Preqin

Strategy

Private Equity – Tremendous Prospects for the Taking! Private Equity Fundraising in Emerging Markets is Increasing Rapidly: Despite the

Global market turmoil and Sub-prime crisis, emerging markets private equity fundraising continued to grow not just in 2007 but in the first half of 2008 as well. However, it is likely to see some moderation now on the back of the financial crisis that started in the US and soon spread into global financial crisis. Fundraising in the Middle East bit sedate in the first half of 2008: After witnessing a

stellar growth in 2007 on the fund raising front, as well as fund sizes, private equity in the MENA region witnessed some moderation in 1H-2008. Nonetheless, this seems to be an aberration and activity is expected to pick up soon. MENA Private Equity Sector focus Telecomes & IT 1% Oil & Gas 7% Construction 3%

MENA GDP Growth

Transport 8% Services 5%

Healthcare 11% Financial Services 11%

Others 18%

(Real GDP Growth)

MENA

October 2008

Consumer Goods 3% Basic Materials 33%

Source: Zawya Private Equity Monitor

Source: IMF

Saudi Arabia, the market to watch out for: The geographic focus of regional funds is

changing and becoming more di­verse, as mandates and operations broaden to include other regions with many regional players opening offices in regions like Saudi Arabia, Turkey, Egypt and North Africa region. Saudi Arabia due to large economic reforms and privatization efforts of the government holds the maximum promise and private equity players with physical presence and local know how likely to tremendously benefit from the tremendous potential the Kingdom offers. Omar M. El-Quqa, CFA

Healthcare, Financial, Education, Services and Transport the most promising sectors:

Executive Vice President [email protected] Phone No:(965) 22951110

The spending power of the region’s growing middle class is influencing a shift in investment focus away from oil & gas to service-based and consumer-oriented businesses.

Faisal Hasan, CFA

Current financial crisis offers tremendous opportunity: Private equity investments continue

Head of Research

[email protected] Phone No:(965) 22951270

Digvijay Tanwar Financial Analyst

[email protected] Phone No:(965) 22951275

to generate consistently higher returns than most public equity markets and bond markets. The most profitable fund vintages to invest in have often been those where the in-going investments have been made in challenging times. 2008 may well be one of these. As a result, people are very bullish about return prospects for 2008-10 vintages. The most successful investors in private equity have been those with a consistent long-term strategy, investing over a long period. Fundamentally nothing has changed: private equity will continue to grow, and will continue to deliver net returns well in excess of those available in the public markets.

Strategy - MENA Private Equity

1

Global Research - Private Equity

Global Investment House

Private Equity – Ready to deliver In the recent years, alternative investment asset classes such as private equity have become increasingly important source of capital in the global financial system. Private equity activity in particular (defined as equity investments by professionally managed partnerships that involve leveraged buyouts or other equity investments with a substantial indebtedness) has accelerated noticeably. The tremendous growth of private equity in the Middle East and North Africa (MENA) region in the past few years in general and 2005 onwards in particular, reached record highs in 2007, with the wealth created from oil spreading further inside the GCC and into MENA. Improving investment conditions, increased liquidity, and mounting international interest in these emerging markets led to private equity as a quality asset class capable of providing good returns. According to the research paper “The Globalization of Alternative Investments Working Papers Volume 1: The Global Economic Impact of Private Equity Report 2008” published by the World Economic Forum, the total value of firms (both equity and debt) acquired in leveraged buyouts is estimated to be US$3.6trillion during 1970 to 2007, of which US$2.7trillion worth of transactions occurred between 2001-2007. The asset class has grown in scale such that by 2005 about 2% of non-government US employees worked for firms that received private-equity investment, and in global scope such that a majority of private equity transactions now take place outside the United States. Simultaneously, many private equity firms have expanded dramatically in size and global reach, and the sector has attracted attention from many other players, such as politicians, regulators and organized labor. Worldwide, private equity funds manage over US$1.0trillion of capital currently. About two-thirds of this capital is managed by buyout funds, where leverage can multiply the investment size by three or four times base capital. Overall, private equity funds play an increasingly important role as financial intermediaries in addition to their significant day-to-day involvement as board members and advisors. Virtually all private-equity funds are organized as limited partnerships, with private equity firms serving as the general partner (GP) of the funds, and large institutional investors and wealthy individuals providing the bulk of the capital as limited partners (LPs). These limited partnerships typically last for 10 years, and partnership agreements signed at the funds’ inceptions clearly define the expected payments to GPs. These payments consist of both fixed and variable components. While the fixed component resembles pricing terms of mutual-fund and hedge-fund services, the variable component has no analogue among most mutual funds and is quite different from the variable incentive fees of hedge funds. Data sources We construct our dataset from several sources. Our main data source is the “Zawya Private Equity Monitor”, from where we obtained detailed information on terms and conditions of the private equity funds raised in the MENA, besides the report “Private Equity and Venture Capital in the Middle East in 2007” by Gulf Venture Capital Association (GVCA). In addition we also obtained information from Emerging Markets Private Equity Association (EMPEA) and Private Equity Intelligence Ltd (Preqin) along with our interactions with industry experts among others. 

Strategy - MENA Private Equity

Global Research - Private Equity

Global Investment House

Private Equity Worldwide Private equity is an industry that continues to be heavily concentrated in the US and the UK. According to Preqin database, there are currently (September 2008) a record 1,595 private equity funds in the market, a 24.3% increase over 1,283 funds reported at the end of 2007. The aggregate target being sought by new funds currently stands at US$934bn, an increase of 33.7% from the US$698.5bn capital sought at the end of 2007. Chart 1: Funds in Market by Type and Size

Source: Preqin

Fundraising Worldwide Despite continuing problems in the credit markets, private equity fundraising has continued at a strong pace in terms of capital commitments, with a total of US$323bn committed during 1H-2008 with a total of 372 funds achieving final close during 1H2008. This represents a 12.5% increase from the US$287.2bn raised during H2-2007, and matches the US$323.6bn raised during the very successful first half of 2007. However, the current financial turmoil and resultant slowing of economic growth worldwide would have an impact on the private equity fund raising as well, which is likely to slow down. Private equity players globally are likely to feel the pinch of the credit squeeze and may find it difficult to raise funds with the same ease as they had in the recent past. Table 1: Funds in Market by Region, Type and Size (September 2008) USA EUROPE ROW Aggregate Average Aggregate Average Aggregate Average Type No. of No. of No. of Target Size Size Target Size Size Target Size Size Funds Funds Funds (US$bn) (US$mn) (US$bn) (US$mn) (US$bn) (US$mn) Buyout 156 190 1218 72 80 1108 60 33 555 Fund of Funds 110 55 498 82 34 416 19 3 177 Mezzanine 25 13 524 12 9 715 2 0 189 Real Estate 235 152 645 122 57 470 60 30 493 Venture 231 43 185 93 17 183 130 25 193 Other 85 107 1254 49 43 870 52 42 799 Total: 842 560 665.1 430 240 558.1 323 133 411.8 Source: Preqin

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Global Research - Private Equity

Global Investment House

Looking at the funds in market by fund type illustrates that buyout funds remain the most prominent type of funds in the market, accounting for 33% of total capital sought. There are 288 buyout funds on the road targeting to raise US$303bn in capital commitments. There are currently 417 real estate funds on the road targeting to raise US$239bn in capital commitments or 26% of the total capital sought. There are 454 venture funds in the market with a target aggregate size of US$85bn. This represents 9% of the entire capital sought by private equity funds on the road. Although fundraising has maintained a strong pace in terms of aggregate commitments raised during the first half of 2008, the number of funds achieving a final close has fallen considerably from earlier quarters, and is still falling well short of the required level to bring stability and equilibrium to the fundraising market. Activity within the sector is low, with fund managers finding it very challenging to raise funds as investors remain reluctant to make new long-term commitments in the current environment. At the end of September 2008, there were 24 funds on the road seeking to raise US$5bn or more in commitments. The target size of these funds makes up 23% of the total capital sought by funds on the road. Seven of these large funds are targeting to raise US$10bn or more in capital commitments. Funds classified as mega funds include Blackstone Capital Partners VI, a buyout fund targeting to raise US$20bn in capital commitments and and CVC European Equity Partners V, which has a target size of Euro11bn. The average size of funds closed in 2Q-2008 stands at US$983mn, far exceeding the average size of funds on the road which stood at US$593mn. With larger funds remaining popular amongst investors, many smaller funds are finding conditions to be increasingly competitive, with the absolute number of other funds on the road all vying for the investors’ attention causing funds to remain on the road for longer than some managers anticipated. As per Preqin estimates, fundraising period is now taking an average of 14.2 months to complete, up from 12.0 months in 2007, and 11.1 months in 2006.

