Private Equity and Venture Finance in MENA: Back to the Future

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The Middle East has a history of breeding amazing entrepreneurs the world over. One thing though that remains in short supply, in my personal opinion, is the buildout of a Team Spirit. I strongly believe in the fact that there’s still plenty of money and private equity capital available around the globe. Yet currency alone may be inapt to cultivate great entrepreneurs gelling to form great teams. A company’s biggest challenge and biggest advantage is and has indeed always been the team behind it – The right people with the right talent backing opportunities as they emerge, continually win. There is no secret sauce. The “cult of the personality” has clearly taught us all a lesson we are not about to forget anytime soon.

The Birth and Growth of Private Equity in MENA Unlike the United States, where the seeds of a fledging and flourishing PE industry were planted as far back as 1946, the Middle East has a short and tumultuous history. The emergence of PE in the MENA region made its ostentatious debut in the 1990’s.

The asset class was well-received, gaining the attention and interest of local – primarily GCC based – limited partners (LPs) which led to the establishment of many first-time funds successfully raising sizable pools of capital in a relatively short time period. By 2007, the funds raised for regional investments reached $6 billion. They unfortunately fell dramatically after a stable period between 2013-2016 to around $2 billion today according to Bloomberg.

One of the major setbacks to the industry was the recent saga of the Abraaj Group which collapsed in Dubai and left a dry deal landscape for regional-based PE firms. The saga though didn’t keep foreign private equity money away from the United Arab Emirates entirely.

Let’s be honest, the challenges, a bumpy evolution and such scandal is not limited to the region, as the US and Europe have had their fair share of capital chaos. Due to the asset class in the region being fairly nascent with few players, these events tend to be accentuated and overpublicized. In fact, foreign investors are as active as ever in the region.

This year alone, New York-based KKR & Co. and BlackRock Inc. agreed to invest $4 billion in Abu Dhabi’s oil pipelines, while London-based CVC Capital Partners agreed to buy a 3 percent stake in private schools’ operator GEMS Education. Prior, Carlyle Group’s $51.3 million investment in Jordan’s frozen food producer – Al Nabil Food Industries – posted a 40 percent cumulative gain. Not to mention the largest exits in the region’s history – famed acquisitions of Maktoob, Careem and Souq by Yahoo!, Uber and Amazon respectively.

Current State of Affairs Overall though, it is a fact that the downfall of Abraaj Group didn’t just kill the private equity firm Arif Naqvi built in Dubai. It crippled the entire market.

Since Abraaj’s swift and spectacular demise was set in motion almost two years ago, funds went from flourishing to finite in which there was virtually no money raised by private equity firms based in the Gulf Cooperation Council despite strong performance by PE firms almost everywhere else, according to Seattle-based data provider PitchBook and London-based Preqin. Although Jordan, the UAE and Lebanon are still the centers of influence for PE and VC in the MENA region, some drastic policy measures and recommendations are in order with some underway in these countries and others as well to turn the tide and create a MENA powerhouse.

A close look at the private equity industry in MENA shows us indeed that it has faced a succession of setbacks over the last 15 years – which few players are still ready to accept – and some thorny geopolitical issues may be creating new uncertainties despite the fact that the current roster of firms active in the region still consist of seasoned professionals who have negotiated previous waves of political and economic volatility and created value in the process.

Also, despite the industry’s small size, reported deal performance on both a gross IRR and cash multiple basis is good, proving that in spite of all the headwinds, private equity firms focused on the MENA region have been able to both source high-quality investments and generate returns.

One should hence take confidence from the past experience that the region’s fund managers will be able to navigate the next wave of challenges. But there is more to the story.

While the rapidly growing youth population is a potential boon for firms focused on consumer goods, services, healthcare and education, it’s requiring governments to achieve levels of economic growth capable of putting all of these young people to work.

