MENASA region enjoys prime conditions

First there was the Middle East (ME), then there was Europe, the Middle East and Africa (EMEA), then there was the Middle East and North Africa (MENA) and now, in the most recently-coined acronym, South Asia has been bundled up with the latter nations to form MENASA (Middle East, North Africa and South Asia).

It is a bit of a mouthful, and encompasses countries that have very little in common, stretching from Morocco in the west to the eastern tip of India. What they do share in common is the oil-rich nations of the Middle East at their geographical and financial hub, with their sovereign wealth funds and investment groups increasingly willing to support projects and acquire assets within the region rather than looking for prime real estate (for example) in London or New York.

“Petrodollar investors are investing in their own backyards,” notes Fred Sicre, executive director at Abraaj Capital. “They have also rediscovered an entire hinterland from India to Morocco. New trade links, investment cross-fertilisation and intra-regional labour mobility are driving regional integration.”

The six Gulf Co-operation Council countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE, along with the Levant countries of Jordan, Lebanon and Turkey, the North African states of Algeria, Egypt, Libya, Morocco and Tunisia, plus India and Pakistan make up MENASA. Together they account for 29% of international oil production and 15% of global gas production. They hold 45% of the world’s proven oil reserves and 28% of the proven gas reserves.

Most of these resources are held by the GCC states, but the other countries (particularly India, Pakistan, Egypt and Turkey) are blessed by large and skilled populations, available to work at low cost. “Never before has the inflow of financial liquidity into the region from hydrocarbons and the availability of skilled labour been so large, and never before has economic development in the region been accompanied by comprehensive government reforms,” states a recent report by McKinsey on the region. MENASA is predicted to generate 9% of the world’s total growth in GDP in the next 10 years (up from a current 5%), according to the report.

The upshot is that private equity groups are ever more active in the region, as total FDI has shot up from US$16bn in 2002 to US$128bn in 2007. The financial sector has grown at an average rate of 25% per year since 2002, as total banking assets reached US$2.3trn in 2007. New PE firms are launching every month.

This summer, First Gulf Bank, majority owned by the ruling family of Abu Dhabi, launched First Merchant International private equity fund to invest in the MENASA region. Dubai International Capital, the private equity arm of Dubai Holding, has announced that its 10% of total assets under management invested in the region will rise significantly in the coming years. And in July 2008, Global MENA Financial Assets, a private equity fund specialising in investments in the Middle East and North Africa, raised US$500m through an initial public offering in London, against the grain of general investment sentiment.

Baring Asset Management then launched a new MENA fund to invest in oil and gas, tourism, construction and infrastructure in August, while HSBC, Investec, Schroeders and others have launched ‘new frontier’ funds to include North Africa and the Middle East.

The term ‘frontier’ underlies the sense of adventurism that accompanies investment in markets such as North Africa, with its high upside potential but largely unproven track record. While there have been knock-on effects from the global downturn, they have not been as pronounced as in developed markets, or even emerging markets, according to fund managers who have kept their eyes on progress. MENA funds saw net inflows of US$1.3bn in the first half of 2008 and the continued activity of Chinese investors in developing the region’s infrastructure has helped to provoke growth in industries such as financial services, telecoms and tourism.

From a private equity point of view, structural shifts in the region are providing new opportunities, according to Fred Sicre at Abraaj Capital. “A new generation of Western-educated leaders are concentrating on their core competences,” he says. “WTO regulations are also changing the competitive landscape, encouraging family businesses to divest non-core assets, thus offering PE players interesting opportunities.”

Banks are willing to lend to the right projects, notes Sicre. But he advises that private equity is still relatively new and untested in the region. “It is important to note that PE investing in the region is much less about financial engineering than it is about pure operational enhancements and growth strategies.”

Further opportunities inside and outside the region are likely to emerge as the industry matures, according to Sicre. “The Central Asian republics and Africa stand to benefit from this in the medium term, placing GCC countries firmly in the centre of an exciting growth territory.”