With hindsight, you might ask why it took so long for a shrewd investor to snap up mercator, the aviation software business bought by US private equity group Warburg Pincus (WP) earlier this year.
The business is one of the Emirates' genuine success stories. It was set up in 1995 by dnata, the aviation services unit of the Emirates Airline group, and grew by offering software services to airlines in emerging markets in Asia and Africa. By 2007, it was serving a stack of carriers with financial accounting, cargo tracking, baggage handling and safety services.
Joe Landy, WP’s co-chief executive, saw the success of meractor and its potential, and bought it for an undisclosed amount (reckoned to be in the hundreds of millions of dirhams). “Significant progress has been made in carving out mercator as a standalone entity from dnata. The company has continued to make good progress and win new customers. Customer feedback on our investment in mercator has been very positive. Dnata and Emirates have proved to be excellent partners in mercator,” he says.
The deal was WP’s first in the Middle East, but is unlikely to be the last. The firm has been around for 45 years from its roots in New York, originally as an offshoot of the Warburg banking dynasty, and has become one of the most active US private equity businesses, investing more than $48 billion in 700 companies in 35 countries around the world.
Mr Landy’s focus looks likely to fall increasingly on the Gulf region. “From an investing perspective, private equity can play an active role in helping with the development and growth of the UAE region. Private equity does not just bring capital but also experience and knowledge to help build businesses and expand them internationally,” he says.
“The economies of the UAE are growing and diversifying away from energy-related industries and it is likely that over time the private sector take a more active role in running businesses in the region,” he adds.
He also sees opportunities in the family business sector, one of the mainstays of regional economies, where founding generations are often looking for ways to smooth the transition to a more modern corporate and financial structure. “All of these are positive factors which will lead to a more active private equity market in the region,” Mr Landy says.
Although mercator was his first deal in the region, he is no stranger here. “We have been doing business in the Gulf for more than 15 years as several of our investors are based here. A number of our portfolio companies have been active across the Gulf for many years.
“We are a global private equity fund and historically our focus has been on our five industry sectors – consumer, industrial and services; energy; financial services; healthcare and telecoms – in our key geographic areas of the Americas, Europe and Asia. As new markets such as the Middle East and Africa have opened up, then we have begun looking at them more,” he says.
The WP model does not just bring capital to the businesses in which it invests; it also injects management expertise and know-how. A management team, headed by what Mr Landy calls an “entrepreneur-in-residence”, is put into the invested company to offer management advice but also to identify subsequent investment opportunities.
The executive involved with mercator was David Tibble, who had considerable experience in the aviation technology business with the buyout of British Airways’ offshore processing business, WNS, in 2002. The business grew revenues dramatically, from $15 million annually in 2002 to more than $500m last year, and along the way got a listing on the New York Stock Exchange in 2007.
Is a similar successful exit on the cards for mercator, in which Emirates and staff retain an interest after the WP deal? “We intend to nurture it over five to seven years and then, as a private equity investor, we will look for an exit. An IPO is one option, and of course also a possible trade sale. But for now our focus is on growing mercator rather than exiting it. An exit is a long way off and for now we are focused on expanding the business,” says Mr Landy.
He continues: “In private equity the environment has been tough but now we’re seeing a rebound, so there’s lots of liquidity back in the markets. After the financial crisis the markets did shut down. There was no liquidity being created anywhere in the world for a couple of years. But it’s getting much better.
“Finding assets, that’s where it’s difficult, because prices are high and money is cheap. As a global firm we are always asking the question: where are the opportunities? We’re looking to identify not especially broad markets, more like needles in a haystack, with the right management teams, products and technology,” he says.
The “needles” are found in the US, where slightly more than 50 per cent of the investments are made, but also increasingly in the East. “China is very interesting. We’ve had some good success there in creating liquidity”.
