The OPIC, which has approved a US$455m financing facility to support the five private equity investment funds, has picked the investment firm to manage the Riyada Enterprise Development Growth Capital Fund, which has a target capitalisation of $500m.

The fund will invest in small and medium-sized enterprises throughout the MENA region, particularly companies, which stand to benefit from investment in technology.

The other funds to secure OPIC’s investment include the KIPCO Opportunity Fund, the Siraj Palestine Fund, Citadel Capital Joint Investment Fund and Accelerator Technology and Innovation Capital Partners.

The move comes after President Barack Obama announced in June that the US would launch an investment fund to support technological development in Muslim-majority countries.

There’s nothing unusual about private equity firms chasing Middle East health investment, but what happens when deals dry up, asks Ryan Harrison.

The region’s medical sector emerged from the aftermath of the global financial crisis with barely a scratch on it.

Alongside education and utilities, health is one of the most robust industries, weathering the economic storm thanks to strong demand for services on the back of rapidly growing and aging populations, and spikes in traffic accidents.

In recent years, as governments tweaked their public policy, regional private equity firms made healthcare the home for increasingly large piles of their cash. And during the boom they started a landslide of deals that secured them handsome profits.

But it’s healthcare’s resilience that’s now playing havoc with their deal making. Asset valuations haven’t dropped like other sectors and there haven’t been the fire sales of distressed assets found in the property markets in places such as the UAE. Some say at best it’s left the market for healthcare deals sluggish, and at worst stagnant.

Abraaj Capital, the Middle East’s biggest private equity firm, with US$6.6bn funds under management, has identified high valuations as a hurdle to the conclusion of deals.

The firm has been a major player in healthcare since 2007, when it decided to take the plunge for the first time, buying a substantial stake in Turkey’s Acibadem Healthcare Group, the country’s largest privately owned operator of premium hospitals. Abraaj has since gained a foothold in Saudi Arabia and Egypt through acquisitions and is spreading across the region using these ventures as a launch pad for further buyouts.

Achmed Al-Shahrabani, a senior vice president at Abraaj, says: “Valuations are a key element in deals; good assets come at a price. Because healthcare is more resilient to economic downturns than other sectors valuations in general haven’t come down as much.

“In general, valuations in healthcare companies have generally remained stable, however in some instances we have seen some reductions.”

Abraaj, established in Dubai in 2002, recently used its controlling stake in Eqypt’s Al Borg Laboratories – a medical laboratory-testing company – to buy a 51 per cent stake in Medical Genetics Centre, also based in Egypt. “It gave us a chance to increase the physical size of our operation – by way of more branches allowed us to diversify into genetics. MGC is the country’s biggest genetics testing laboratory,” says Al-Shahrabani.

“We’re looking at healthcare on a regional basis, so if there’s a suitable hospital or other healthcare business then you take that company and continue to grow it in its home country and in parallel roll it out across the region,” he adds.

The “roll up, roll out” M&A model has also proved popular with Gulf Capital, an Abu Dhabi private equity firm with assets of about US$1bn, but valuations have also proved a headache.

Gulf Capital and Abraaj have focused initially on markets such as Saudi Arabia and Egypt; countries with the highest populations. Gulf Capital allocates three per cent of its capital towards healthcare, which may appear small, says Imad Ghandour, an executive director at the company, but is comparable to the ratio of healthcare in the wider economy of Gulf countries.

He says: “Generally, valuations are very high in this region. You have to work hard to get a good deal in healthcare.

“Good deals are hard to do at the right price and today people are aware of the risks and are very keen to invest correctly, whereas before people were prepared to pay higher prices. Now, they are asking for lower prices and fewer deals are being done.”

Ghandour, which oversees Gulf Capital’s investment primarily in mid-market private companies in the GCC with profits between US$5m and US$20m, estimates that there has been a drop of up to 85 per cent in deals done in the Middle East health sector between 2008 and 2009.

Given the dearth of reasonably priced hospitals in today’s market, some smaller private players are taking the initiative and building their own assets from scratch.

Salam Saadeh, founder and CEO of Active-M, a small venture capital outfit that’s been running for a year, says she’s working on a series of projects, on a deal-by-deal basis, and may one day launch a private equity fund.

“We build the health projects ourselves. And, as far as I am aware, there is no one else in this space. No one is focusing on the venture capital health market, the risks are high, but return on investment is also high.

“There are lots of private equity firms that want to get into the private health sector but the problem is there aren’t many assets for sale,” Saadeh says.

“The returns in stock exchange and real estate investment are no longer there to the same extent, this means people are interested in VC for returns.”

Founder of venture capitalist says investors are hungry to strike health sector deals.

While the private equity industry is hungry for growth in the UAE health sector, the number of available assets is limited.

“There are lots of private equity firms that want to get into the private health sector but the problem is there aren’t many assets for sale. The way we do it is we build our own assets. We currently have four health projects in the pipeline,” says Salam Saadeh, founder and CEO of Active-M Group.

“We build the health projects ourselves. And, as far as I am aware, there is no one else in this space. No one is focusing on the venture capital health market, the risks are high, but return on investment is also high.”

At the beginning of this year, Dubai Healthcare Authority, Active-M Group and Philips announced a joint venture to develop a strategic framework for delivering and marketing a Continuous Medical Education academy of excellence. The academy, based in Dubai, will offer both international and local accredited courses for all medical practitioners in the UAE and the GCC.

“Active-M and its shareholders put up the funds for Continuous Medical Education in Dubai; DHA has come on board as a guidance facility; and Philips is a preferred equipment partner,” said Saadeh.

