It’s a case of rapid evolution. During the last two years, a quarter of the private equity transactions in the Middle East were control investments in which the fund acquired a 50 percent stake or more.

Yet as recently as 2006, just 7 percent of those transactions were control investments. It’s all part of what Ammar al-Khudairy, managing director of the private equity firm Amwal AlKhaleej, calls “buying in, not buying out.”

This veteran Saudi financier knows a thing or two about buying in. His half-billion-dollar firm consists entirely of bankers and analysts from the region who use their intimate knowledge of the local scene to their advantage in the search for growth investments. And al-Khudairy thinks it’s an advantage that’s going to pay off big.

“More than half the private equity shops in the region will close down in the next three to five years because their business models are no longer solid,” he says. “Those that survive the carnage will emerge better and stronger to deliver superior returns. Remember that achieving superior returns is the raison d’être of our industry. Many have lost focus on this point.”

There’s a good chance that the firms facing extinction began – and exist today – as annexes of commercial banks. Institutional investors are less willing these days to invest in private equity that’s part of a larger institution, according to al-Khudairy. Then there’s the possibility of someone setting up a new shop in the next year or two. “It’s not going to happen,” he says.

Institutional players are going back to basics. “The more you digress from the true model, the more difficult it is to get money. If a team doesn’t have enough skin in the game, investors will pick up and go elsewhere. There’s more scrutiny now of firms that use leverage to drive business,” he says.