If you’ve been having trouble raising money in the United States, you might think it is a great idea to try your hand in the Middle East. After all, with the price per barrel of oil topping $75 in July, family offices and others whose wealth is based on oil have more money than they know what to do with.
Sadly, it’s probably not worth the effort—unless you’re a top-tier U.S. fund or a fund based in the Middle East that plans to invest in the Middle East. Of course, that hasn’t stopped desperate fund-raisers from trying.
“Everybody raising a fund comes through here at least once,” says the head of a family office based in Dubai. It’s understandable. There are limited partners in the Gulf region, such as the $600 billion Abu Dhabi Investment Authority (ADIA), which have been known to invest “at least a million in every fund that approached them—everybody,” he says.
But outside of a few stellar limited partners like ADIA, “fund-raising is hard here; it always has been,” says Ali Tabbara, CEO of Strategia, a Lebanese business consulting firm that is raising a private equity fund. The region’s LPs have moved beyond being thought of as a group of friends, fools and angels and toward becoming an astute group of investors whose representatives have developed a “tin ear” for smooth-talking fund-raisers.
Name brands welcome
“There is a reason why we gravitate towards name brands, whether it’s cars, watches or venture firms,” one Mideast GP told VCJ. Arab investors want quality, reputation and reliability. “If you’re going to raise funds here, you have to be prepared to come here and spend the time to develop long-term relationships. And you’re better off if you’re raising money for non-tech funds.”
Another local GP who has been in the trenches told us much the same: “If you have a good name and track record, you can raise funds here,” but second-tier or emerging managers wildcatting for money in the Gulf region are likely to turn up a lot of dry holes.
You can’t just jump off a plane and rush around doing pitch meetings. In fact, you can’t even set up meetings with most Mideast LPs without some kind of personal introduction. You have to know someone who can provide a reference, and most people in that position are not about to share their contacts with other GPs.
Sadly more than a few American GPs think of cash-laden Gulf LPs as “dumber” than Western sources of funds. It’s an attitude known by several generations of the region’s wealthy investors, who have been worked over by Western fund-raisers more than a few times. Most recently, they got caught up in Internet Boom. Abe Saad, managing director of Shuaa Partners, a $200 million fund in Dubai, recalls that time clearly. “Even my grandmother was quoting the price of Red Hat or Yahoo shares,” he says.
No tech, thanks
Since the bubble burst, there is “little interest in technology, semiconductors, telecommunications, Internet and software development here, unless it’s for funds that will go into a local firm,” says an investment manager based in Bahrain. Middle East investors are more interested in sectors such as energy, construction, retail, consumer, transportation, health care and financial services.
The best-performing U.S. private equity funds are well known to the region’s LPs. Among those that have raised Mideast money at one time or another are Accel Partners, Battery Ventures, Blackstone, Bridge Capital, Credit Suisse, The Carlyle Group, Goldman Sachs, Invesco, Morgan Stanley, New Enterprise Associates and Oak Investment Partners.
One experienced GP in the region says there are three ways to raise money in the Gulf: “Direct contacts with the big institutional LPs in Abu Dhabi, Saudi Arabia and Bahrain. Or you can work with the big firms who have fund-raising agents here who have been working in the region for 20 years—Merrill Lynch, CFSB, HSBC and Morgan Stanley. Or you can come here and start networking.”
Adds Khaled Al-Muhairy, founder of Evolvence Capital, a late stage private equity investor based in Dubai: “The Gulf region is a region based on relationships and if you want to do business you have to be on the ground. Flying for seven hours does not work anymore.”
Others agree. Kevin Higgins, managing partner at Large Day Ventures, a Dubai-based firm raising a $150 million fund, offers the following advice to GPs: “Invest some time. Send a partner or associate to the Gulf for three to six months and the opportunities will appear out of the shimmering heat of the desert.”
Grab your partner
Much as it has become fashionable for U.S. venture firms to tap local partners in India and China, if U.S. VCs want to tap Mideast funds they’re going to have to find locals who can lead them though the high walls that surround LPs in the region, says Ahmad M. Al-Sari, managing partner of Malaz Group, a $100 million fund based in Riyadh, Saudi Arabia.
The question GPs have to ask themselves is whether they have the time. First, you have to spend time understanding a complex geographic and cultural region. Second, you have to figure out if your firm has the time to dedicate to a source of funds that is almost exactly the least convenient fund-raising region to reach. And finally, you have to ask yourself if the amount of money you raise will justify your investment of time.
Says one Mideast investor: “It used to be that everyone who came here went away with at least an investment from ADIA, but those days are over.” —Jerry Borrell