The region still suffers from a dearth of finance available for businesses, particularly small-and medium-sized enterprises, as well as insufficient management expertise to take companies to their next stage of development. Private capital can bridge these gaps by providing expansion capital, by helping businesses grow in line with international standards, by connecting these companies to new markets, and ultimately by creating licit opportunities for the region’s youth to earn a living in the formal economy. Government though has to play its part too. Regional policy and practices unfolding in the region at large to address this gap are promising, particularly among the influential hubs for PE and VC (Jordan, UAE and Lebanon). However, there is still ample room for advancements where acknowledgement and meaningful action prove vital.

As governments across the Middle East and North Africa increasingly appreciate this connection, they should start much more aggressively to actively engage private sector partners. Nearly all regional governments have come to realize that youth employment is critical to stability, and that they alone cannot employ the waves of young people coming into the workforce. Unless leaders get the private sector side of the equation correct-and allow the private sector to develop and drive job growth-a world of turbulence will likely ensue.

Bottom Line: Private equity remains grossly underutilized, with private equity investment as a percentage of GDP weighing in at just 0.2% for the MENA region in 2018. In an environment where newsfeeds carry more headlines of destruction than construction, private capital can be a substantial positive agent of change. By partnering with local entrepreneurs and building better businesses, the private equity industry can also help the region build a much brighter future.

Capital Access Recommendations

Recommendations for policymakers:

  1.  Design policies and programs to fit the “reality” of business: It is a fact that government policies at large are not well understood or utilized by businesses and fail to provide the competitive price, accessibility, and certainty that businesses look for when seeking capital. For these policies and programs to achieve their stated goals, policymakers should structure them to meet the specific needs of business or consider enhancing and expanding collaboration with private-sector capital providers to leverage those providers’ expertise and capabilities. This may necessitate agility and better integration to streamline efforts across, often dispersed, programs.
  2.  Expand entrepreneurial education of capital options: Even if a source of capital is a good match for the needs of business, it won’t be utilized without substantial awareness among target enterprises. Policymakers should encourage educational programs that help inform businesses, nonprofits, and government agencies of all sizes of the different capital access options, as well as their costs, benefits, and requirements. This could be a direct government effort, but it may be more effective and efficient to partner with nonprofits, global institutions and business organizations focused on improving capital access.

Recommendations for capital providers:

  1. Develop a relationship with clients: A positive relationship is a major driver of clients. It behooves one to get to know them and develop a positive relationship. This will not only help make the relationship “sticky” but will also help in understanding the needs and trends in the market, positioning providers to better adjust as the market changes.
  2.  Consider strategic partnerships: Leaders may not be able or willing to provide capital to all companies; however, even if it’s not possible to deliver on all the necessary services, through the use of strategic partnerships they can preserve the presence of a company within their respective relationship umbrella. Financial technology alone has little meaning unless there is underlying value. In order to create jobs and real prosperity, financial technology must act on other factors; and none is more important than human capital. Once again, “Human Capital” and the burgeoning of “Team Spirit” is the essence of all.

* Zana Nesheiwat is CEO of BrandZA, Inc., Partner at Blackhawk Partners, Inc.and wealth-curator charged with building valuable brand assets, originating and optimizing strong partnerships, and advancing investment opportunities that benefit all stakeholders.

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Venture Finance in the MENA Region: Challenges and Opportunities Ahead

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I recently had the pleasure and honor of participating in the Digital Mashraq Forum (DMF) under the patronage of HRH Crown Prince Al Hussein Bin Abdullah II, the Ministry of Digital Economy and Entrepreneurship in Jordan and the World Bank Group.
The high-level affair to discuss the future of digitalization in the region attracted upwards of 500 attendees from public and private organizations across 25 countries. The DMF hosted a VIP pre-reception and an immersive two-day program with 26 panels, 69 speakers, 40 startups and 22 investors on board. A commendable success to orchestrate such a powerful platform.

The caliber of men and women was unexpected, to say the least. It was most certainly a remarkable experience to be surrounded by so many educated, talented, sophisticated, pleasant, informed, ambitious, engaged and relentless humans for three days.

Although a regional event, it was without a doubt global. Entrepreneurs, companies, VCs and public officials from MENA, Europe, Asia, Africa and throughout the US all doing great things.

