Why there is more to the Gulf than oil

Is now a good time to invest in the GCC (Gulf Cooperation Council) region?

While the GCC region is certainly going through a volatile period, there are still pockets of growth, especially in non-oil sectors. The non-oil economy in the GCC has historically grown at more than two times the pace of the oil sector over the last 16 years (6.5 per cent annual growth for the non-oil sector versus 2.8 per cent growth for the oil sector from 2000 to 2016). Defensive sectors within education, healthcare, food and beverage and retail are still attractive industries to invest in, in the current cycle. They naturally benefit from the strong regional demographics and solid purchasing power. Many of these sectors are still at the early stages of their long-term growth, thus representing compelling investment opportunities for private equity players.  Additionally, the digital economy is proliferating globally and has been a fast-growing industry in the MENA region during recent years. With one of the highest mobile phone and internet penetrations in the world, the GCC is a promising region for e-commerce and social media investments.

Does the restricted nature of stockmarkets mean private equity is the best route?

2016 promises to be a productive year for the GCC private equity industry. Sellers’ expectations are coming down and many companies are looking for fresh funding in order to weather the current cycle and expand. With the IPO market virtually shut down and banks’ liquidity drying up, private equity is often the only route for many business owners to fund their growth or to secure a liquidity event. In that sense, the next two years promise to be very productive for private equity firms in the region.

How has the depressed oil price affected opportunities?

The drop in oil prices is being felt throughout the economy as government revenues drop sharply and consequently public investments are reduced. There is a trickle down effect across the economy with overall GDP growth for the region dropping from a historical 5 per cent to 2.9 per cent in 2016. The non-oil sector is still growing at a respectable 3.8 per cent across the GCC in 2016. With this slowdown in the economy, we see valuations of potential transactions coming down and sellers becoming more realistic when it comes to price expectations. This should result in more opportunities and more private equity transactions closing in 2016.

Can you give a few examples of the defensive sector companies you have invested in and why you favoured these particular opportunities?

Gulf Capital is currently invested through its various private equity and private debt funds in a number of defensive sectors including power, water, healthcare, education, food, fast-moving consumer goods (FMCG)and logistics. These sectors tend to do well and will continue growing on the back of a strong population growth rate (at 4.4 per cent growth over the last 10 years – one of the highest population growth rates in the world) and a rising GDP per capita (the highest in the world at $61,117). 

Which countries are you favouring in the GCC, bearing in mind that investors could be put off following some of the events following the Arab Spring?

We have always viewed the GCC countries as a compelling investment destination within the wider MENA region. The governments long led wise expansionary policies and implemented aggressive reforms as to create self-propelling economies. This has resulted in a clear diversification of the economic base away from the traditional oil and gas component. The UAE in particular has done a very good job at diversifying its economy with over two-thirds of the economy today being non-oil based. The UAE remains our preferred investment destination in the region on the back of the strength and diversity of its economy.

There is currently many succession issues affecting Arab Gulf countries and talk about state ownership of certain industries being relaxed – how will these issues affect perspectives for investment?

Regional governments, especially Saudi Arabia, are contemplating introducing fiscal reforms, cutting subsidies, increasing taxation and contemplating privatisation and public-private partnerships. While some of these measures are difficult in the short-term, they are necessary and healthy in the long-term. Given the fiscal pressures, governments are actively pursuing privatisations of major companies and infrastructure projects and this privatisation drive could result in attractive investment opportunities for global and regional investors.

What are the three key challenges or problems investors looking to the Gulf region should be aware of?

Many emerging markets investors worry about currency exposure and fluctuation. Fortunately, this is not a concern in the GCC as most of the regional economies are pegged to the dollar. In essence, there is no currency risk for dollar-based investors when investing in the GCC. Some worries or “clouds on the horizon” include a softening economy, the introduction of taxation and the weak capital markets (which prevent potential exits in the short term). As a long-term private investor, we hope to acquire promising companies at attractive valuations during this current downturn and ride the current turbulence and be ready to exit some of our portfolio companies during the next upturn.

You are also expanding to sub-Saharan Africa through a partnership with Serengeti Capital – is this because there are currently better opportunities in Africa than in the Middle East?

A number of our portfolio companies have expanded already from the GCC into Africa. We are active today in power, water, healthcare, FMCG, oil and gas and manufacturing in Africa. The UAE is a great place to operate from and to invest into Africa, with Dubai being the single most connected city into Africa through its national airline. As we grow our operation and follow our portfolio companies’ expansion, Africa was the next logical growth market for us.