Months

Chart 2: Year on Year Global PE Relative Fundraising Comparison

Source: Preqin

Investments Worldwide Private equity deals too have sharply fallen with a lot less deals happening as institutional investors have become highly cautious when presented with new investment opportunities



Strategy - MENA Private Equity

Global Research - Private Equity

Global Investment House

As per Standard and Poor’s data, the number of private equity deals post 3Q-2007 when the financial crisis first surfaced has come down drastically with only 410 new private equity deals happening in 3Q-2008 almost 34% down from 620 reported for 3Q-2007. Chart 3: Number of New Private Equity Deals

3Q2008

2Q2008

1Q2008

4Q2007

3Q2007

2Q2007

1Q2007

4Q2006

3Q2006

Credit Crisis

Source: Dealogic

Big deals are difficult to come by as liquidity has dried. Deals are done with much lower levels of debt, and more equity. As a result, the new deal size too has come down sharply with the size of new private equity deals standing at US$134mn, much lower than the peak of US$519mn in 2Q-2008. Chart 4: Average Size of New Private Equity Deals

3Q2008

2Q2008

1Q2008

4Q2007

3Q2007

2Q2007

1Q2007

4Q2006

3Q2006

US$ mn

Credit Crisis

Source: Dealogic

Strategy - MENA Private Equity



Global Research - Private Equity

Global Investment House

Private Equity in Emerging Markets Fundraising in Emerging Markets Despite the Global market turmoil and Sub-prime crisis, emerging markets private equity fundraising continued to grow not just in 2007 but in the first half of 2008 as well. However, the crisis reached a new level only in the third quarter and consequently the high growth, which the emerging markets had witnessed until recently, is likely to tone down. According to data compiled by Emerging Markets Private Equity Association (EMPEA) in 2007, two hundred and four private equity funds focused on emerging markets raised US$59.2bn in capital commitments. This figure represents a 78% increase over the US$33.2bn raised by 162 funds in 2006, and a 17-fold increase over the US$3.5bn raised in 2003.

(US$ mn)

Chart 5: Funds Raised for Emerging Markets Private Equity

Source: EMPEA estimates

During 2007, the growth had been stupendous, beating all expectations in nearly all emerging markets regions. Growth of Asia funds continued at an even faster pace than in 2006, and Latin American private equity continued to benefit from renewed interest. Fundraising in Central and Eastern Europe rose 300%. Middle East funds sustained the tremendous growth of previous years and grew by 71% in 2007. After a significant increase in 2006, African fundraising remained steady in 2007; unlike past years, the majority of funds raised were for investments across the region, beyond South Africa. Table 2: Growth in Funds Raised, 2005–2007 Years 2005-2006 2006-2007

Emerging Asia 26% 48%

CEE/ Russia 21% 347%

Latin America 109% 66%

Africa 197% -1%

Middle East 54% 71%

Pan-EM Total EM -29% 29% 58% 78%

Source: EMPEA estimates

The increases in 2007 were multi-dimensional and attributable to both growth of funds in the market and notable increases in fund sizes. New entrants included both US and European private equity managers turning to Asia and Central and Eastern Europe, and domestic funds in the Middle East and Latin America. Fund sizes grew more than 50%, with funds holding final closes in 2007, raising on average US$426mn versus US$272mn



Strategy - MENA Private Equity

Global Research - Private Equity

Global Investment House

in 2006. Among closed funds, 54% held final closes at US$250mn or under, compared with 65% in 2006. The nature of private equity funds dictates that the fund manager initially announces the fund, along with the sector specialization, size, investment strategy, and so forth. The private equity fund then, goes through different stages regarding the capital raising process. The fund starts raising its target capital before it closes. Private equity funds normally have multiple closing dates before it starts investing the capital raised. After it is fully vested, the fund manager liquidates the fund through calculated exit strategies. As in 2006, the majority of funds that achieved final closes in 2007 raised US$250mn or less. However this portion of the emerging market private equity background decreased from 65% of funds in 2006 to only 54% in 2007. In 2007, 19 funds in the market raised US$1bn or more. Of these 19 funds, 17 achieved final closes during 2007. This compares with only four funds of such size in 2006. While the vast majority of funds in these markets continued to be generalist in strategy and focused on growth capital, the 2007 landscape included a number of funds with sector strategies, including infrastructure, energy and natural resources, agribusiness, environment and consumer funds. Table 3: Sector Focus among Funds with Closes in 2007 Sector Generalist Technology Infrastructure Energy Natural Resources Financial Services Industrials/Manufacturing Consumer Agriculture/Agribusiness Environment Other/NA Total

No. of Funds 118 34 8 6 1 3 5 4 4 4 17 204

Fund Value ($US mn) 39,137 7,595 3,395 1,538 1,300 1,020 981 624 356 262 2,952 59,161

Source: EMPEA estimates

Of funds in the market, 58% were generalist in strategy (representing 66% of capital raised). Another 17% were focused on technology, while eight funds, or 4% of the total number of funds and 6% of the capital, were primarily investing in the infrastructure sector. The growth continued unabated in the first half of 2008 as well and despite much skepticism grew substantially. However, the financial crisis reached a new height only in the third quarter which is likely to have a significant impact on the fund raising front. This was predominantly due to Emerging Asia in which 104 funds dedicated to investments in emerging markets raised US$35.3bn in capital in the first half of 2008, a 68% increase

Strategy - MENA Private Equity



Global Research - Private Equity

Global Investment House

over the amount raised during the same period in 2007. The total value of private equity funds raised in the 1H2008 exceeds the US$33.2bn raised during all of 2006. As had happened in the past years, Emerging Asia continues to lead in emerging markets fundraising. Funds focused on Emerging Asian private equity markets raised a total of US$26.3bn, more than double the US$11.6bn raised by Emerging Asian funds in the first half of 2007. Pan-Asian regional funds accounted for US$11bn of the US$26.3bn total raised for Emerging Asia, while fundraising among China-dedicated funds boomed, with a turning point US$11.2bn raised through June 2008. Capital commitments for India-dedicated funds grew by 357% over the same period in 2007, raising a total of US$3bn in the first half of 2008. Consequently, funds focused on Emerging Asian markets accounted for 75% of capital raised in the first half of 2008, versus 55% during the same period in 2007. This portion of the Emerging Market PE landscape had earlier decreased from 65% of funds in 2006 to only 54% in 2007. Chart 6: Emerging Market Fund Focus Composition 2006

2007

MultiRegion 10%

MultiRegion 8%

CEE/Rus Sia 17% Emergin g Asia 55%

Lat Am/ Carib 6% Africa 3%

CEE/Rus Sia 7%

Emergin g Asia 75%

Lat Am/ Carib 4% Africa 3% Middle East 3%

Middle East 9%

Source: EMPEA estimates. Note: Emerging Asia excludes funds focused on investments in Japan, Australia, and New Zealand.

While capital raised by Emerging Asian funds has grown considerably in the first half of 2008, the pace of fundraising among funds focused on other emerging market regions is roughly tracking with trends in 2007. Funds focused on growth and expansion capital continue to dominate emerging markets private equity, accounting for nearly half of funds raised in 1H2008, up from 38% of the total raised in the first half of 2007. Venture capital funds represented 26% of capital and buyout funds 13%. Table 4: Funds Raised by Regional Focus (US$mn) Emerging Asia Multi-Region CEE/Russia Lat Am/ Carib. Africa Middle East Total

1H 2007 11,549 2,127 3,611 1,354 592 1,816 21,049

1H 2008 26,295 2,739 2,537 1,289 1,258 1,140 35,258

Source: EMPEA estimates. Note: Emerging Asia excludes funds focused on investments in Japan, Australia, and New Zealand.



Strategy - MENA Private Equity

Global Research - Private Equity

Global Investment House

MENA Private Equity – Driven by high liquidity Private equity in the MENA region has continued its robust growth in 2007, although a bit sedate in 2008 on the fund raising front. This growth was made possible due to a lot of factors, mainly the increase in liquidity in the MENA region on the back of the recent surge in high oil prices. Other factors that contributed to the private equity rise relates to the governments’ initiatives to foster this sector through privatizations, along the efforts exerted by fund managers and investment firms to encourage private equity as means of financing. There is no doubt that the recent surge in oil prices have provided the MENA countries with ample liquidity enabling them to rehabilitate and diversify their economies which have long been dependent on the oil sector. To that end, the MENA governments have embarked on a total “make-over” of their economies. Massive infrastructure projects throughout the GCC in particular, enhancement of financial sectors, privatization efforts and opening the markets to international competition in MENA region are only a few of the efforts undertaken by the MENA governments to capitalize on their growing cash balances. Relatively cheap valuations of MENA listed companies, coupled with an increasingly progressive regulatory environment, are expected to attract more long-term institutional money to the region. Table 5: Fundamental difference in MENA & International Market   Economic growth Housing crisis Budget Credit crunch impact Correlation with international markets Balance of trade Banking Sector effect of Credit crunch Effect of increasing commodity prices Currency stability

Developed Stagnant/low (0-2%) Major Huge deficit Major Very high Deficit Turmoil Negative Volatile

Emerging Very high (7-9%) None Huge deficit Average High Deficit Considerably Negative Volatile

MENA Very high (7-9%) None Surplus Average Low but increasing Surplus Marginally hit Net positive Stable

Source: Global Research

The MENA countries have also realized the importance of involving the private sector in this restructuring, so privatization has played a pivotal part in the process. The private equity market is an important source of funds for startup and young firms, firms in financial distress and those seeking buyout financing.

