PE in Saudi, the future ?

Hey guys,

I've recently been thinking that the middle east is ripe for PE investments. I worked at one of the largest banks in Saudi last summer and I remember that the Blackstone guys from London came down to ask us about investment opportunities. I know that KKR is setting up shop in Saudi as well and have already done so in Dubai.

There are just so many private companies that have a lot of potential but are not run that well that it seems like an amazing place to operate out of. That is, if you are like me and actually enjoy the Middle east / the culture, or at least don't mind it enough to let it get to you.

When you put the fact that you can work half the time, live in a penthouse, eat amazing food every day, save 90% of your salary, and have 50 days vacation time a year to enjoy it all it seems like an amazing place to operate out of.

I'm just a freshman, so take what I say with a grain of salt, but I think that this may be the next big thing.

http://www.ftmandate.com/news/fullstory.php/aid/2217/KKR_eyes_Riyadh_for_debut_Saudi_office.html

http://online.wsj.com/article/SB124265105285430335.html

Comments (8)

 
Mar 5, 2011 - 3:35pm

GoodBread:
Perhaps after the government is overthrown? I can see the appeal but you might after to pack your bags sooner than you'd like the way things are going right now.

Not to worry mate. The only way I see things , atleast from my sight here on the ground and the palaces, going are 2 ways: The royal family stays in power (which is most likely), or they are overthrown (highly unlikely, thankfully). If they are overthrown, then rest assured the star-bangled eagle will swoop down and force all the major government companies to de-nationalize..that doesnt sound too unfamiliar does it? :)

Quite inevitable actually, with companies as big as Aramco ($233.3B in 2008 revenues) completely private (gov). Big PE cant have that.

May I ask why Americans are so keen and bent over on overthrowing the Saudi government?


Anyways, back to the topic. You are on the spot. The market is ripe for private equity. You've got the likes of Saudi Oger, Saudi Bin Laden Group (not to worry, not THAT bin laden), SAMACO, Sharbatly Foods, and a whole list of others. Foreign investment in Saudi Arabia isn't as easy as it is in the UAE for example, but SAGIA is definitely making it easier by the day. Foreign investment IS possible in Saudi Arabia, but there is some sort of rule that stipulates a certain number of the investors to be Saudi citizens. I do not recall the exact details, but it's something along those lines.

Greed is Good.
 
Mar 5, 2011 - 6:09pm

The big US financial sponsors are actively looking at assets in the region but they are coming up short. The problem is the lack of corporate governance and other factors necessary to make PE investments. The fact that IPO valuations are determined by the regulators (Saudi equivalent of SEC) and not the issuer/underwriters is also hampering investment there, since that adds a huge element of uncertainty to the exit.

 
Best Response
Feb 13, 2012 - 4:10am

Input from one of my friends ex-colleagues who now works in region.

There is hardly any PE investment in Saudi (or the wider middle east), relative to developed markets or even emerging markets in Asia.

There are only 3 actual private equity firms that manage over a $billion from the region. Investcorp, Arcapita and Abraaj. The rest are either small teams at banks, small funds or parts of government / family holding companies. The US firms are somewhat active, but their teams are tiny (1 or 2 guys) and they haven't done much.

The issue isn't really governance as much as it is:
- Lack of sophisticated debt capital markets
- Less need for PE investment. Most owners of decently sized Saudi businesses don't need capital or can get it more cheaply in other forms (bank loans, IPOs, private placements, internal funds, etc...)
- Many large businesses rely on government or royal contracts/concessions for monopoly power or significant parts of their revenue. This isn't something transferrable when you sell a company to some private equity firm/financial sponsor.
- Limitations on foreign ownership
- Limited ability of PE firms to add value or originate deals. They have no connections, don't know the business practices, have limited networks, etc...
- Small economy compared to the USA, large countries in Asia or larger European countries. e.g. Spain's GDP is circa $1.4 trillion, VS GDP of all GCC countries combined is less than $1 trillion (Saudi, UAE, Kuwait, Qatar, Oman & Bahrain)
- Non-middle eastern capital prices itself out of the market due to political risk / home bias. Saudi investors don't need a risk premium for investing in Saudi.

You might like this presentation at Wharton from a Saudi based private equity firm.

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