27 June 2011

Middle East outlook

The Middle East is losing out to heightened dealmaking activity in South America. However, deal values in the region have not taken the dip that could have been expected given the level of political uncertainly emerging in 2011.

Excluding Israel from the equation, there were 234 deals with Middle East-based target companies in the first half of the year and they were worth a combined USD 10.23 billion, according to Zephyr. In monetary terms this actually represents strong growth over the last six months of 2010 (a 42 per cent gain from USD 7.18 billion in H2 2010). What’s more, deal volume declined by 52 per cent over the timeframe – so transaction values had to increase considerably to generate this 42 per cent growth.

The H1 2011 deal value of USD 10.23 billion includes private equity and venture deals. This segment has been particularly weakened, even allowing for the fact that the second half of the year traditionally outstrips the first in terms of PE investment in the Middle East. The results from H1 2011 are stark: seven PE deals worth a combined USD 25 million in six months. This compares to 12 worth USD 157 million in H1 2010, and by value is the weakest H1 result of the last four years. While there has been much talk of dry powder in Middle East funds, another six months have gone by without a major investment.

Consider this lack of activity against a doubling in the value of private equity deals targeting South and Central America in H1 2011, compared with the corresponding year-ago period. The number of these transactions only increased by 4 per cent from 48 to 50 but their value surged by 129 per cent from USD 3.35 billion to USD 7.67 billion – marking the third successive period of growth. South America is now firmly on the private equity radar. Major investors so far in 2011 include Warburg Pincus, Vestar Capital and Advent International – and Brazil’s upcoming World Cup and Olympic Games will ensure continued interest.

So while multinationals, including BP, Portugal Telecom and Nippon Steel, vie for a Latin foothold, Middle Eastern investors are keeping capital at home: almost half of all deals targeting the Middle East in H1 2011 had a buyer from the region. In its monthly private equity insight, Zawya recently touted Iraq as a destination not to be missed by global investors. With the NGP Iraq20 Index up by more than a third this year, all eyes should be on Iraq in H2 2011. If nothing else, it should be a region coming out of instability rather than becoming increasingly unstable, so investors may have a clearer idea of what to expect.

© Zephyr