Strategy - MENA Private Equity



Global Research - Private Equity

.6%

(US$ mn)

90

Source: Zawya IPO Monitor

Chart 8: IPO Trends by Quarter

(US$ mn)

Chart 7: IPO Activity 9M-2008 VS 9M-2007

Global Investment House

Source: Zawya IPO Monitor

Recent trends in the GCC had positive spill-over effects on the MENA regions. MENA countries have adopted “openness” to their economic and financial sectors, which gave cash rich private equity managers the incentive to seek investment opportunities within the region. To that end, private equity funds that invest in the MENA region have increased tremendously in numbers and sizes, whereby over US$13bn in private equity capital are currently under management in the region. What is noteworthy is that until recently, many local and international private equity operators had looked at the MENA region only to raise cash. However, due to the rapid economic growth and fundamental strength of the MENA countries, many of them are looking for investment opportunities as well. The Carlyle Group was one of the first to set office in the region and is actively looking at investment avenues in many of the region’s own companies. Similarly, Investcorp, which until recently was using the Gulf money to invest in foreign markets also launched Gulf Growth Capital Fund, that solely looks for investment opportunities primarily in the GCC region. And while the real estate and construction sectors are attracting a large share of these investments for the time being, opportunities in private-sector transportation, financial services, travel and tourism, energy, and other sectors are flourishing as never before. Private equity activity in the MENA region has a potential to continue growing in the years ahead. Based on available data related to private equity transaction volumes as a percentage of GDP, the region is still underserved relative to other regions throughout the world. Chart 9: Private Equity as a Percentage of GDP 3.5% Potential for PE in the Region

1.7%

0.3% USA

UK

MENA

Source: Global Research, IFSL Research.

10

Strategy - MENA Private Equity

Global Research - Private Equity

Global Investment House

The results of the 2007 GVCA survey on the impact of private equity investments on private companies in the GCC region highlighted the financial as well as non financial contributions that a private equity infuses in the partner company. The survey results indicated average annual growth in sales in the years following the investment of 92%; in capital expenditure of 86%; in exports of 95%; and in research and development (R&D) expenditure of 32%. These high-growth companies, financed by private equity and venture capital – are central to GCC governments’ efforts to develop their non-oil economies. Besides the funding from private equity houses, the private equity executives also bring expertise and experience from other companies in their portfolios to these companies, including strategy and finance, and industry-specific knowledge. Many of these private equity investors are also instrumental in introducing international best practice and sound corporate governance. Fundraising in the MENA Region After witnessing a stellar growth in 2007 on the fund raising front, as well as fund sizes, private equity in the MENA region witnessed some moderation in 1H-2008. According to EMPEA data, the fundraising for private equity invest­ment in the region has grown manifold over the past five years and has increased from a meager US$680mn raised in 2003 to over US$5bn in 2007. Average fund sizes have also grown from US$215mn in 2005 to US$265mn in 2007. However, fund raising declined to US$1.14bn in the first half as compared to US$1.8bn raised in the first half of 2008. Nonetheless, this seems to be an aberration and activity is expected to pick up soon.

(US$ mn)

Chart 10: MENA Region Private Equity Funds Raised

Source: EMPEA estimates

As per the GVCA report 2007, 64% of all capital raised was for funds larger than US$500mn, while in 2006 this figure was 19% (22% in 2005). The tendency to raise funds larger than US$500mn will probably continue in the future, particularly for infrastructure investments. With billions of dollars of infrastructure assets set to be privatized or to be built, infrastructure funds today have a much larger market in the region than buyout funds. Yet, the mid-market funds (US$100mn to US$500mn) maintained a significant market share in 2007 and are expected to remain a major player on the regional scenes for years to come. With transaction sizes centering inbetween US$20mn and US$100mn mark, such funds will be in an optimum position to tap into the majority of the deals in the region.

Strategy - MENA Private Equity

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Global Research - Private Equity

Global Investment House

First permanent capital vehicle from MENA region listed on the London Stock Exchange Global Investment House set up a private equity permanent capital vehicle, Global MENA Financial Assets Limited (GMFA), focusing on the high growth financial services sector of the MENA (including Turkey) region. GMFA is the first permanent capital vehicle from MENA region listed on the London Stock Exchange (Main Market), which would invest in private equity assets. Even in the adverse market conditions, especially for the financial services sector, GMFA’s IPO got subscribed more than 100% with interest from both the European and Middle East investors. European investors’ primarily included financial institutions and pension funds, whereas Middle Eastern interest came from business conglomerates and sovereign backed funds. GMFA was successfully listed on the main market of London Stock Exchange on 18th July, 2008. This further created a company with a market capitalization of over US$500mn, making it one of the largest funds from the emerging markets to float on the London Stock Exchange till date. The issue drew huge interest from European investors despite difficult market conditions even in such markets where many IPO are being pulled back or delayed due to the global market conditions. Status of Investing –MENA Private Equity Funds From the beginning of 2006 till 1H-2008, the majority of the private equity funds raised in the MENA region are in the ‘Investing’ phase, where 40 funds with a total size value of US$10,433mn, 35.9% of total value, are classified as part of the group. Funds that are in the “fund raising” stage throughout the same period in the MENA region constituted 44.5% of total value of funds. Announced private equity funds in the MENA region during the period have a combined size of US$2,670mn, which constitutes 9.2% of the total fund sizes of private equity funds in the region. There were 7 rumored funds for a total size of US$2,540mn while there was a sole fund in the liquidation process for a total size of US$500mn. Chart 11: MENA Private Equity Funds by Status of Investing, 2006-1H-2008

Investing 45%

Rumored 8% Liquidation 1% Announced 16%

Fund Raising 30% Source: Zawya Private Equity Monitor

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Global Research - Private Equity

Global Investment House

According to GVCA report, the cumulative funds raised during the period 2005 to 2007 has increased more than threefold from US$4.7bn funds raised cumulatively up to 2005 to US$13.4bn up to 2007. However, total assets under management as a percentage of total funds (announced and closed) marginally decreased from 68% in 2006 to 58% in 2007. This was primarily because of larger size funds announced in 2007 for which a large proportion has not yet started the fund raising activity. Nature and Size of Investments The MENA private equity market is relatively young, not quite mature and has witnessed unprecedented growth in the last few years. Due to lack of maturity, a number of PE investments continue to go unreported. Furthermore, some PE houses have not revealed the size of their PE investments, leading to further limitations on the information available. We have done our analysis below based on data available as per zawya private equity monitor.

(US$ mn)

Chart 12: MENA Private Equity Investments (2006- 1H-2008)

Investment Size Source: Zawya Private Equity Monitor

As can be seen, the total PE investments in the MENA region have increased substantially in the recent past. During 2006, the number of investments made stood at US$1,577mn through a total of 69 transactions. The number increased to US$3,901mn for the year 2007 through the same number of transactions. However it is worth mentioning that the 2007 figure was largely inflated due to the US$1.4bn acquisition of Egyptian Fertilizers Company by a consortium led by Abraaj Capital. Deal sizes in the region have risen significantly from an average of US$33.6mn in 2006 to US$79.6mn in 2007 representing an increase of 137%. However, the recent financial turmoil has cast a shadow of uncertainty over the private equity industry as well, with institutional investors remaining highly cautious when presented with new investment opportunities. Consequently, the number of investments made till 1H-2008 is far fewer with only 16 reported as per zawya private equity monitor, down from 33 during the same period in 2007. Not only have the number of transactions fallen significantly in 1H-2008 but so has the size, with the largest deal closed being Intaj Capital’s purchase of a majority stake at an announced $188m transaction size.

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13

Global Research - Private Equity

Global Investment House

Focus of investments The geographic focus of regional funds is changing and becoming more di­verse as mandates and operations broaden to include other regions with many regional players opening offices in regions like Turkey, Egypt and North Africa region. Egypt emerged as the preferred destination for investment in the MENA region, with US$2.4bn being invested in the last decade. The higher level of investments in the past 10 years is mainly due to two investments of more than US$500mn each, carried out in 2006 and 2007 and accounted for 82% of the total Egyptian investments.

