Middle-East Investors Stick With The Big Names

Middle-Eastern investors have recently been making a splash with big investments in brand-name firms. But for the moment, their appetite for smaller funds seems subdued.

A trio of powerful investors dominates the limited partner scene in the Middle East. They are the vastly wealthy Abu Dhabi Investment Authority (ADIA), and the smaller, but still powerful Kuwait Investment Authority (KIA) and Qatar Investment Authority (QIA).

ADIA, which invests oil money on behalf of the United Arab Emirates, has anywhere from $600 billion to $900 billion under management, KIA an estimated $300 million, and QIA an estimated $40 billion to $80 billion. When it comes to private equity, the three are largely interested in brand name mega-firms, at least in the U.S. market.

Hard data seems to vanish when it comes to the second rung of Middle-Eastern LPs, which includes The Olayan Group, the bin Laden family’s Saudi Binladin Group and The Saad Group. Those three investors, based in Saudi Arabia, all derive their wealth from the industrial conglomerates that they run. Somewhere between 25 and 50 Middle Eastern institutional investors have private equity programs, according to Anne Gales, a partner with placement agency C.P. Eaton Partners in London. By her estimate, that compares with 2,000 LPs in the United States and about 750 in Europe. On some funds that CP Eaton represents, 10 percent of the money comes from the Middle East.

Mike Miller, head of a five-person fund placement team for investment bank Arab Banking Corp. in Bahrain, puts the number of those second-tier institutions higher, at more than 100. Miller added, “You can’t buy a directory of investors here.”

The Big Three

Founded in 1976 and located in the capital of the United Arab Emirates, ADIA manages one of the largest pools of capital in the world. Sources who requested anonymity offered the following information: ADIA won’t make a commitment smaller than about $50 million, and it has probably backed between 30 and 50 general partners to date.

Beyond that, ADIA’s recent deals suggest a big appetite for minority stakes in buyout shops. Reports have recently surfaced that ADIA is planning to buy a sizeable chunk of Apollo Management, New York. That would set the stage for that management company’s shares to trade on the same quasi-public Goldman Sachs exchange where shares in Los Angeles-based Oaktree Capital Management already trade. ADIA had already been a sizeable investor—by one estimate $600 million—in Apollo’s AP Alternative Assets fund, which trades on Amsterdam’s Euronext exchange.

ADIA earlier this year paid $375 million for an estimated 15 percent stake in Los Angeles-based Ares Management, the private equity and distressed debt investor of which it has been a long-time backer. The firm, which has $16 billion under management, declined comment on the investment, and ADIA could not be reached for comment.

“People are often surprised to find out that Middle-Eastern investors have formed the backbone of a number of private equity groups,” said Rafic Said, of placement agent Park Hill Group, an affiliate of The Blackstone Group, New York.

Monte Brem, founder of La Jolla, Calif.-based StepStone Group, an advisor to Middle Eastern money, added that in buying a stake in a buyout firm’s management company, an investor like ADIA is usually looking for long-term access to the firm’s funds, and for co-investment opportunities. Buying stakes in management companies also has the virtue of letting an investor deploy capital all at once, rather than seeing it drawn down slowly during a fund’s investment period.

KIA, which recently hired StepStone Group as an advisor, is the second-largest of the trio, with an estimated $300 billion under management. It reportedly gets to invest at least 10 percent of the Kuwait’s oil revenue. KIA appears to have an appetite for both U.S. and European buyout funds. Partnerships that KIA is believed to have backed include London-based Charterhouse Capital Partners VII, the Third Cinven Fund, and Close Brothers Private Equity Funds VI and VII; along with New York-based Morgan Stanley Capital Partners IV and Boston-based Thomas H Lee Equity Partners V. On its Web site, KIA says that it would like its private equity investments to achieve an annual rate of return in excess of 500 basis points over the S&P 1200 Global Index.