Back in Business: Ripe, Rich and Ready

It is no secret – The Kingdom of Jordan is on the brink of breaking through bureaucracy to bring in billions of dollars and it’s only a day away. The events taking place are defying the antiquated sentiments that postulate a lack of resources as an uncontended culprit preventing a rapid evolution to modern economic and social systems. The fact is there is abundant capital and it’s high-time this wealth is unlocked and effectively allocated to achieve its full impact-potential.

Public-Private Partnerships

Once again, it is as much about the caliber of people and companies and the ambitious agenda the DMF sets to advance as what it symbolizes. The conference concluded with the release of “Amman Communique,” announcing Jordan’s plan to launch a regulatory reform process and digital transformation strategy by the end of 2019 to improve the Kingdom’s business environment. The communique also addressed the government’s commitment to open the National Broadband Network (7,000 kilometers of fiber) for public-private partnerships (PPP).

For Jordan, the meeting was one of many recent government-backed initiatives that emphasize its commitment to back and empower entrepreneurs, create a conducive business environment, and advance robust public-private cooperation.

The Role of the Central Bank

My partners at Blackhawk and I strongly believe the Central Bank of Jordan can serve a fundamental role in leading a PPP that will open up the flood gates of capital.

Consider Lebanon, a neighboring country in the Levant, that instituted an impactful PPP model. In 2014, The Banque du Liban (Central Bank of Lebanon) introduced Circular 331 to bolster the Lebanese ‘Knowledge Economy.’ It is proving effective despite the Central Bank’s massive debt and the country’s stormy geopolitical climate.

In fact, Circular 331 which encourages commercial banks to invest in startups is clearly one of the boldest and smartest initiatives undertaken so far by the Lebanese government. For the uninformed, the Central Bank now guarantees up to 75 percent of the value of a commercial bank’s investments into a startup. That move opened up a potential of $400 million that could be invested into venture capital funds or directly into startups. Circular 331 has clearly taken it up a notch by encouraging venture financing.

This model can be similarly emulated in Jordan to open up the flood gates of capital second to none; especially given the fact that Jordan has half the Debt/GDP ratio of Lebanon.

The Flood Gates of Capital

Purposing a public-private partnership of this magnitude to create professionally managed pools of capital in Jordan will create an octopus of opportunities:

  1. More Capital: The capital injection will increase the number and variety of VCs which would in turn fund and empower more entrepreneurs.
  2. Take Jordanian Companies Global: Such program would establish new VCs of the highest caliber with qualified experience that not only meet local-standards but have the aptitude to fair-well globally was well. More globally competitive VC’s mean more globally competitive companies.
  3. Larger Pools of Capital: It will serve to develop and expand the current VC system exponentially. Most VCs in Jordan today are basically restricted, for the large part, to seed-stage. This opportunity would allocate capital to equip new VCs to mature and develop seed to later-stage companies. Larger VC pools of capital will serve to accelerate the growth and scalability of the companies they fund, positioning them compete in global markets.
  4. Empowered Entrepreneurs: With new VCs and larger funds, a whole new spectrum of entrepreneurs will have access to capital. Consider the shift in dynamics that would follow – Consider companies or entrepreneurs that don’t conform to their capital providers but are forced to comply to secure their financial survival. This desperation leads to discouragement which in turn stifles individual potential and the evolution of their enterprise. A robust VC model will pierce this paralysis and protect innovation capital, a source of national wealth.
  5. Green Light for Foreign Investment: This government-backed initiative gives outsiders the greenlight – Jordan is open for business. The blessing and support of the Kingdom boosts investor confidence, garners respect from national leaders and will certainly serve in reaching their FDI targets, probably overnight.

Looking Ahead

Make no mistake about it. At the end of the day, it all boils down to access to professionally managed pools of capital that can make a real dent in the marketplace. You can have the smartest and most educated entrepreneurs on the planet but without “smart” capital backing them, their projects are nothing but a pie in the sky. Silicon Valley is a prime example in this regard. Without Sand Hill Road backing the entrepreneurial spirit and companies of the Valley back in the early 80s and 90s, the tech giants of today would have never existed.

