New fuel for M&A

The idea that the Middle East could be an entirely ‘safe haven’ for investments may be getting tested more than in recent years when sports such as football and golf flocked to the region attracted by untold investment. The region still has its own enmities, barriers and turmoil, but in a world where, it could be said, other regions have the same problems, the Middle East’s resource-rich landscape has experienced unprecedented economic and industrial growth and is rich in capital and high on diversification. It’s maybe less of a surprise that local and international capital and corporates are competing for transactions.

Summing up the deal picture, Richard Dingle, corporate finance partner at EY-Parthenon in the Middle East and North Africa (MENA) region, says: “The sovereign wealth funds across the region are still very active; including the usual larger players. There is also activity from the national oil companies, which are looking to deploy capital and develop joint ventures and partnerships.”

Aside from these large deals and transactions taking place, there is a significant middle market to cater to, with many homegrown family businesses looking to exit or seeking growth options through interested strategic or financial investors.

“There has been a recent flurry of large global private equity and other investment firms entering the region and setting up local offices,” Dingle adds. “This is only likely to increase M&A activity in the region, with some of the largest global investors bringing their teams and expertise.”

In transition

Energy transition is driving deal activity. This takes many forms – not just the diversification into non-carbon sources of income (which the Gulf Cooperation Council countries of Saudi Arabia, Dubai and Qatar have been doing for decades), but investment in more efficient fossil fuel production and greener alternatives. As Dingle says, it’s “the technology and infrastructure that drives the transition”.

As corporate finance leader for PwC in the Middle East, Dubai-based Zubin Chiba works across the region. He has seen “a strong deals environment” post-COVID. He says there has been “a bit of a decline globally, but a slower decline in the Middle East over the past two years”.

He adds: “Market challenges haven’t prevented the influx of capital coming into the region. And what continues to attract international investors are the growth opportunities that exist here, where the level of government investment and transformation that’s happening in the public sector has been filtered through to a very conducive private sector market.” 

Local presence

Global advisory firms have a significant presence in the region, which “allows us to connect and support foreign investors looking at the Middle East, and also in the other direction”.

Sovereign wealth funds invest directly, but they have also created related entities and subsidiaries to develop what Chiba calls “local, then national, then regional champions”. There is also heavy corporate activity, with established players looking to enter new markets. In addition, Chiba highlights family offices, high net worth individuals and institutional private equity firms as other major market players.

“The re-emergence of regional private equity is another theme. And while the Middle East has always been a strong source of capital for some of those foreign private equity firms, what’s changing is that the capital raised in the region is also being deployed in the region. And some of those institutional asset managers from abroad are sizeable, which will bring some interesting opportunities for larger dealmaking here.”

Salmaan Khawaja, head of financial advisory for Grant Thornton UAE and chair of the ICAEW Corporate Finance Faculty’s Middle East Panel, says: “From an investment perspective, we’re seeing a lot of sovereign wealth or government-related entities investing heavily in the international markets right now, particularly around technology and artificial intelligence (AI). While there is certainly a trend to diversify from hydrocarbons, that will take time. So we continue to see opportunities arising in the conventional hydrocarbon space, but with an angle of improving efficiencies and with exposure to technology.”

Khawaja also notes “quite a lot of cross-border activity and foreign investment”. Big-ticket deal sizes mean that the high-profile sovereign wealth funds “come up more often in media coverage” but, he adds: “Private businesses are certainly active as well. The deals are often not as large as with sovereign and the government-related entities, but there’s a lot of activity as family conglomerates continue to expand their businesses.”

Bricks and mortar

Over the past two decades, real estate and hospitality have been a balance and hedge against potential over-reliance on oil and gas, but now Khawaja sees an overall stabilising of real estate valuations.

“Sentiment in the market has been hot for a long time but the UAE is now no longer a place where people are flipping properties – they are actually buying to invest and live.” As real estate moves from a speculative to a settled investment, the influx of people and infrastructure is set to encourage other sectors to take centre stage.

The sectors Chiba currently sees as most active are technology, media and telecommunications (“around areas like AI, cloud, cyber security, digital infrastructure”), industrial manufacturing, financial services, renewables and associated infrastructure, and consumer markets. Of consumer markets, he says: “We have a young population base with strong degrees of consumerism and that’s driving a lot of activity.”

When deals do come, there is “significant use of leverage in transactions”. He continues: “International and regional banks are both supportive, particularly for larger government-backed transactions, or large institutional asset manager deals. Perhaps it’s more selective in the mid-market and SME segment of the market. But we’ve seen an increase in capital being managed in the region and that’s also facilitating acquisitions through their private credit opportunities.”

Dingle also identifies education and healthcare as sectors that will “expand and require investments” in the region, as demographics and priorities continue to develop. For him, “the key challenges in the MENA region include navigating diverse legal and taxation frameworks across jurisdictions as well as aligning transactions with constantly developing frameworks. These challenges are worth navigating though, due to the great opportunities for growth within the region and the ability to scale by investing in solutions to support local businesses.”

Deloitte’s Chiba says the other dynamic, in a region with ancient and complex relationships and rivalries, is working cross-border between Saudi, Qatar and the United Arab Emirates (UAE). “Relationships matter in any market”, Chiba, who worked worldwide before spending two decades based in the Middle East, adds. 

“They matter significantly in the ability to draw capital. And Middle East investors are very astute. Historically, perhaps, investors from the region would look to invest outbound in a significant way and diversify from the wealth creation in the region. The major shift over the past five years is with significant reinvestment back into local and regional opportunities, supporting long-term economic growth and job creation in the Middle East.”

Khawaja, who has worked in London and the Far East, as well as the Middle East, says: “There is an expectation that local-based teams are used. Firms operating in the region must have full knowledge of the ecosystem and investments and have teams who understand the local market and can cater to that. 

“There is a change taking place and it will continue to move in that direction until the flying in and out model is no longer sustainable,” he continues.

“Over the past few years, there has been a visible change in the sophistication of the community that deals with transactions. And that’s probably been a function of a lot of cross-border activities taking place.”

Ambitious economic diversification agendas, favourable regulatory reform and abundant financial resources have characterised the M&A landscape across the Middle East. With an urbanising population, increasing private sector involvement and rapid technological advancement, M&A activity looks set to be a continuing lever of growth and opportunity.