QIA, meantime, reportedly has about 40 investment professionals responsible for managing between $40 billion and $80 billion. It invests directly in companies and, like ADIA, buys minority stakes in buyout firm management companies. It made a $21 billion offer for British supermarket operator J Sainsbury PLC last month; it reportedly was interested in making the investment in Blackstone Group that China ultimately got. It also made a large investment in Fortress Investment Group when that buyout and hedge fund manager listed publicly, according to reports.

One placement agent said that when it comes to backing buyout funds, QIA wants to commit at least $25 million, and it won’t back a fund smaller than $500 million. QIA also doesn’t want its commitment to represent more than 5 percent of any fund. According to another placement agent, QIA has really started ramping up its investment activity in the last six months. We were unable to reach KIA or QIA for comment.

With few exceptions, the story of these and other Middle-Eastern investors has been one of backing only the largest U.S. firms. Blackstone Group Chairman and CEO Steven Schwarzman visited the region earlier this year to help raise its soon-to-be-closed supplemental portion of its fifth fund, while The Carlyle Group’s David Rubenstein has long been known to travel and raise money in the region.

“We have noticed that that there is a strong focus on larger, brand-name funds,” said C.P. Eaton’s Gales, echoing the sentiments of many placement agents. With the exception of real estate assets funds, hedge funds and funds with links to Asia, Gales added, “We generally recommend our first-time fund clients…not spend too much time marketing in the Middle East.”

To be sure, some lesser-known firms have raised money in the Middle East, among them Emerging Capital Partners, a Washington, D.C.-based firm that invests in Africa, and Wafra Partners, a New York-based firm that buys middle-market companies.

But placement agents agreed that with a target fund size of less than $500 million, it would be hard for a firm to generate interest from the larger institutions in the region.

Alexander Apponyi, in the London office of placement agency BerchWood Partners, said that, in backing brand-name firms, Middle-Eastern investors are in part motivated by a desire for stature outside their region. “If you’re looking for exposure to private equity, what could be better than taking a stake in a world-class private equity fund manager with multiple funds and strategies?” He added: “If you’re going to establish yourself globally, where are you going to make the bigger headlines, by investing in 10 middle-market funds, or two or three large ones?”

Challenges Getting Money

General partners raising capital in the region have to contend with Patriot Act regulations, which are meant to unearth any connections Middle-Eastern investors have with terrorist organizations. Hussein Khalifa, a partner with placement agent MVision, said that in the wake of 9/11, buyout shops didn’t handle their Patriot Act requirements with finesse, jarring some long-time LPs.

“People felt like they were being interrogated,” said Khalifa. “The GPs were required to produce a whole bunch of information from the investors. Often it was handled by a lawyer…who told them, ‘You need to submit this and if not, we can’t accept your money.'” The situation has improved of late, placement agents said, and most experienced Middle-Eastern investors have all their Patriot Act materials ready when buyout firms come to visit, said placement agents.

Time and distance pose other obstacles. It is eight hours later than New York City in most parts of the region, and the work week in the Middle East extends from Sunday to Thursday. That leaves just a few East Coast working hours on four days to communicate. Also, while the region has embraced mobile phones, e-mail communication isn’t as common there as it is in the West.

Raising money in the Middle East also requires the face-to-face trip. A typical one involves several countries, explained Park Hill’s Said. Given the example of having to raise a hypothetical, $2 billion-targeted, fourth buyout fund, Said might propose a trip to three cities in Saudi Arabia, then on to Abu Dhabi, Qatar, and Kuwait. One note of caution: The Saudi government requires a government-issued visa for travel within its borders. These visas can take several months to process, according to the U.S. State Department.

“They like to be met on their own turf,” said BerchWood Partners’s Apponyi of Middle-Eastern investors. “Hunting one of the investors down at a conference in Frankfurt or New York is good, but I don’t know if you get any points for that. Making an effort to see them is half the battle won.”