“We’ve just signed the MoU for the Continuous Medical Education, so we’re still drawing up the strategy and finances. The project may be worth around US1.5 million. The VC projects often involve smaller capital than the private equity firms.”

The CEO added that the recession means the returns in stock exchange and real estate investment have diminished so clients people are turning to venture capital for high returns.

Active-M Group is building up its projects on a ‘deal-by-deal’ basis, before looking at launching a healthcare fund.

FORMER ISTITHMAR CEO, DAVID JACKSON

Istithmar has a job convincing investors that its asset-selling strategy is by no means a fire-sale.

Dubai World’s investment arm Istithmar World has put its port and shipping agent Inchcape Shipping Services (ISS) up for sale for between $600m and $700m and has attracted interest from private equity groups.

At this point it’s worth remembering that Istithmar has nothing to do with the huge restructuring taking place at Dubai World, despite being owned by the emirate’s flagship conglomerate.

Something Dubai World made clear in a recent statement to its investors: “The process will not include Infinity World Holding, Istithmar World and Ports & Free Zone World.”

The problem is that any news at the moment of selling of assets or major personnel shifts at Istithmar is likely to get lumped into this larger restructuring process. Or worse, investors may see it as a reckless short cut to shore up confidence and offload assets for quick cash.

Either way, there will have been some nervous faces in boardrooms at Istithmar’s Emirates Towers headquarters over the last month.

David Jackson, the chief executive of Istithmar, resigned a few weeks into the New Year, leaving a legacy of borrowed capital as a major strategy for a variety of high-profile investments, including the New York boutique investment bank Perella Weinberg Partners and Cirque du Soleil, the Montreal-based entertainment company.

During his time at Istithmar, Jackson also acquired a number of high-end properties, including upscale retailer Barneys New York, Manhattan’s chic Mandarin Oriental Hotel and the landmark Fontainebleau Hotel in Miami, site of the James Bond “Goldfinger” film.

But, in December, Istithmar lost the W Hotel Union Square in Manhattan in a foreclosure auction. It bought the property for about $282m in 2006. It sold for $2m.

Now comes news that ISS is up for sale.

It’s, therefore, clear that regardless whether a restructuring falls under the Dubai World umbrella or not, Istithmar needs to reassure investors and banks that its not acting recklessly in a bid to grab instant cash, but instead prides itself on being a long-term value creator.

As the private equity industry shifts from risky debt-laden buyouts, firms are hiring corporate fixers to build up the companies in their portfolio.

Borrowing large sums of money to fund massive takeovers was once a quick and easy way for some private equity firms to turn a profit, but the advent of the financial crisis made life a little more complicated.

Liquidity at various sources of lending, especially banks, dried up and buyout specialists were left scratching their heads.

The private equity industry, which ranges from venture capital to mid-market and large buy-out firms, is now leaning towards a fourth segment, growth capital.

It’s less sexy, but less risky in the current climate. And for the Middle East, it’s a perfect fit, experts say.

The growth capital model allows private equity firms to make money by helping small businesses grow into large, efficient ones, in what is being seen as a fundamental shift back to the industry’s roots.

The truth is the culture of the large buyout that was deployed in the west never gained traction in the region because of the way business is done.

Antoine Drean, the chairman and chief executive of Triago, a French private equity agency that does business in the region, says: “Some large private equity companies tried to import the buyout model into the Middle East, but it didn’t work. For the reason that most of the industries in the region are quite young and belong to owners that aren’t willing to sell.

“Instead, it’s in the growth capital side that you’re seeing the most activity now. So, the idea is that you invest in companies and nurture them rather than trying to purchase them.”

He says in the Middle East there are a lot of companies that need this type of treatment, particularly
in Saudi Arabia, Kuwait and the UAE, across all sectors, but specifically education, health care and financial services.

Triago acts as an agent for private equity firms to raise money in the Middle East and has worked with sovereign wealth funds including the Abu Dhabi Investment Authority.

A number of the larger international firms such as the Carlyle Group and Kohlberg Kravis Roberts have all faced difficulties executing dramatic leveraged buyouts in the region.

Experts say that there’s little appetite among many family businesses for huge capital injections from private equity firms, given their large market shares and healthy revenues in a region where oil revenues drive economic activity.

Sometimes it’s as simple as not wanting to relinquish power over a family business that their fore fathers have spent decades building up.

To support the shift to growth capital, private equity firms are hiring business specialists – known as operations staff – to go into companies in their portfolio and assess the strengths and weaknesses.

Drean says: “They need someone to make sure that the businesses that they’ve invested in are well managed, which is where most of the challenges lie in today’s market.”

David Rubenstein, a veteran private equity player and co-founder of US-based Carlyle Group, said recently while at an investment conference in Dubai, that there will be a far greater emphasis across the whole industry on growth capital strategies, adding: “Many more private equity firms will add operational people to their talent pool and spend much more time working on a company post-investment.”

Rubenstein said that the private equity industry will transform following the credit crisis, which has prevented firms from obtaining cheap debt to buy companies in highly leveraged deals – the mainstay of the 2005 to 2007 boom.

The Carlyle co-founder thinks investments will be smaller and less frequent, deals will see more equity and less debt, and holding periods will be longer.

“We relied on very cheap debt. It was intoxicating to get debt with no covenants – people wanted to do more and more deals and there was a greater focus on very large deals,” he added.

With US$86.1bn under management, Carlyle is one of the biggest private equity firms in the world.