Getting personal

The presence of a large number of family offices in the Middle Eastern LP base underlines the importance of relationships in the region, writes Siddharth Poddar.

Recent media reports have suggested that private equity fundraising from the Middle East has ground to a halt as investors in the region – often perceived as an extremely lucrative stop-off on the fundraising trail – continue to suffer from a loss of liquidity in the aftermath of the global financial crisis.

An investor in Abraaj’s third buyout fund, which is likely to fall short of its $4 billion target, told PEO that fundraising is “obviously” difficult because high net worth individuals – who along with the region’s sovereign wealth funds make up the core of investors in the Middle East – are facing liquidity constraints. Their traditional heavy weighting to property, amongst other factors, has led to plummeting portfolio values.

However, while fundraising is indeed tough in the Middle East, many point out that Abraaj has raised an enourmous amount of capital from its LPs and other established institutions are still tapping the market to raise new funds. Earlier this month, Invest AD, the investment firm formerly known as the Abu Dhabi Investment Company, launched its second private equity fund targeting commitments of $400 million, while the Abu Dhabi Investment House aims to close on $300 million by year's end for a fund targeting $1 billion for Sharia-compliant investment in the hospitability sector.

What all of these firms have in common is longstanding relationships in the region. An Indian fund manager currently marketing to LPs recently told PEO his fund is drawing a very good response from investors in the Middle East, in part because is it is sponsored as opposed to being a standalone entity.

Traditionally, limited partners have had reservations about investing in funds that are either affiliated to or a part of a larger parent company as there is a view that decision-making is not independent of the parent and that the economics may be skewed in favour of parent companies, prompting professionals to spin out. Middle Eastern investors, however, particularly family offices, may prefer such funds if there is an existing relationship with the parent.

Enrique Cuan, managing partner at London-based placement firm Mercury Capital Advisors, agreed that raising capital from family offices and high net worth individuals in the Middle East centres more on relationships that a particular due diligence checklist. “This capital is less 'sticky' than the money raised from institutional investors,” he said.

This is because families and individuals in the Middle East often base their investment decisions on factors that extend just beyond the merits and strategy of a fund, Cuan said. Much emphasis is placed on whether investors have had prior interaction with the fund managers or not. “Personal relationships with the GP are critical,” he emphasised.

Adding to this is that in the Middle East, like in many other parts of the world where private equity is a nascent asset class, the infrastructure, resources and talent for evaluating managers are not yet fully developed except among a handful of sophisticated LPs. Although that is slowly changing, the due diligence process still often includes a larger than average emphasis on existing, often personal, relationships.

As the region's fundraising environment remains somewhat constrained, expect firms announcing signficant closes to be marketing their second or third funds, or to have longstanding regional relationships from which to draw.