Press Release

April 06, 2011

Private Equity Firms Set To See Upside Trend In 2011

The worst in the private equity (PE) industry is still to come. A number of analysts expect more than 50 per cent of the firms in the sector to be wiped out over the next two to four years.

A couple of companies, in fact, were already being disbanded, Karim El Solh, Founder and Chief Executive of Gulf Capital told Emirates Business.

“A lot of firms were launched in 2006 and 2007 because there were a lot of money. It would be hard to build a track record, have an exit and be able to build your second or third fund. Most of these firms will be one-time funds, he said, and disappear by slow death,” he said.

The real shake up is also slated to happen in 2011-2012 because most bullet debts, debentures where a single payment is due on the maturity date of the debentures, undertaken by PE firms will mature by then. Gulf Capital is nevertheless upbeat that 2010 will be the year of consolidation and growth for them. The Abu Dhabi based firm will close its $500 million (Dh1.83bn) Gulf Capital Equity Partners Fund II on February 15, 2010 and plans to conclude four deals every year.

“The trend is definitely up but more so in 2011… remember we are just recovering now from the slump. We are definitely on the way up, probably most of the upside is in 2011,” he said.

In June last year you said you have received capital commitments of about Dh1.75bn for your Equity Partners Fund II. How much of those funds have you already deployed?
Our Gulf Capital Equity Partners II was oversubscribed. They covered $500m and we’ll probably come higher than that figure. We’re closing on February 15, 2010 and we’ll announce the final figure then.

What’s remarkable about this fund is that two-thirds of it came from abroad. This came as a surprise to us because the Gulf is typically a net exporter of capital and not a net importer, but we’ve proven that this is an interesting region to invest in. That there is a lot of growth and that there are global investors who want to put money through us. They are among the most sophisticated investors we have partnered with – sovereign wealth funds, pension funds, insurance companies and financial institutions.

We already started investing. In private equity, you draw down on the capital as you need them so we don’t have $500m in our bank account.

We have commitments from investors to back us as we make the deal. When we’re about to close the deal, we’ll ask for that amount of funding.

What investments have you made under this fund?
In the fund, we now have three investments – one in oil and gas, one in education and one in healthcare. In the oil and gas sector, it is Gulf Marine Services, which we own 79 per cent, it is the leading operator of jack up barges in the Gulf.

But you owned this already, didn’t you?
Yes, what we did was we’ve moved it to Fund II.

What are the other two deals?
In the second deal we bought the largest group of schools in Saudi Arabia. We bought 50 per cent of Al Maaref. The third is a healthcare deal. We really wanted to be in healthcare. Healthcare and education, called the social infrastructure, are reliable, predictable and growing in the back of population boom.

When will you close this healthcare agreement?
We’re closing as we speak.

How big are these three deals?
Probably in the $150m range. So a third of the funds have already been deployed. We’re Gulf focused, we’re not industry focused. What we want is to have a diversified fund, so you have oil and gas, some healthcare, some education and hopefully some food and services. Our goal is to provide exposure to global investors to growth in all sectors of the region. But more and more we are moving to defensive sectors, which grow regardless of market conditions.

For example in schools, it doesn’t mater what happens in stock markets and financial markets people will not take away their children from school. It is predictable. We have amazing visibility and we like that kind of business, it’s a low risk business.

Can you disclose that company in the food sector?
We are looking at what we call from farm to fork so the whole supply chain from agricultural processing, manufacturing, sales, to quick-service restaurants and casual dining. We’re looking at opportunities across the value chain and we want to see what makes sense to us. We are probably going to do one or two deals in the food sector in 2010.

How many deals do you want to close in 2010?
We expect to close approximately a deal per quarter so probably we’ll be closing four deals in 2010.

You opt to buy companies in the defensive sector. But some say that if you want to make money these days, you need to go cyclical assets because they are the first to go up?

Well then, you are taking a bet on the cycle and the timing and I don’t know if it always works. I’d rather say a 30 per cent internal rate of return (IIR) in education deal, which is low risk than a 100 per cent on a deal that’s either a homerun or a complete write off. You have to look at return risk perspective not only on the returns but also the risks that you are taking. We’re a bit more cautious from that perspective.

Are market prices still at low or distressed levels?
They have become more reasonable. They were inflated in 2007 and 2008. Beginning 2009 people were coming back to reality. There is always a lag of one year between public market correction and private market correction. Some people we were speaking to were asking for 2007 valuation – they were living in a dreamland – now they are selling because prices have come down, banks are not lending, they need capital to grow and so finally they are talking to us. So it is a good time for the investors.

Are you launching any fund in addition to the one you’ve raised last year?
We have to invest Fund II before we launch Fund III. If you look at our agreement with the limited partners (LP)s we have to be 75 per cent invested before we launch a new fund.

Will you be able to finish investing that $500m in 2010?
No, we expect it to take us another two to three years.

Are you looking at any exits?
We’re always open to exits. These are young investments so we have to spend time to help them grow before we consider exits. Plus the market will recover probably by 2011 so think of 2010 as the year of consolidation and growth; and by 2011-2012 we’ll start exiting some of our investments.