(US$ mn)

Chart 13: Break Up of Investments in MENA region (2005-2007)

Source: Zawya Private Equity Monitor, GVCA

Once these two significant investments are excluded from the analysis, the geographic split shows a considerable amount of investments in the UAE (27%) and Saudi Arabia (22%) and modest totals in Jordan and Egypt with a combined US$0.8bn being deployed into these countries in the past decade. Chart 14: MENA Private Equity Deals by Geographic Distribution (2007 – 1H-2008)

Source: Zawya Private Equity Monitor

In 2007, private equity investment in Egypt stood at US$1,539mn which was highest in the region in one country. However this was again largely inflated by the US$1.4bn investment into Egyptian Fertilizers Company. The UAE continued to be a hot destination with US$782mn deployed in the market. Investments in Saudi Arabia reached US$729mn, which was the third highest in the region after Egypt and UAE. This was mainly due to the economic liberalization policies adopted by the Saudi government and reflected by the Saudi Arabian General Investment Authority (SAGIA) 2010 plan. 14

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Global Research - Private Equity

Global Investment House

Saudi Arabia – A Unique Opportunity The Saudi economy offers a highly attractive economic landscape for private equity investors. The Nominal GDP of the economy has grown at a CAGR of 15% during the period 2002-2007 while the real GDP increased at a CAGR of 5% for the same period. With around 50% of the population less than the 20 years age bracket and another 33% in between 20-40 age group, demographics remain attractive and this, coupled with high oil prices have ensured governments thrust on infrastructure and social spending remained high. According to a World Bank report, Saudi Arabia is the 7th fastest reformer globally, and 2nd fastest within MENA. Also, the Kingdom’s surge in ranking to 16th in the world and as the best in the MENA region in regards to ease of doing business is a reflection of the reformatory action taken by the government to derisk its economy from oil. Sectors of high potential include sectors subject to privatization and regulatory reforms such as air travel, telecom, financial services and services such as education, healthcare, food and beverage, consumer goods, and transportation. Chart 15: World Bank: Ease of Doing Business Survey Ranking – Saudi Arabia

Source: World Bank

All the above offers a unique opportunity to tap this high potential market. However, a number of obstacles stand in the way of effective access to this attractive market. The PE deal volume as a percentage of GDP is still among the lowest and is estimated to around 0.1% as compared to around 1.5% in the UAE. The reluctance of family owners to relinquish control, high valuation expectations, unique social and regulatory setting and relational business culture and talent scarcity are some of the factors that have made it difficult for outside players to execute deals in the Kingdom. Thus a physical presence with right contacts in the Kingdom along with a deep understanding of the social and regulatory setting become the key to success for private equity players to benefit from the private equity boom that the Kingdom is on the verge of witnessing. With relatively cheap valuations of Saudi listed companies due to the current meltdown, coupled with an increasingly progressive regulatory environment, long-term institutional money will be attracted to the region. Global Investment House is the most active private equity player in the Kingdom with around 31% share of the investment universe of GCC PE houses.

Strategy - MENA Private Equity

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Global Research - Private Equity

Global Investment House

Chart 16: Sector focus of Private Equity Investments in MENA region (2007 – 1H-2008) Telecomes & IT 1%

Oil & Gas 7% Construction 3%

Transport 8% Services 5%

Healthcare 11%

Others 18%

Financial Services 11% Consumer Goods 3% Basic Materials 33%

Source: Zawya Private Equity Monitor

The spending power of the region’s growing middle class is influencing a shift in investment focus away from oil & gas to service-based and consumer-oriented businesses. During the period from 2007 till 1H-2008, investments made were highest in the Basic Materials sector with a total of US$1,422mn worth investments. It was followed by Healthcare sector (11% of all investments) followed by Financial Services (11%), Transport (8%), Oil and Gas (7%) and Services (5%) sectors. Basic materials sector was again influenced by the US$1.4bn investment in Egyptian Fertilizers Company. As the economies and population of the region will grow, social infrastructure needs in healthcare and education will increase and these will be the sectors that private equity players would look for. Table 6: Key Sectors to Look Out For: Sectors Energy

Specific Investment Opportunities Companies engaged in exploration and production, gas handling and transportation etc. are attractively positioned to benefit from increasing private sector participation in mid-and downstream oil sector with a total of US$300bn spending in oil/gas infrastructure. The sector is projected to grow significantly with gas production expected to increase by 8% in the next five years in the Middle East. Emerging market demand for Petrochemicals/Fertilizers and Aluminum will drive gas production. MENA Oil/ Gas offshore services market size is US$7.5bn and is expected to grow to US$12.5bn by 2012 at a CAGR of 10% and another US$15bn to be spent in LNG export terminals.

Key subsectors: - Oil and gas exploration/drilling services - Oil Refining and marketing - Gas – Upstream and downstream - Oil and Gas (LNG) transportation - Oil and Gas Construction Services

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Utilities/ Infrastructure

Global Investment House

MENA region faces shortage of power following demand and consumption growth with the consumption rising by 7%. Privatization of power sector assets and growing acceptance of Integrated Utilities projects is likely to attract further investments. Also an expanding industrial base and the setting up of GCC power grid is likely to increase the utilization efficiency and may result in improved margins for the operators. As per zawya estimates around US$150bn of planned capital expenditure has been announced so far to be carried out in the next few years.

Key subsectors:

Retail/ Consumer Goods

- Power Equipment Industry - Power Construction and allied services - Power Projects management - Water Projects, Waste water management including recycling Driven by increasing purchasing power and low retail penetration, the retail spends going forward are expected to rise. Retail companies, especially those with franchises for foreign labels in any retail activity, are expected to offer good growth potential and with increasing population and lifestyle improvements the prospects look bright. Saudi Arabia, UAE and Egypt have good potential for growth.

Key subsectors:

Logistics

- Hypermarkets and Supermarkets - Fashion Retailing and Specialty Retailing - Beauty, Fitness Centers, Pharmacy - Electronics Retailing - Restaurants and Food/Beverages - Consumer Finance The sector is expected to ride on the on-going project & infrastructure investments and impending retail boom in the region. Companies with established region-wise network and presence all across the supply chain are expected to benefit. 

Key subsectors:

Health Care

- Warehousing, Distribution services, Contract logistics - Port Management and Port services - Freight and Forwarding - Oil, Gas, and Petrochemicals Transportation Healthcare and Pharmaceuticals continues to grow at a high rate with rising health care spending in the region. Factors like population growth (at a higher rate than Europe or US). Mckinsey estimates Healthcare spending to increase at a CAGR of 10% up to 2025. Currently MENA Healthcare is characterized by low private sector penetration which currently stands at 25% of total expenditure. This is expected to increase with increased private sector participation. Introduction of mandatory medical insurance for expatriates and private sector employees in Saudi Arabia and UAE with other countries also expected to follow, just adds to the growing potential in the sector.

Key subsectors: - Diagnostic centers and Medical Centers - Hospital Operations and Management - Healthcare Equipment and Devices - Distribution - Pharmacy Retailing & Distribution

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Global Research - Private Equity

Education

Global Investment House

Higher education especially in developing the technical skills which will help in the development of small and medium enterprises. Current GCC general education market size is estimated at over US$3.0bn including Saudi market size of US$1.5bn. Young population and rising standard of living is driving the need for quality education and with low private sector participation, the sector offers an attractive preposition. With the private sector participation in Saudi on the uprise and growing at 6.5% as against 3% in government sector, the market offers attractive opportunity.

Key subsectors:

Financial Services

- Education Management - Primary and General Education Schools - Higher Education The financial sector in the MENA has largely been insulated from the mortgage crisis in United States with mortgage finance still evolving in MENA. Most product categories/markets, consumer segments remain fragmented and immature and fundamentals look attractive. Ongoing industry transformation provides scope for M&As, recapitalization and restructuring. The sector offers relatively lower risk with a proven path for exit multiple expansions.

Key subsectors:

Real Estate

- Banking - Auto finance - Consumer finance - Mortgage Finance - Stock and Commodity Exchanges - Brokers and Intermediaries Construction and real estate sector’s share in GDP has been rising fast with record level of spending happening and many projects in the pipeline. As per Zawya estimates, a record US$1.5trillion projects are either in execution or planned while MEED forecasts project spend of over US$2trillion by 2020.

Key subsectors:

Transport - Air

- Construction contractors - Construction equipment leasing companies - Interior Decoration MENA being centrally located between Asia and Europe enjoys geographical advantage with Dubai fast emerging as a global hub in air transportation. Growth rate is high in the region with international arrivals growing at 13% and revenue per passenger kilometer growing at 20% in 2007 is highest in the world. With high levels of capital expenditure in between US$25-30bn in airport expansions expected in the next few years, this sector too offers attractive investment opportunity for PE players.

