Middle East private equity is entering an interesting period, with the next “vintage” – or cycle of investment – likely to offer investors attractive opportunities, because growing companies are increasingly seeking equity capital as bank loans become harder to access.
Liquidity in the banking system has tightened in recent months as lower oil prices result in a reduction of the flow of government deposits. This has been reflected in an increase in money market rates, which is likely to be compounded by rising policy rates, as regional central banks react to the beginnings of a US rate hike cycle.
Against this backdrop, banks will naturally become more conservative in their lending. For example, the UAE Central Bank’s quarterly credit sentiment surveys have shown that commercial banks began to tighten their credit standards in 2015. However, demand for credit has remained fairly steady, and the manufacturing, transport and logistics sectors are particularly hungry for financing.
While lower oil prices and consequent fiscal constraints are causing Arabian Gulf economies to slow, the region is still likely to see strong enough expansion to encourage private companies to press ahead with their capital expenditure plans. The IMF predicts 2.75 percent GDP growth for the six Gulf Cooperation Council countries in 2016, compared to 3.25 percent in 2015, but non-oil output is expected to expand at a rate of just below 4 percent.
Indeed, if anything, we should expect a redoubling of government efforts to encourage private investment in several key strategic areas such as healthcare, education, energy and infrastructure.
The area of healthcare is a case in point, with governments introducing new licensing regimes to allow private provision of care in specialised areas, while also encouraging public-private partnerships.
The opportunity became clear to me personally when I was visiting the region to meet institutional investors in the late 2000s while raising a global fund. Again and again I was told that healthcare-specialist private equity firms should be investing in the Gulf, as the need for modern, high-quality, specialist healthcare was so clear.
This was partly driven by acknowledgement that the region has some of the highest incidence of obesity and diabetes in the world.
But demographics are also spurring demand.
The population of the UAE grew at a compound annual rate of nearly 8 percent in five years to reach 9.2 million in 2012, according to the National Bureau of Statistics. The birth rate of UAE nationals stands at just over 30 per 1,000 compared to a global average of 19. Neighbouring Saudi Arabia is not only experiencing rapid population growth, the high birth rate and low death rate are also producing a demographic shift, with half the country’s people now under the age of 25.
As the population grows and ages, spending on healthcare across the region is expected to climb in the coming years to developing country levels of as high as 9 percent of gross domestic product (GDP), from only around 3 to 4 percent now.
Across the GCC region, we are undoubtedly seeing an economic shift as the effects of lower oil prices ripple through the economy. Thankfully, government policies to diversify the economy and strong financial reserves are now serving the region well.
In many ways, the time is now ripe for private investment to step up and play a larger role.
Tighter credit conditions should result in better alignment between investors and company owners on valuations. If this combines with a decent rate of economic growth, and attractive sectorial investment stories, 2016 will be a fine vintage for private equity.
Dr Helmut Schuehsler, Chairman and CEO TVM Capital Healthcare Partners
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