There had been talks of a Metito IPO. Does that mean we can expect it to go public only by 2011?
With Metito – we are now growing so fast, an exponential growth. We’re expanding across North Africa, India, Indonesia, we just moved in to China so we are in the process of building one of the largest emerging market water utilities companies.

We are still in an expansion phase. We don’t want to sell them too early. We are supporting them in the execution plan so it’s a bit early for them.

You’ve recently been elected as the Chairman of Maritime Industrial Services. What are the kinds of “value add” that we can expect from Gulf Capital to MIS?
Gulf Capital is based in Abu Dhabi, we are strong here, and there’s a huge exposure of business here. We have our eyes set in Abu Dhabi and part of the partnership is to get a big share for MIS.

MIS has traditionally been in Sharjah and Jebel Ali. We have ambitious growth plans and we plan to execute them. Could be about the yard that we’re talking about, could be about acquisition like the Rig Metals.

We’ve done acquisition in the past, we have expanded the business, done some financing so we’ve been quite involved. The beauty of MIS is that it is a mature large company with 30 years of experience, good cash flows and very diversified business and we have excellent relationship with the banks, modest leverage so we are in the position to expand during this difficult period.

MIS has been looking at acquiring a yard in Abu Dhabi since 2008. Considering business has slowed down, is that still in the pipeline?
We need a base in Abu Dhabi not just from business perspective but also on operational perspective. Either we will lease a land or build our own land or we’ll look at an acquisition. MIS is a large company and we have been acquisitive in the past and we are still at the same position.

Once we find a good opportunity, we will negotiate, if it makes sense. Our alternative is to go and build our own yard but if the prices are high we will say no and lease a land and build our own yard.

How long usually does it take for a fund to take an exit from the moment it takes on the investment?
We are an investment company, we are not a fund. We are an asset manager and we launch sub funds so within the fund when you make an investment the average period is five to seven years.

Is the timeframe much shorter than the Western model?
It used to be that you could flip into the stock market after a year or two but that’s gone. Now you have to roll up your sleeves and build value the honest old way and then sell and so now it’s in line with the international markets.

Did the overall salaries of private equity players dive down in tandem with the recession and lack of exits?
As an employee you make your money two ways – you make salary plus bonus, which is your annual package and you get the biggest portion of your money on the performance fee on exits. There are not a lot of exits happening now so I suspect not anyone is making any windfall from exits. That portion of your compensation has been pushed two to three years down the line.

You talked about consolidation and a massive withering away of private equity players the last time we talked in 2008. Is your prediction happening now?
What I said was there were 128 firms in the region and that’s way too much for this region. A lot of firms were launched in 2006 and 2007 because there were a lot of money. It would be hard to build a track record, have an exit and be able to build your second or third fund.

Most of these firms will be one-time funds and disappear by slow death. We’ve seen a couple already being disbanded or unwind. The market will consolidate naturally and only the stronger will stay.

You are Gulf focused. Are you looking at government-owned entities?
If there are assets in our target verticals where we want to be investing in, yes sure, we will look at it. We don’t buy by city we look at companies by sector. So it’s not to say we want to be in Dubai tomorrow then Qatar, and Saudi. We say we want to be in food, education, so we’re not saying today we want to be in Dubai.

Do you think the restructuring of some government-owned entities would be better dealt with the entry of private equity capital?
I am sure they are looking at selling or disposing a lot of their assets to generate income. They are looking at realising some proceeds from these disposals and surely that’s an opportunity for private equity firms.

What could be the risks in that kind of an agreement?
They have so many assets with different profiles and risks. You cannot generalise the risk – they have some companies that are young – in the start ups; and they have some very established companies so it all depends on the type of assets you buy.

What’s the flow of liquidity in the system now?
We’re on our way to recovery. This will take longer than expected. Everyone is waiting and seeing how the situation settles.

What is your 2010 outlook?
The market is picking up and we’re investing in lots of divisions and acquisition in 2010 preparing for 2011. The trend is definitely up but more so in 2011… remember we are just recovering now from the slump.

Profile: Dr Karim El Solh Founder and Chief Executive of Gulf Capital

Prior to founding Gulf Capital, Dr Solh was CEO of the National Investor and before that he was responsible for European High Yield/LBO Capital Markets at Donaldson, Lufkin and Jenrette (now part of CSFB), where he was in charge of structuring, marketing, syndicating and executing European leveraged buyouts and high yield issues. He has been involved in more than $20 billion (Dh73.4bn) worth of LBOs and debt financings in both Europe and the US. He worked as a senior banker at Citigroup Salomon Smith Barney where he was in charge of originating, structuring and executing new equity and equity-linked issues from the Middle East, Eastern Europe, the Indian Subcontinent and Africa.

El Solh also worked for five years at PriceWaterhouse where he was a senior advisor to emerging countries on a number of major privatisation, restructuring and project finance transactions. He has worked on numerous transactions across the world in more than 15 industries.

He has a bachelor’s degree in civil engineering from Cornell University, an MBA from Georgetown University, a PhD in economics from the Institute D’Etudes Politiques de Paris and a Certified Management Accountant diploma, among other qualifications.