Key subsectors: - Airport management and services - Aircraft maintenance - Air Cargo Services - Low cost Airlines

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Metals Aluminum & Steel

Global Investment House

Middle East enjoys competitive advantage in aluminum production which is almost 30% cheaper than the West and China due to its low energy cost. Also proximity to key markets (Asia) provides another advantage. It is estimated that a total of US$30bn is to be spent in new aluminim projects in the MENA region. Steel also is in strong demand for construction sector with GCC being net importer.

Key subsectors:

Travel & Tourism

- Aluminium Production - Downstream Production (Aluminium/Steel) In its drive to reduce dependencies on oil revenue, the GCC governments have been promoting travel and tourism projects in their countries in particular UAE, Saudi Arabia, Bahrain, and Oman. The industry is healthily growing with travel and tourism growth in MENA expected to grow at 7% in 2008 (6% in 2007). The occupancy and average room rates are high in the region particularly in UAE, Saudi Arabia, Egypt and Oman.

Key subsectors: - Hotel sector especially in UAE, Saudi Arabia, Egypt, Oman - Air Cargo Services Source: Global Research

Exits by Value and Number Private equity investments are relatively illiquid, particularly in the early years. The life-cycle of an average private equity fund investment averages three to seven years. Investors in private securities generally exit their investment and achieve returns through an initial public offering, a sale (to corporate buyers or another private equity firm), a merger, or a recapitalization. As the companies are not listed on a public exchange, investors wishing to exit their private equity holding do so by selling the holding to another investor through the secondary market. The MENA private equity industry being still in its early stages, most funds are still in the deployment stage and consequently few exits have been realized by this stage. However, the exit rate is likely to increase as investments made in the past few years reach realization. A recent private equity confidence survey by Deloitte shows that the private equity exits are likely to go up in the next twelve months with 42% predicting trade sales will be the dominant exit route and 39% believing an IPO will be the dominant exit route.

(US$ mn)

Chart 17: Exits by Value and Number in MENA region (2006-1H-2008)

Source: Zawya Private Equity Monitor

Strategy - MENA Private Equity

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During 2006, there were 18 exit transactions while the amount realized was only available for 15 of them worth US$154mn. In 2007, the number of exits was almost similar to 2006 at 16, however details were provided for only 7 of them. The exit value soared to US$1,289mn in 2007. So far in 2008, only nine exits in the MENA region have been reported with the amount for only two exits available. For the first half 2008, the value of exit reported was US$2,555mn. The two prominent exits that have happened in recent times is Abraaj Capital’s sale of its stake in the EFG Hermes Holding for US$1.1bn in 2007 and recently concluded US$2.5bn in the 1H-2008 of Egyptian Fertilizers Company sold to Orascom Construction Industries. In the exits to date, the holding period appears to vary from one to four years, with an average of just over two years with the internal rate of returns (IRRs) achieved by these exits ranging between 31% and an outlier 348% considered very healthy returns for a nascent industry. Many investments are reaching realization faster than the planned typical investment horizon of three to five years.

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Private Equity Fund Performance Over the past few years private equity has become broadly accepted as an asset class which not only enhances the returns but at the same time contributes to portfolio diversification. Although there is some correlation between returns on private equity and public equity and bond markets the correlation is not high. A major reason for the substantial growth of the private equity market in the past few years has been the anticipation by institutional investors of returns substantially higher than that can be earned in alternative markets. With all together different kind, size, liquidity and term of investment appetite needed for private equity investments which only institutional investors and HNIs can take, the expected returns are high and a major attraction for them to invest their money. Worldwide, institutional investors’ commitment to alternative investments has risen. Institutional investors have recently exhibited an increasing appetite for investing in private equity to seek higher returns that the sector has historically provided. US institutional investors at the end of 2007 allocated the highest proportion of their portfolios to private equity than European and Japanese. However their average allocation of 7% has increased only marginally between 2005 and 2007, whereas the share of portfolio allocation to private equity in Europe increased from 4% to 6% and doubled from 2% to 4% in Japan. An important reason for the high growth of the private equity market has been the fact that private equity investments generated consistently higher returns than most public equity markets and bond markets. As per data compiled by Cambridge Associates LLC Proprietary Index, private equity returns in the CEE & Russia PE had far outperformed returns in other regions. The private equity industry has produced strong returns in one year period ending Mar-2008, with all regional private equity investments giving high double digit returns while the return on benchmark S&P index being in red. CEE & Russia PE provided the highest return of 66.95 while Western Europe came second at 37.1% return. The returns on Emerging markets VC & PE and Asia (ex Japan) PE with 28.5% and 25.7% too was substantially high. The net return of Emerging markets VC and private equity funds measured at end Mar-2008 was: 3 years 27.7%, five years 25.8% and ten years 9.6%. Table 7: Comparative End-to-End Returns by Region (as of 31 March 2008) Index Emerging Markets VC & PE Latin America & Caribbean PE Asia (ex Japan) PE CEE & Russia PE MSCI Emerging Markets US VC US PE Western Europe PE S&P 500

One Year 28.5% 31.5% 25.7% 66.9% 21.7% 11.6% 11.2% 37.1% -5.1%

Three Year 27.7% 26.1% 22.6% 46.5% 29.6% 14.1% 23.2% 44.4% 5.9%

Five Year 25.8% 18.6% 21.1% 47.3% 36.0% 11.6% 24.1% 38.0% 11.3%

Ten Year 9.6% 1.1% 8.8% 20.8% 12.5% 32.8% 13.1% 26.5% 3.5%

Source: Cambridge Associates LLC

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Global Research - Private Equity

Global Investment House

As private equity investments are generally medium and long term investments, one year returns are inappropriate as a realistic measure of private equity performance due to the volatility in returns. We therefore look at the rolling 3 year, 5 year and 10 year returns for Emerging markets VC & PE returns. Chart 18: Trends in Emerging Markets VC & PE Returns (As of March 31, 2008)

50%

1 Year

40% 30%

3 Year

20%

5 Year

10%

10 Year

0% -10% Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Sep-07

Mar-08

Source: Cambridge Associates LLC

What is noteworthy is that the graph plotted of these returns is upward sloping substantiating the high returns generated by private equity investments throughout the period. It is also important to note that throughout the past 10 year period, the returns have always been positive.

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Sovereign Wealth Funds Sovereign wealth funds (SWFs) have grown substantially in size over recent years and are increasingly in the limelight with the investments being made by these of late. High oil prices have boosted the total assets of SWFs to record levels thus increasing their influence in global financial markets. Since the start of the sub-prime crisis SWFs, have invested over US$60bn predominantly in US and Swiss banks and according to Dealogic, cross-border M&A deals by SWFs totaled US$49bn in 2007, up 165% from US$19bn in the previous year. Another US$24bn has already been invested in the first three months of 2008. According to “The Preqin Sovereign Wealth Fund Review”, the total assets of all sovereign wealth funds stood at around US$3.05 trillion at the end of 2007, with this capital coming from 46 confirmed funds. On average, sovereign wealth funds have grown by 33% over the figure at the end of 2006, with the combined total assets rising by a significant 51% - indicating that it is the bigger funds that are growing fastest. Merrill Lynch estimates the value of assets held by SWFs will grow to US$8.0 trillion by 2011 and the IMF is predicting this figure to exceed US$12 trillion by 2015 substantiating the fact the role that SWFs would play in the near future. Table 8: Sovereign Wealth Funds - Middle East Fund Name Abu Dhabi Investment Council (Abu Dhabi) SAMA Foreign Holdings (Saudi Arabia) Kuwait Investment Authority (Kuwait) Qatar Investment Authority (Qatar) Brunei Investment Agency (Brunei) Kazakhstan National Fund (Kazakhstan) Dubai International Capital (Dubai) Oil Stabilization Fund (Iran) Istithmar World (Dubai) Mubadala Development Company (Abu Dhabi) Mumtalakat Holding Company (Bahrain) Public Investment Fund (Saudi Arabia) State General Reserve Fund (Oman)

Assets estimated (US$bn) 875.0 300.0 250.0 60.0 30.0 21.5 13.0 12.9 12.0 10.0 10.0 5.3 2.0

Source: SWF Institute, EMPEA

Middle Eastern investors have been one of the driving forces behind this growth, and currently represent the largest regional group. With oil prices rising sharply and reaching record levels over the past five years led to a significant amount of wealth generation by the major oil producing nations. This has resulted in significant cumulative current account and trade surpluses for the Middle Eastern SWFs, which are significantly increasing their presence on the international scene as they try to diversify their economies away from a reliance on oil and gas. This boom in Middle Eastern sovereign capital is also one of the driving forces behind the growth in the GCC private equity market with Preqin estimates indicating the figure for SWFs committed to private equity between US$120 - US$150bn or almost 10% of Strategy - MENA Private Equity

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Global Investment House

the global total capital available to the private equity industry. Preqin further estimates 52% of all SWFs invest in private equity funds, 33% do not invest while no information was available for the remaining 15%. According to the 2008 Norton Rose/EMPEA survey “Sovereign Wealth Funds and the Global Private Equity Land­scape,” 70% of PE firms surveyed expected an increasing amount of investment from SWFs, through coinvestments on deals (41%), investing directly in fund management companies (13%), or via fund commitments (16%). Chart 19: Percentage of SWFs that Invest in Private Equity

Invest 52%

Do not Invest 33%

Unknown 15% Source: Preqin

MENA Sovereign Wealth Funds A considerable number of investments made by the SWFs mainly go unreported or data is not available. In the absence of that we have analyzed only the data as has been available from Zawya Private Equity Monitor for which the transactions size is available in the last five years which again highlight the growing participation of SWFs in the regional PE landscape. During the period, Istithmar has made the largest number of investments (22) followed by Dubai Investment Capital (DIC) and Mubadala. However, based solely on investment size, ADIA and Mubadala have invested the largest amount of capital to date. In 2006, Istithmar made five acquisitions in the US totaling US$2.4bn, with half of this money invested in the US real estate market (including 280 Park Avenue which was subsequently sold in 2007).

