Fund-Raising Heats Up In The Middle East –

Investors in China, watch out. Your country and the rest of Asia may not be the hottest place on the planet for private equity deals. The place to be is quickly becoming the Middle East.

Dubai, UAE-based Abraaj Capital is approaching a final close on the largest ever Middle East buyout fund, Abraaj Buyout Fund II L.P., which could exceed $500 million when it formally closes at the end of the year, Buyouts has learned.

The firm’s first fund of $116 million, Abraaj Buyout Fund, was fully invested by January 2005.

Jonathan Hall, senior vice president of Abraaj Capital in Dubai, says that the second fund would have the same focus as the firm’s first-mid-market management buyouts and leveraged buyouts in the Middle East. But Hall says the firm will look more broadly at doing deals in North Africa, India and Pakistan, “as opportunities arise.”

The second fund brings Abraaj’s total capital under management to about $1 billion, including a $113 million real estate fund and a $103 million special opportunities fund.

The only disclosed LP in the second fund is Dubai International Capital, the private equity investment arm of Dubai Holdings. Hall wouldn’t disclose specific LPs, but he says that investors include regional pension funds, financial management groups, insurance companies, banks and high net worth individuals.

Abraaj is not alone in being bullish on the Middle East and North Africa region. Intel Capital recently announced the formation of the $50 million Intel Capital Middle East and Turkey Fund to invest in startups in the Middle East. Intel Capital also announced that it would help the Saudi Arabian General Investment Authority establish a $100 million venture fund to invest in technology companies in Saudi Arabia and nearby countries.

Meanwhile, Atlanta-based investment bank Arcapita recently launched a venture fund that must adhere to Islamic law. The firm secured a $40 million anchor investment from its parent bank in Bahrain. The rest of its funding will come from individual and institutional investors that do business with the bank.

Also, earlier this year, investment bank Shuaa Capital’s private equity subsidiary, Shuaa Partners, had a first close on its inaugural fund of $160 million. That fund appears headed for a final close of about $200 million.

And just last week, Venture Capital Bank and Global Emerging Markets Group teamed up to launch a $250 million fund focused on small and mid-sized businesses in the Middle East and North Africa regions.

GEM Group Executive Director Chris Brown says that the fund will focus primarily on “micro-buyouts” in the $2 million to $15 million in EBITDA space and an enterprise value between $10 million and $100 million. He says that the new fund will probably close its first microcap LBO in the third or fourth week in January.

VCBank doesn’t specify what sectors of investment it will focus on, but says that its venture investments will cover a “diverse range of industry sectors” and expects to have an internal rate of return (IRR) of 25% over a three to four year investment period.

VCBank and GEM will launch and market the fund in the first quarter of 2006 and approach both institutional investors as well as individual backers from the GCC region and internationally. The region is comprised of the countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. The 80 high-net-worth individuals and families that initially funded VCBank with its inaugural $66 million will have the right to invest first in the fund, followed by existing GEM institutional LPs.

Brown says that there are some unique challenges to doing private equity in the Middle East. “Liquidity is not an issue,” he said. “But sourcing is very difficult and expectations with regards to multiples are probably the most difficult. Historically we pay between 4x to 6x cash flow for a business and with the stock markets in the Middle East selling at ridiculous valuations, sellers have rather unrealistic expectations of what their businesses are worth.”

VCBank was founded earlier this year and licensed by the Bahrain Monetary Agency in May. It adheres to Shariah, or Islamic religious law, and even consults a special advisory board to insure compliance with Islamic strictures.

It is a strategic partner with the Al Sulaiman Group of Saudi Arabia. It aims to have an ownership distribution among the Arab Gulf states comprised of 40% from Saudi Arabia, 20% from Kuwait, 10% from Bahrain and Qatar, 10% from Oman and the United Arab Emirates, 10% from strategic partners and 10% from GCC-based financial institutions.

In addition to new U.S. interest in Middle East investment, the private equity industry is getting boosts from within. Also earlier this year, investment bank Shuaa Capital’s private equity subsidiary, Shuaa Partners, had a first close on its inaugural fund of $160 million. Other established Arabic private equity firms include Abraaj Capital and HSBC Private Equity. Though there has been this build up of activity, Abraaj’s $500 million fund is making many investors stand up to take notice. Some sources in the Middle East suggest the current rise of new firms and fundraising activity in the Middle East is the result of the vast wealth generated from oil in the region. Many sources also say that these funds represent a coming of age by the local investment community, which, in the past, looked towards the United Kingdom or the United States for assistance in raising and investing funds.

Hall says that the firm’s first fund invested in eight portfolio companies. Hall points to the June 2005 IPO of Aramex-a Jordan-based air freight and courier company that was listed on the Dubai Financial Market-as the most successful of the first fund’s two exits to date. Hall says Aramex returned $192 million, or 6.5x, Abraaj’s investment.

For the new fund, Hall says that investments will range from $20 million to $40 million in deals valued at between $40 million and $100 million. The firm has no specific sector focus. Hall says the key is to invest in “established companies, with revenue, good cash flow, and with strong growth potential.”

CEO Arif Naqvi and several of the firm’s directors, who are also investors in the firm, founded Abraaj in 2002.