Just as it has in the United States, the worldwide democratization of capital will democratize industrial assets and produce an explosion of job creation the world over. The MENA region needs this more than any region in the world. And the capital revolution, which so changed America in the last third of the 20th century, is only the prelude to the other two major revolutions of the 21st century — the worldwide democratization of venture financing and of knowledge. These three revolutions, each aided by emerging technology, provide hope that the 21st century will be able to avoid the terrible Middle East conflicts of the past hundred years and become a new Age of Enlightenment. Our children won’t have opportunities unless there are opportunities for everyone.

*Zana Nesheiwat is a Partner and wealth-curator at Blackhawk Partners, Inc. charged with building valuable brand assets, originating and optimizing strong partnerships, and advancing investment opportunities that benefit all stakeholders.

Blackhawk Partners Inc. is a New York based private “family office” that is in the business of originating, structuring and acting as equity investor in management-led buyouts, strategic minority equity investments, equity private placements, consolidations and buildups, and growth capital financings for both US and emerging market companies at all stages.

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American Exceptionalism vs. Socialism

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Ask your neighbors and coworkers whether it’s a privilege to be an American, and nearly all of them will answer with a resounding “yes.” But the rising new leaders of today’s Democratic Party see American privilege as a mass delusion standing in the way of their political ambitions. This was painfully evident last week during President Trump’s State of the Union address (SOTU).

SOTUs have traditionally been positive affairs. American exceptionalism is so everlasting that most presidents can find something in the national condition worth boasting about, and even their political opponents find something in the boasts worth applauding.

Not so this year. Having presided over the strongest economic expansion in generations, President Trump’s speech had no shortage of achievements, and the response of ordinary Americans was electrifying. According to a CBS News poll, 76 percent of Americans who saw the speech approved of it.

However, the response of Democratic lawmakers who attended the speech flew in the face of our political traditions, particularly that of a bloc of congresswomen wearing white from head to toe to commemorate the 100th anniversary of women winning the right to vote.

The “women in white” leered with contempt at the president throughout his speech. They ignored his call for unity and bipartisanship. About half, including newly elected loudmouth Alexandria Ocasio-Cortez, refused to join the rest of the chamber for a standing ovation when President Trump called upon the American people to “embrace the boundless potential of cooperation, compromise, and the common good.”

They sat stone-faced when the president touted the lowest ever unemployment among minorities and the disabled. They ignored his praise of new “right to try” legislation giving terminally ill patients access to experimental medicines. Same thing with America becoming a net exporter of energy for the first time in 65 years.

They remained somber even when President Trump announced his new Women Entrepreneurs Finance Initiative, which promotes the economic empowerment of women in developing countries.

Only when President Trump specifically hailed the achievements of American women — filling 58 percent of new jobs last year and being elected to Congress in record numbers — did members of the group feel obliged to stand en masse, essentially to applaud themselves.

The refusal of Ocasio-Cortez and other “progressive” Democrats to celebrate, or even acknowledge, the success and good works of other Americans, irrespective of ideology or creed, on this time-honored occasion is shameful and unbecoming of servants in public office.

But it’s politically astute. Proponents of the socialist Green New Deal — which now has the support of 70 Democrats in the House, 12 in the Senate, and six presidential candidates — know it’s impossible to get Americans to accept a one-size-fits-all blueprint for centralized planning of their lives and livelihood so long as they think of themselves as privileged.

For all of their divisive rhetoric and mainstream media adoration, Ocasio-Cortez and her ilk aren’t likely to convince a majority of the U.S. public that the American dream is a lie, at least not in time for the 2020 election. But they may convince enough people to enflame the social chaos and division we have been experiencing lately, and that might set a prelude one day for realization of their socialist fantasies.

President Trump is right that the state of our union is strong, at least economically and militarily, and a majority of Americans embrace his call to “step boldly and bravely into the next chapter” of this country’s glorious history. We must not let the ideological radicalism and hunger for power of a few destroy this future.