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Mubadala

ADIA

DIC

DIFC

KIA

Isthithmar

QIA

ADIC

(USD bn)

Chart 20: Investments by Regional SWFs (2003-2007)

Source: Zawya Private Equity Monitor, GVCA

Previously the regional SWFs had been targeting the western and European markets for their investments. Some of the acquisitions were Qatar Investment Authority taking a 20% stake in the London Stock Exchange. In 2007, DIC made sizeable investments in the banking giants HSBC Holdings in the UK and ICICI bank in India. ADIA invested US$7.5bn in Citigroup, to acquire a minority stake. In 2006, DIC acquired Travelodge, the UK’s budget hotel business, paying US$1.3bn for the chain’s 291 hotels. Table 9: Subprime capital infusions from SWFs End Sept 2008 Citigroup Merrill Lynch UBS Morgan Stanley Barclays Canadian Imperial Bank Bear Stearns Total

US$bn Stake (%) 22.0 12.7 12.2 23.0 11.5 12.0 5.0 9.9 5.0 5.2 2.7 11.1 1.0 6.0 59.4  

Source: Bloomberg, SWF Institute

Although there is still a significant concentration on the US and the United Kingdom, in 2007 there has been increased focus on investing in the MENA region and developing markets. In 2007, US$6.6bn was invested into the UAE, the largest transaction being Mubadala’s US$4bn investment in Emirates Aluminium.

(USD bn)

Chart 21: Aggregate Investments by SWFs

Source: Zawya Private Equity Monitor, GVCA

Strategy - MENA Private Equity

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Exits in the SWF market seem limited, because the market perception is that they prefer to have long term, risk-averse portfolios and tend to pursue buy-and-hold strategies, with no short positions and perhaps no borrowing or direct lending of any kind. They probably have long horizons and, like other long-term investors, are willing to step in when asset prices fall. Istithmar’s sale of its two Park Avenue properties in the US. It claims the original strategy was to hold on to these investments and attributes the sale to ‘unusual opportunities’ in the market. Istithmar made a 63% return on the 230 Park Avenue purchase price (bought for US$705mn in 2005 and sold for US$1.1bn) and a 12.5% return on 280 Park Avenue (bought for US$1.2bn in 2006 sold for US$1.4bn). DIC acquired the Tussauds Group in 2005 for US$1.5bn and sold it to Merlin’s Entertainment Group two years later for US$2bn (which is majority owned by Blackstone private equity group) while maintaining a 20% stake in the merged Group. The most notable feature of the SWF investor universe is the huge amount of potential for further growth. With the combined total assets of these investors currently standing at US$3.05 trillion, and with oil prices at high levels, the potential for further growth is immense. In the past, SWFs had been conservative and concentrated on low risk instruments such as government bonds and bank deposits. However, there is now a growing trend to move towards private equity type deals, real estate, commodities and hedge funds. There will be a growing appetite for foreign investments in the coming years as petrodollar wealth is recycled on global financial markets. Considering the size and growth expected in SWFs, even a small proportion of total assets directed towards private equity will ensure that these funds represent an increasingly important share of the overall investor universe. Furthermore, the fact that SWFs typically lack liabilities that they are obligated to pay out on, and do not have external investors able to withdraw capital at short notice, coupled with a lack of restrictions on the investments they can make corroborate the increasing significance that SWFs will hold in investments made into private equity and real estate. A number of institutions are actively looking to increase their existing allocations, or are currently in the process of examining whether to enter the asset class for the first time - a trend that is likely to continue in coming years.

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Opportunities and Challenges - Stock Market Correction and future of Private Equity There has been a wave of corrections sweeping the regional markets. The regional markets, which had earlier remained largely insulated from the global financial turmoil, have been falling sharply taking cues from global markets. We attribute this decline to negative sentiments prevailing in the market. The decline in the market has also been triggered by the outflow of foreign investments. Foreign investors have been exiting emerging markets (MENA markets being no exception) on account of liquidity crunch and losses in the equity markets. The selling pressures by foreign investors have accentuated over the past two months in the wake of recent crisis of Lehman Brothers and Merrill Lynch. Margin calls from local investors have been also adding the woes to the market. This has cast a shadow of uncertainty over the private equity industry as well. Fundraising and deal flow is down, and institutional investors remain highly cautious when presented with new investment opportunities. Table 10: Performance of Regional Markets Kuwait Qatar Bahrain Saudi Arabia UAE Oman Egypt Jordon Tunnisia Lebanon Morocco Nikkei S&P 500

2005 67.6% 83.4% 22.7% 103.7% 102.9% 44.4% 146.3% 56.1% 21.0% 105.6% 19.9% 40.2% -2.9%

2006 -10.6% -41.0% -4.4% -52.5% -39.9% 14.5% 10.3% -29.3% 44.3% -9.6% 57.4% 6.9% 17.0%

2007 31.7% 48.2% 29.8% 39.1% 33.6% 61.9% 51.3% 21.9% 12.1% 26.8% 25.9% -11.1% 3.5%

YTD* -30.7% -24.1% -20.4% -49.8% -34.5% -32.3% -51.6% -16.5% 16.4% -8.7% -5.4% -46.4% -36.7%

*YTD as on October 29, 2008 Source: Global Research

However MENA economies are more robust and fundamentally different from other economies. Considering the fundamental factors in the region, the only negative factor

in the current economic scenario is the real estate market in Dubai. After recording spectacular growth over the past few years, we expect Dubai real estate market to slowdown in coming years as the expect supply-demand gap is bridged. Dubai government has also taken steps to curb speculation in the real market which might slowdown the growth to some extent in the near term. However we firmly believe that these regulations will strengthen the market in the long run. We believe that the fundamental factors remain intact and this should help the market tide over the recent declines. In the wake of recent sell-off, the regional markets are trading at an attractive level. This has created an opportunity for private equity. The main reason for the expected rapid recovery is the strong fundamentals of the regional companies.

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Global Investment House

The subprime crisis has had no fundamental impact on the macroeconomic performance of the MENA region. Economic growth is being sustained mainly by non-oil sectors including construction, retail, transportation, and financial services. The lack of contagion is attributable to weaker integration of MENA’s financial sector with those of the US and Europe; and improvements in MENA’s fundamentals over the last decade - including better fiscal and monetary management; more open regimes with more flexible exchange rates, and better debt and financial management that has reduced exposure to international capital markets. Chart 23: MENA Among the Fastest Growing Economies in the World

(US$ mn)

(Real GDP Growth)

Chart 22: Strong GDP growth in MENA

Source: IMF World Economic Outlook, October 2008

Source: IMF World Economic Outlook, October 2008

Oil price declines are significant but not disastrous. Most government budgets and investment programs in the Middle East will remain intact unless oil falls below US$50/ barrel. Prolonged drop below US$50 is highly unlikely because global demand for oil continues to rise while supply is largely static. The governments in the MENA region have amassed huge reserve funds which they could deploy to support regional growth if the outlook darkens. The government has saved 70% of their surplus oil revenues over the past five years and Sovereign wealth funds in the MENA region have over US$1.5 trillion at their disposal. So the growth and funding of various projects is less likely to be impacted with the region continuing to remain the most insulated of the global credit crunch. The repricing that has taken place has woken investors up to the risks inherent in riding the equity market wave far more convincingly then the financial advisers’ mere words had been doing earlier. The repricing that has happened in both 2006 and now will to an extent put a word of caution to high-net worth individuals who questioned why they should lock their money into a private equity fund for a longer period when they could reap in great returns on the stock market in a month’s time. People would have more realistic expectations. They would remember these periods and realize that situations can quickly change. The silver lining of the current stock market correction is that these pricing expectations will now start to come into line with reality, opening the door for more deals which had been a major impediment for deals not happening as per the GVCA survey 2007. The drop in stock market value also means that company valuations are less inflated than they were one year ago and there is more value to be found. Company owners too

