Intouch Autumn/Winter 2007-08

Gulf joint venture broadens partners' horizons

When 3i committed $15m to Gulf-based private equity firm Ithmar Capital last year the deal not only brought 3i Group exposure to a high-growth region but also marked the start of an innovative and mutually positive alliance.

By becoming the first foreign private equity house to invest in a Gulf fund, 3i has become established in a key emerging market. “3i is now recognised as a committed investor in a region that is growing almost as fast as India and China,” says Dubai-based Ithmar’s founder and managing director, Faisal Belhoul.

Government spending on infrastructure projects, and fast population growth across the oil-rich Gulf Co-operation Council (GCC) states of the United Arab Emirates, Kuwait, Qatar, Bahrain, Oman and Saudi Arabia, is creating a large number of investment opportunities. What’s more, industries tend to be highly fragmented and served by family-owned firms, often with succession issues.



Beyond real estate
Funds are still pouring into real estate as construction races ahead in Dubai and across the Gulf. But many regional investors are starting to embrace private equity and to seize opportunities to refocus, consolidate and prepare promising ventures for exits. As a result, the volume of private equity funds under management across the Middle East and North Africa has doubled over the past year and is expected to hit $25bn by the end of 2007, according to the Gulf Venture Capital Association.

“Property is an asset class that investors understand and it makes up the bulk of most portfolios. Less than 5% of investors are pure private equity players,” Belhoul says. “But smart investors seek diversification and that’s what makes private equity interesting.”

The Ithmar Capital $250m Fund II, in which 3i has invested, will back GCC firms in the booming oil and gas services and construction industries, as well as the healthcare and education sectors. “The last two are non-cyclical, expand with the population, and are currently underserved,” Belhoul explains.

He expects about two-thirds of the fund to be invested in growth companies that are expanding across the Gulf and that the remainder will back buyouts. The IRR should hit 25%, he adds.



Local partner advantage
But the strategic relationship between 3i and Ithmar is also helping both sides source fresh opportunities for their portfolio companies and to seek out acquisitions in markets that can prove difficult without a local partner. “We expect bilateral deal-flow. 3i is helping us to understand business opportunities and source management talent. We are helping them improve their knowledge and access in the region,” says Belhoul.

Western investors in GCC states discover not only a foreign language and culture but also complex business regulations. Some states forbid foreign ownership of more than 49% of a private venture. Others prevent a single shareholder from owning more than 45% of a listed company’s shares. As in other emerging markets, there are few intermediaries and little information in the public domain about companies.

“At face value it’s impossible for foreigners to do a buyout, but there are ways around the regulations,” says Belhoul. “Our affiliation is also teaching us about Western best practice quickly.” Over the past 12 months the partners have advised each other on key investment opportunities. When the Ithmar II fund was weighing up the $93m acquisition of a 50% stake in Kuwaitbased Mushrif Trading & Contracting last year, Richard Kilner, head of 3i’s business services sector team, was able to help Ithmar Capital assess the company against key players in the global construction market that 3i knows well. “This type of input enables Ithmar Capital not only to invest in the best companies in the GCC, but also ensures that those companies are the best opportunities in their industries worldwide,” says Belhoul.



Meanwhile, Ithmar introduced potential strategic business partners in the Gulf to several 3i portfolio companies. Earlier this year, 3i acquired a minority holding in renowned architectural practice, Foster + Partners, as the firm expands to take on fresh building projects in the fast-growing markets of Asia and the Middle East. Ithmar will provide the company with support, market intelligence and introductions to developers across the region.

The Gulf group has also advised parking services organization NCP, which 3i has since sold, and Spanish family-owned construction firm STEN, on expanding in the region. "We think there are big opportunities for 3i portfolio companies as the region grows, especially in the oil and gas, construction, education, healthcare, logistics and distribution
sectors,” says Belhoul.

Looking ahead, Belhoul forecasts a healthy exit market. Stock markets throughout the Gulf are trading strongly, refinancing is becoming more common and Saudi trade buyers are eyeing firms across the GCC states. “Together we are increasing companies’ exit values,” he says. “The future looks good.”

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