in a healthcare company in Saudi Arabia, giving no further details.

Abraaj last month completed an investment in the Saudi fast food chain Kudu, in conjunction with the US private equity firm TPG Capital.

But sustained lower oil prices may have an impact on deals in infrastructure and construction sectors, according to Sameer Nawaz, the managing director and co-head of investment banking at Saudi Fransi Capital in Riyadh.

“With many of the big infrastructure projects the reality is that the investment is led by government; if that spending comes down deal activity will be affected,” he said. “There’s no evidence that it’s going to be affected immediately, but it could have an impact over time.”

Events in Yemen do not appear to be dissuading would-be dealmakers in the kingdom, he said.

“It has come up in discussions, but only in about one in 30 conversations, so I don’t see it having a major impact on deal flow.”

Saudi Arabia’s Capital Markets Authority issued its long-awaited final rules for qualified foreign investors late yesterday. The first qualified investors will be able to trade directly in Saudi equities from the middle of next month.

The entry of QFIs in the Saudi market will only benefit the private equity market in the country, according to Ms Al Lawati.

“For a lot of international investors, their first entry into a new market comes via equities,” she said. “The opening up of the Tadawul serves to create additional insight for foreign investors coming into our region, which helps our international fundraising process in the long run.”

“From our perspective it will mean a deeper stock market and more exit opportunities.”

According to Ruth McKee AlGhamdi, the head of Mena at Mergermarket, there has been less M&A activity in the first four months of 2015 than the corresponding period a year earlier. But activity is forecast to pick up later in the year.

“We are expecting a number of deal announcements in the health care, financial services, food and beverage, retail, industrial, construction, engineering, infrastructure, education and ICT sectors,” she said.

“Several new regional private equity funds are being raised and this will fuel the mid-market buyout pipeline, particularly in the UAE, Saudi Arabia, Egypt and Morocco.”

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