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would be more realistic about valuations and consequently would be more receptive to private equity alternatives. There also seems to be less resistance from local businesses to private equity, now that they can see cases where the cash injection has made a positive difference. The demand for investment capital would continue to grow in the region and consequently deals will continue to be done. However the deals would be done with much lower levels of debt, and more equity as fewer lenders would provide debt to fund acquisition. Minority stake transactions will predominate with local private equity players because of the regional expertise likely to be more active. The most profitable fund vintages to invest in have often been those where the in-going investments have been made in challenging times. 2008 may well be one of these. As a result, people are very bullish about return prospects for 2008-10 vintages. Chart 24: USA Private Equity Funds Performance by Vintage Year (IRR)

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

2001-2002 Tech Bubble

1994

1993

1992

1991

1990

1989

1988

1987

1990-91 Savings & Loan Crisis

Source: Cambridge Associates

The most successful investors in private equity have been those with a consistent longterm strategy, investing over a long period. Fundamentally nothing has changed: private equity will continue to grow, and will continue to deliver net returns well in excess of those available in the public markets.

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30

Fund / Institution 1H-2008 Tranactions Intaj Capital Al-Futtaim MENA Real Estate Development Fund Global Buyout Fund L.P. Global Opportunistic Fund II Global Opportunistic Fund II The Port Fund L.P. Saraya Real Estate Mena Fund Intaj Capital Istithmar Istithmar Swicorp Joussour Fund SHUAA Partners Fund I, L.P. Ithmar Fund II Amwal Fund II Dubai International Capital Saraya Real Estate Mena Fund Infrastructure and Growth Capital Fund The Libya Fund EuroMena Fund Abraaj Buyout Fund II MENA Infrastructure Fund EuroMena Fund Unicorn Global Private Equity Fund I Egypt Saudi Arabia Saudi Arabia China Philippines Oman Algeria United States United Kingdom UAE UAE UAE UAE Singapore Russian Federation Pakistan Libya Lebanon India Egypt Egypt Bahrain

Cairo Festival City Al Sawani Group Al Sawani Group Evergrande Real Estate Group Global Gateway Logistics City Saraya Bandar Jissah Petroser Gulf Stream Asset Management LLC ESPA International Mosvold Middle East Jackup Ltd Drake and Scull International Dubai Dewan Architects and Engineers Dubai Contracting Company The True Group Saraya Sochi Bosicor Group Etelaf Oil Services Intercontinentale Bank of Lebanon Osian’s Connoisseurs of Art Private Limited Alexandria International Container Terminals National Printing Company Gulf Strategic Partners WLL

Jordan Aviation

Country   Jordan

Target Company

MENA Private Equity Investments (2007-1H-2008)

Appendix

Real Estate Retail Retail Real Estate Transport Real Estate Oil and Gas Financial Services Travel and Tourism Construction Construction Construction Construction Healthcare Real Estate Oil and Gas Oil and Gas Financial Services Services Transport Basic Materials Oil and Gas

Sector   Transport

Shopping Malls General Retailers General Retailers Real Estate Developer Specialized Aviation Services Landlords and Developers Distribution and Marketing Asset Management Recreation Heavy Construction Electro-Mechanical Contractors Engineering Services Building Contractors Healthcare Services Landlords and Developers Integrated Oil Companies Oilfield Services and Equipment Commercial Banks Education and Culture Marine and Seaport Services Containers and Packaging Oilfield Services and Equipment

Industry   Airlines

84.0 66.5 30.0 30.0 30.0 17.0 15.0 -

Size in US$mn   188.0

Global Research - Private Equity Global Investment House

Strategy - MENA Private Equity

Strategy - MENA Private Equity

KFICME Private Equity Fund Saraya Real Estate Mena Fund Amwal Fund II

Fund / Institution 2007 Tranactions Infrastructure and Growth Capital Fund Dubai International Capital Dubai International Capital Dubai International Capital Dubai International Capital Istithmar Istithmar Istithmar Aldar Private Equity Fund Abraaj Buyout Fund II Swicorp Joussour Fund Infrastructure and Growth Capital Fund Global Buyout Fund L.P. Infrastructure and Growth Capital Fund Infrastructure and Growth Capital Fund Istithmar Ithmar Fund II Gulf Capital Swicorp Joussour Fund Global Buyout Fund L.P. IDB Infrastructure Fund L.P. Intaj Capital Swicorp Emerge Invest Global Buyout Fund L.P. Istithmar Egypt United States United Kingdom Germany United Kingdom United States United Kingdom Morocco UAE Saudi Arabia Saudi Arabia Turkey Turkey UAE UAE United Kingdom UAE Saudi Arabia Egypt UAE Malaysia Saudi Arabia MENA Oman China

Egyptian Fertilizers Company Och-Ziff Capital Management Group LLC Alliance Medical Mauser AG HSBC Holdings PLC Barneys New York 2 business parks in the South East of England Mazagan Resort Infrastructure and Growth Capital Fund Saudi Tadawi Company Eastern Petrochemical Company Acibadem Saglik Hizmetleri and Ticaret Fon Finansal Kiralam A.S. Global Educational Management Systems Air Arabia Queen Elizabeth 2 Mushrif Trading and Contracting Company Education Company Egyptian Refining Company Planet Pharmacies LLC Maegma Hot-rolled Coils Amlak Pulsar MENA Al Jazeera Steel Products Company Hans Energy Company Limited United Yemen Telecommunication Services Company Saraya Islands Right Angle Media FZ LLC Yemen UAE UAE

Country

Target Company

MENA Private Equity Investments (2007-1H-2008) - Continued

Telecoms and IT Real Estate Media

Basic Materials Financial Services Healthcare Basic Materials Financial Services Consumer Goods Real Estate Travel and Tourism Financial Services Healthcare Oil and Gas Healthcare Financial Services Services Transport Travel and Tourism Construction Services Oil and Gas Healthcare Mining and Metals Financial Services Real Estate Mining and Metals Transport

Sector

Telecom Operators Landlords and Developers Advertising

Fertilizers Asset Management Medical Equipment Containers and Packaging Commercial Banks Department and Variety Stores Landlords and Developers Hotels and Resorts Investment Funds - Islamic Pharmaceuticals Refining and Petrochemicals Healthcare Services Credit and Finance Education and Culture Airlines Recreation Heavy Construction Education and Culture Refining and Petrochemicals Pharmaceuticals Fabricated Metal Products Credit and Finance - Islamic Landlords and Developers Fabricated Metal Products Warehousing and Storage

Industry

41.9 40.0 37.5

1,400.0 1,260.0 1,250.0 1,155.0 1,000.0 942.3 388.0 350.0 200.0 177.0 175.0 162.5 120.0 111.0 101.0 100.0 96.6 93.0 80.0 77.5 73.0 64.0 60.0 53.7 52.0

Size in US$mn

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Fund / Institution Target Company KFICME Private Equity Fund Bayan Holding Company The Pre-IPO Fund Ajlan and Brothers Company Gulf Capital Gulf Marine Services KFICME Private Equity Fund Arab Finance House Global Opportunistic Fund II Planet Pharmacies LLC Global Opportunistic Fund II Real Estate Finance Company Global Opportunistic Fund II Ajlan and Brothers Company Gulf Capital Gulf Marine Services Swicorp Joussour Fund Ghani Glass Limited Amwal Fund II Amwal Al Arabia Amwal Fund II Zohoor Al-Reef EuroMena Fund IT Worx KFICME Private Equity Fund Rasmal Holding Company Amwal Fund II KSAM 2 Amwal Fund II Egyptian Propylene and Polypropylene Company Sabre Abraaj India Private Equity Fund I Limited Ramky Infrastructure Limited TNI Growth Capital Fund Emaar MGF Land Delta Capital MENA Telecom Fund Karoui and Karoui World KFICME Private Equity Fund MENA Real Estate Company Unicorn Global Private Equity Fund I US Precision Team Incorporated EuroMena Fund Sodamco Holding Global Opportunistic Fund II Model Restaurants Company Unicorn Global Private Equity Fund I Al Assi Private Equity Fund Ajlan and Brothers company MENA Small and Medium Enterprises Fund I Jordan Abyad Fertilizers and Chemicals Company Middle East Real Estate Opportunities Fund II Philadelphia Investment Group Limited Global Opportunistic Fund II Reach (Cargo Movers) Pvt. Ltd. Global Opportunistic Fund II Uma Precision Limited EuroMena Fund Palestine Securities Exchange

