News Column

Private equity funds are playing key role in Mena

August 14, 2014

MANAMA: Following a period of contraction and consolidation, the private equity (PE) industry in the Middle East and North Africa (Mena) region is beginning to show signs of a recovery, both in terms of deal volume and size.

However, PE's challenge has been the perception that investors focus excessively on short-term results, and have a negative effect on job creation and the long-term health of the economies in which they operate.

A white paper published by MBA graduates of Harvard Business School (HBS) in collaboration with GCC-based PE firm Growthgate Capital, seeks to debunk some of the myths, by reviewing how local and international PE firms have been able to add considerable value to portfolio companies and the broader economy.

The analysis suggests that many of the beliefs surrounding the impact of PE firms, such as job destruction and an excessive focus on short-term profitability, do not hold.

The white paper demonstrates that PE funds globally have improved performance of target companies by reducing constraints for firms in need of external capital, focusing on investments in innovation, increasing capital expenditures, and instilling better corporate governance and operational practices.

Referring to a number of recent academic studies, the paper also confirms that companies acquired by PE funds grow significantly more than comparable firms in terms of sales and capital employed, and often in employment.

For instance, a comprehensive study using data from 3,200 deals in the US reveals that, on average, private equity buyouts raise firm productivity by more than two per cent in the two years after the buyout.

Across both good (2005-2007) and bad times (2008-2012), PE makes a net contribution to employment growth.

The study also shows that PE increases not only employment but also labour productivity as it increased by more than 7pc a year from the time PE acquired companies in the sample to the point of exit.

Another study, using data from 839 European deals during 1994-2004, shows that between the four years preceding the transaction, and the four subsequent years, employment, assets, and sales growth of PE targets are, respectively, 18pc, 12pc, and 12pc higher than non-PE backed firms.

These transactions were largely growth equity deals rather than the leveraged buyouts that dominate the US market, and those may be more representative of the PE transactions that dominate emerging market regions such as Mena.

Furthermore, the white paper tracks the evolution of the PE asset class in the Mena region.

PE firms that continue to innovate in terms of their funding model and deal sourcing and build portfolio operation capabilities are likely to continue doing well.

As the evidence shows, through such investments, businesses in the region are likely to grow faster, and become more efficient and competitive on an international stage.

For more stories on investments and markets, please see HispanicBusiness' Finance Channel

Source: Gulf Daily News (Bahrain)

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