Zana Nesheiwat is the founder of Brand ZA, Inc., an integrated business solutions and impact-branding firm specializing in financial services, public policy, and technology, and an associate partner with Blackhawk Partners, Inc. a private equity firm based in New York City.

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Future of the VC Industry

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dont-follow-trends

FROM DISNEYLAND TO VC MANOR

Imagine gallivanting across Disneyland on a sunny March afternoon as the delightfully consuming scent of a fresh batch of popcorn kernels pop to perfection. The popcorn maker sits adjacent to the churros chariot that you’ve been evading all afternoon. Yet, this isn’t any ordinary trip to The Happiest Place on Earth. You’ve arrived early, the crowds are minimal and all the rides are operational. As you approach the renowned and recently renovated Indiana Jones ride, you are astonished to find a zero-minute wait and no line. Believe it or not, your timing was impeccable – Gather the troops, the 2 ½ minute Harrison Ford-themed adventure awaits.

HOW DOES THIS TRIP RESEMBLE THE CURRENT STATE OF THINGS FOR VCS?

Venture capital markets survived 2016 slumps, continuing on an onward and upward trajectory through 2017. The disruptors and catalysts with the emerging technologies come out on top. Although some disparity appears among volume and funds, the game play implications are massive. While a crowd-less Disneyland is unlikely, venture capital is thanks in large part to the current landscape.

As evident of Disney purchasing rival studio 20th Century Fox (the most significant cataclysm for the film industry in the 21st Century), VCs too aren’t short on cash. Lines are blurred and technology is changing the game for the industry – GET IT EARLY.

HOW CAN QUALIFIED COMPANIES GAIN A COMPETITIVE EDGE, AVOID DREADED WAIT TIMES AND TAKE A PIECE OF THE PIE? (theme park visit is optional)

Top 8 hand-picked Predictions for the Venture Capital Industry in the next decade:

  1. Technology/Big data/Automation etc. will continue driving M&A deals
  2. Full-stack professional services a trend evident by investor acclimate
  3. Venture funds will revive their passion for early-stage investments
  4. “Truly Great” companies will sidestep the venture funding circus altogether
  5. Investors receive larger stakes & are integral to the start-up team
  6. Increased liquidity, accountability and transparency is vital
  7. It’s a performance game folks. Personal + Professional Brand Synergy is instrumental
  8. Innovation, experimentation and crowdfunding lead to different types of VCs

For detailed predications and insights click here.

ON THE HORIZON

In the midst of the capital market’s landscape, regulatory overhauls, and record-breaking technology M&As with no sign of reprisal, 2020 will look very different than it does today.

Then, too, there is the surging stock market and, by extension, the rebound in technology IPOs. This has been fueled not only by a strengthening economy but by President-elect Donald Trump’s push to bolster the economy further by reducing taxes, streamlining regulations and sparking major infrastructure development.

Furthermore, the implications of evolving social organizations are worth noting. The New York based think-tank, Financial Policy Council (FPC) captures this trend in a June 2017 article titled, “Financial Power of Impact Investing.” It states:

“For many years the divide between instruments of philanthropy and investing has been clear cut. Investing strategies typically did not involve social organizations focused on non-governmental organization (NGO) concerns. However, the advent of millennial investing power, the rise of social enterprises, and the need for further asset diversification have blurred the line between both industries.”

Lastly, venture is still fairly segmented by geography. As localized hubs become more sophisticated and efficient, venture will truly be a global play.

What’s your power play?

CONNECT + CREATE:

Feature your brand and/or business:

  • Submit your thought-provoking, insightful, and note-worthy content or insights to contact@brandzainc.com or by simply including the hashtag – #VentureImpact in your comment below.
  • Diverse viewpoints and co-publications welcome. No industry, individual or inspiration is off limits.
  • Be featured in future publications.

Zana Nesheiwat is Founder of Brand ZA Inc., an integrated business solutions and impact-branding firm specializing in financial services, public policy, and technology. With global operations from Los Angeles to Dubai, the firm equips clients with intelligence and resources to effectively bridge business goals with turnkey brand strategy – driving growth across all touch points.

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