MENA Private Equity Investments (2007-1H-2008) - Continued Country Sector Kuwait Real Estate Saudi Arabia Consumer Goods UAE Transport Lebanon Financial Services UAE Healthcare Saudi Arabia Financial Services Saudi Arabia Consumer Goods UAE Transport Pakistan Basic Materials Egypt Consumer Goods Saudi Arabia Consumer Goods Egypt Telecoms and IT Kuwait Real Estate UAE Oil and Gas Egypt Oil and Gas India Construction India Real Estate Tunisia Media Kuwait Real Estate United States Conglomerates Lebanon Construction Jordan Travel and Tourism UAE Conglomerates Saudi Arabia Consumer Goods Jordan Oil and Gas Jordan Real Estate India Transport India Auto Ancillery Palestinian Territories Financial Services

Industry Landlords and Developers Textiles and Apparel Marine and Seaport Services Commercial Banks - Islamic Pharmaceuticals Credit and Finance Textiles and Apparel Marine and Seaport Services Containers and Packaging Textiles and Apparel Toiletries Software and Services Landlords and Developers Refining and Petrochemicals Refining and Petrochemicals Heavy Construction Landlords and Developers Advertising Landlords and Developers Diversified Services Building Materials Restaurants Diversified Services Textiles and Apparel Fertilizer Manufacturing Landlords and Developers Diversified Transport Services Diversified Manufacturing Securities Markets

Size in US$mn 37.0 35.0 32.0 30.5 30.1 30.0 30.0 24.0 22.0 21.00 20.0 20.0 18.1 18.0 18.0 17.0 15.0 12.0 10.8 10.5 10.0 9.9 9.0 8.8 8.0 7.0 5.0 4.1 4.0

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Source: Zawya Private Equity Monitor

Fund / Institution KFICME Private Equity Fund KFICME Private Equity Fund EuroMena Fund KFICME Private Equity Fund KFICME Private Equity Fund Middle East Real Estate Opportunities Fund The Pre-IPO Fund KFICME Private Equity Fund The Pre-IPO Fund Istithmar MENA Transformation Fund I Dubai International Capital HSBC Private Equity Middle East Catalyst Private Equity SHUAA Partners Fund I, L.P. Growth Gate GCC Energy Fund L.P. MENA Transformation Fund NBK Capital Equity Partners HSBC Private Equity Middle East MENA Transformation Fund I Catalyst Private Equity Jordan Dubai Capital EuroMena Fund Jordan Dubai Capital Jordan Dubai Capital Jordan Dubai Capital Dubai International Capital Dubai International Capital MENA Small & Medium Enterprises Fund I Infrastructure and Growth Capital Fund

Target Company First Jordan Investment Company Gulf Capital Siniora Food Industries Vision Network Television Limited Gulf Holding Company Philadelphia Investment Group Limited Tamweel Al Safat Takaful Insurance Company Dubai Financial Market GLG Partners Modern Emirates Heavy Cranes LLC Rivoli Group Byrne Equipment Rental Omni Oil Technologies Air Arabia E-Freight International The Stellar Companies ATA Invest Yudum Food Undisclosed company Undisclosed company Millennium Energy Industries Industrial Development Bank Arab Pharmaceutical Manufacturing Company Amlak Finance - Jordan Munya Woodland Resort and Spa Central Electricity Generating Company ICICI Bank Limited Alumina Materials Innovative Solutions (Almatis) IT Worx Al Nouran holding

MENA Private Equity Investments (2007-1H-2008) - Continued Country Jordan UAE Jordan Pakistan Kuwait Jordan UAE Kuwait UAE United Kingdom UAE UAE UAE UAE UAE UAE UAE Turkey Turkey Saudi Arabia Saudi Arabia MENA Jordan Jordan Jordan Jordan Jordan India Germany Egypt Egypt

Sector Industry Financial Services Investment Companies Financial Services Investment Companies Agriculture and Food Meat Products Media Radio and Television Real Estate Landlords and Developers Real Estate Landlords and Developers Financial Services Credit and Finance - Islamic Financial Services Insurance Companies - Islamic Financial Services Securities Markets Financial Services Asset Management Construction Misc. Construction Services Conglomerates Diversified Trading Services Equipment Leasing Oil and Gas Oilfield Services and Equipment Transport Airlines Transport Freight Forwarding Services Power and Utilities Misc. Utility Services Financial Services Investment Banks Agriculture and Food Edible Oils Healthcare Healthcare Services Healthcare Healthcare Services Power and Utilities Electricity and Water Supply Financial Services Specialized Banks Healthcare Pharmaceuticals Financial Services Other Financial Services Travel and Tourism Hotels and Resorts Power and Utilities Electricity Supply Financial Services Commercial Banks Mining and Metals Fabricated Metal Products Telecoms and IT Software and Services Agriculture and Food Sugar

Size in US$mn 3.6 3.5 3.2 2.4 2.3 2.0 1.3 1.3 0.3 -

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Fund / Institution Target Company 1H-2008 Tranactions Infrastructure and Growth Capital Fund Egyptian Fertilizers Company Unicorn Global Private Equity Fund I Ormix Amwal Fund I Damas Jewellery The Jordan Fund Arab Orient Insurance Company - Jordan Egyptian Direct Investment Fund Limited Cairo Medical Tower Laboratory Egyptian Direct Investment Fund Limited Contact Car Trading Company SHUAA Partners Fund I, L.P. Damas Jewellery Abraaj Buyout Fund II GMMOS Group Abraaj Buyout Fund II National Air Services 2007 Tranactions Dubai International Capital Tussauds Group Istithmar 280 Park Avenue Istithmar 230 Park Avenue Abraaj Buyout Fund II EFG - Hermes Amwal Fund I Bank Audi NBK Capital Equity Partners Yudum Food Global Opportunistic Fund II Reliance Petroleum Limited Amwal Fund I Lebanese Canadian Bank Global Opportunistic Fund II Zhaojin Mining Industry Company Limited The Pre-IPO Fund Gulf Navigation Group The Pre-IPO Fund Combined Group Co. for Trading & Contracting Global Opportunistic Fund II Parsvnath Developers (PDL) Global Opportunistic Fund II Dubai Financial Group Market Dubai International Capital Daimler Chrysler EuroMena Fund Arab Pharmaceutical Manufacturing Company Lebanon Real Estate Development Fund, L.P. Park Hill

MENA Private Equity Exit (2007-1H-2008) Country   Egypt UAE UAE Jordan Egypt Egypt UAE UAE Saudi Arabia   United Kingdom United States United States Egypt Lebanon Turkey India Lebanon China UAE Kuwait India UAE Germany, United States Jordan Lebanon

Sector   Basic Materials Construction Consumer Goods Financial Services Healthcare Financial Services Consumer Goods Construction Transport   Travel and Tourism Real Estate Real Estate Financial Services Financial Services Agriculture & Food Oil and Gas Financial Services Mining and Metals Transport Construction Real Estate Financial Services Automotive Healthcare Real Estate

Industry   Fertilizers Cement Jewellery and Luxury Products Insurance Companies Hospitals and Clinics Credit and Finance Jewellery and Luxury Products Heavy Construction Airlines   Recreation Landlords and Developers Landlords and Developers Investment Banks Commercial Banks Edible Oils Refining and Petrochemicals Commercial Banks Metal Mining Maritime Shipping Building Contractors Landlords and Developers Securities Markets Assembly Plants Pharmaceuticals Landlords and Developers

Size in Mn   2,500.0 44.9   2,000.0 1,350.0 1,150.0 1,100.0 91.1 70.7 48.4 13.5 11.4 8.2 5.2 0.9 0.3 -

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Strategy - MENA Private Equity

Source: Zawya Private Equity Monitor

Fund / Institution Injazat Technology Fund Injazat Technology Fund Injazat Technology Fund Lebanon Real Estate Development Fund, L.P. HSBC Private Equity Middle East Abraaj Buyout Fund L.P. Abraaj Buyout Fund L.P. Abraaj Buyout Fund L.P. Abraaj Real Estate Fund

Target Company Jordan Training Technology Group Atos Origin Middle East Omnix Media Networks Park Clemenceau Havelock AHI Maktoob Group Septech Emirates Amwal Arabtec Holding

MENA Private Equity Exit (2007-1H-2008) - Continued Country Jordan Region-wide UAE Lebanon Bahrain Jordan UAE Qatar UAE

Sector Industry Telecoms and IT Software and Services Telecoms and IT Software and Services Telecoms and IT Software and Services Real Estate Landlords and Developers Construction Specialty Contractors Telecoms and IT Internet Services Industrial Manufacturing Industrial Machinery Financial Services Diversified Financial Services Construction Misc. Construction Services

Size in Mn -

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Global Investment House

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Strategy - MENA Private Equity