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‘Emirate must reform’

‘Emirate must reform’

Private equity firms say big reform is necessary to save the sector in the region. That means foreign ownership, family involvement… and of course, transparency.

August 17, 2010 4:18 by

Easing foreign ownership limitations across the Gulf would have a double positive impact as it would allow investors to bid for majority stakes and obtain control of a business while also making the IPO market more attractive.

More IPOs would also mean better exit opportunities for local buyout firms.

“Relaxing the foreign ownership rules and permitting more flexible share structures would all potentially make PE investments more attractive to overseas investors and hence promote deal activity,” said Isabella Roberts, a partner at law firm Simmons & Simmons.

Transparency and disclosure among family-owned companies in the region could also improve.

Damas, a Dubai-based jeweller with retail outlets across the region, is a case in point.

The family-owned business raised $270 million in its 2008 IPO and a local private equity firm took a stake. But earlier this year, the company’s founders were accused of making “unauthorised transactions” valued at $165 million, resulting in management shake-up and financial trouble.

“There is limited history and a poor culture of corporate disclosure, and while this is improving, there is little precedent for the exercise of minority rights by investors,” said a recent survey on Middle East private equity by INSEAD-Booz & Co.

Another concern for private equity has been the difficulty to exit investments due to the IPO market’s sharp slowdown.
Cairo-based Citadel Capital, for example, has been looking for a while to divest the 34-percent stake in gas and electricity distributor Taqa Arabia which it bought in 2006.

“The exits happening today are all through strategic sales but unfortunately for a PE (private equity) player, strategic sales do not give the same value as an IPO,” said Shailesh Dash, chief executive of Al Masah Capital, a Dubai-based alternative asset management firm planning to launch a private equity fund.

Limited partners (LPs) have become increasingly cautious in allocating funds and are demanding more disclosure and transparency from funds. Some have stopped honouring capital calls from general partners or fund managers, analysts say.
The focus for private equity now is on thousands of family-owned businesses across the Gulf, although law experts warn that there are still too many legal hurdles in such deals.

A key challenge is winning work from family-owned groups who are more comfortable doing deals directly with one another.
“The reality is that most of the Middle East market is very fragmented and many family-owned businesses have the tradition to do business among themselves,” said Triago’s Le Febvre.

(By Nicolas Parasie and Dinesh Nair. Editing by Jason Neely and Sitaraman Shankar)

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