Looking Back

More than seven years ago, buyout shops were drooling over the flow of cash coming from the Middle East. Investors from the region were increasingly turning to the United States to put their money to work, and they were especially interested in private equity. Apax Partners, Morgan Grenfell, Thomas Weisel, Doughty Hanson and Indigo Capital are just some of the shops that opened their funds to Middle Eastern backers.

Buyouts covered the infusion in its August 27, 2001 issue, reporting conventional U.S. and European banking institutions were taking steps to begin catering to Islamic investors. Charles Ogburn, executive director of Crescent Capital Investments (now called Arcapita Inc.), was quoted in that article. Contacted to re-visit the situation, Ogburn explained that in 2001 the Middle East was simply awash with petro dollars—so much so that the region was flooded with excess liquidity and investors were crying out for geographic diversification.

But over the past eight years, the tables have turned somewhat. Appetite for investment in the Gulf region has increased over that span, and the flow of funds that traditionally led from the Middle East to the United States seems to be reversing. With the growth of Dubai, Abu Dhabi, Bahrain and Doha as major business centers, a huge build-up in local investment has occurred in real estate and other sectors. To a degree, Ogburn said, this deployment of capital into the region is diverting capital that might have been directed to other geographies, including the United States.

Some macro factors have come into play, as well. Like investors everywhere, Middle Eastern investors have seen their public market portfolios decline significantly, leading to an overallocation to private equity.

Today capital is flowing in the other direction, with U.S. buyout shops and other private equity players checking out investments in the Middle East. Kohlberg Kravis Roberts & Co. recently opened an office in Dubai to pursue private equity and infrastructure transactions in the Middle East and North Africa. Makram Azar, who joined the firm last September to head its Middle Eastern operations, told Buyouts the region has a lot of corporations and family businesses that KKR could support with growth capital, noting that the firm is considering a variety of businesses and is not restricted to any particular sectors. KKR intends to co-invest alongside the area’s sovereign wealth funds, many of whom have previously co-invested with the firm.

Also, The Carlyle Group set up shop in Dubai in 2006, and, in March of 2009, closed its first-ever Middle East and North Africa fund—Carlyle MENA Partners—with $500 million in commitments. The fund will be managed from offices in Cairo, Dubai and Istanbul, and will target investments in industries including financial services, health care, industrial, infrastructure, technology and transportation.