Global Investment House – Kuwait – GCC Market Review – August 2007 – GCC stock markets witnessed strong buying activity on the back of good 2Q-2007 results as barring UAE, all the regional market indices reported strong growth. Saudi Arabia, which has seen strong selling pressure lately, rebounded and recorded strong monthly growth of 8.1% in July-07. However, it still remains the only market in the region to report YTD decline (-5%) at the end of July-07. Kuwait market continued to remain firm as it reported monthly growth of 2.7% in July-07 and a strong YTD growth 33.5% by the end of the month.
Private equity in the MENA region in general and the GCC in particular, has continued its robust growth in 2006 and 2007 on the fund raising front, as well as fund sizes. This growth was made possible due to a lot of factors, mainly the increase in liquidity in the GCC region on the back of the recent surge in high oil prices. Other factors that contributed to the private equity rise relates to the governments’ initiatives to foster this sector through privatizations, also the efforts exerted by fund managers and investment firms to encourage private equity as means of financing.
The GCC countries have also realized the importance of involving the private sector in this restructuring, so privatization has also played a pivotal part in the process. The diversification of their economic bases has most importantly led the GCC countries on a race towards the “financial capital of the GCC”, thus, easing regulations in terms of foreign interests in the regional financial sector. This has provided the right catalysts for the GCC economies to embark on restructuring their financial sectors, hence new regulations were imposed, financial systems were upgraded to allow for new financial instruments, and a myriad of financial companies have launched their products in the region.
These recent trends in the GCC, had a positive spill-over effects on the Middle East and North Africa (MENA) regions. MENA countries have adopted “openness” to their economic and financial sectors, which gave cash rich private equity managers the incentive to seek investment opportunities within the region. To that end, private equity funds that invest in the MENA region have increased tremendously in numbers and sizes, whereby US$13bn in private equity capital are currently under management in the region and has been raised in 2005 and 2006.
As per a recent report produced by the Gulf Venture Capital Association in collaboration with KPMG and data extracted from Zawya, on private equity indicates that the total capital raised by private equity funds in 2006 reached US$7,075mn. This has increased by 61.6% from its level in 2005 of US$4,379mn.
Throughout the period of 1994-2007, the majority of the private equity funds in the MENA region are in the “Investing” phase, where 55 funds with a total size value of US$12,717mn, 40.6% of total value, are classified as part of the group. Funds that are in the “fund raising” stage throughout the same period in the MENA region constituted 28.3% of total value of funds. Fully vested private equity funds in the MENA have a combined total of US$629mn, 2% of total fund sizes, while funds that are in the liquidation process are only 2, and they have a combined value of US$58mn. Announced private equity funds in the MENA region through 1994-2006 are concentrated in the years 2006 and 2007, and they have a combined size of US$3,842mn, which constitutes 12.3% of the total fund sizes of private equity funds in the region. Closed funds, on the other hand, constitute a mere 1.8% of the total size of private equity funds in the MENA region with a combined value of US$554mn.
The private equity industry in the MENA region does not only seek investment opportunities in the region. Private equity managers have also been tracking absolute returns worldwide, given the maturities of the US and UK markets, and the ample of opportunities in Asia, particularly China and India. It is also important to mention that the private equity in the MENA region is relatively a new phenomenon compared with the US and Europe, hence, the reluctance of family owned business to sell the interests in the companies is still widespread. It is only recently that individuals came to grip with the concept of “going public” and the advantages it has within its folds.
MENA private equity deals in the MENA region conducted by private equity managers domiciled in MENA, it is evident that the combined total of deals were focused on Egypt with 61.6% share of total deals in 2006 and 2007. The United Arab Emirates was the next country of attraction to private equity deals in 2006 and 2007 where 15.3% of total deals flows were directed to that country, followed by KSA at 10.3%, Bahrain at 4.3%, Kuwait 2.1%, Jordan 1.3%, and the rest of the MENA region drew less than 1% each in private equity deals from local fund managers.
The basic materials sector took the largest share of private equity deals in terms of value in 2006 and 2007 combined. The real estate sector attracted 16.4% private equity capital from MENA private equity managers. A lot of activity characterized the real estate sector in terms of private equity deals targeting the said sector where a total of 16 private equity deals were closed in 2006 and 2007. The financial services sector was also a favorite destination for MENA private equity managers. A total of 19 deals were done during the years 2006 and 2007 with a total value of US$1.7bn for disclosed deals.
There are a limited number of exit strategies for private equity investments, namely through Initial Public Offerings (IPO), through the sale of the private equity manager’s stakes to other asset managers or individuals, and through mergers and acquisitions. As far as the MENA private equity is concerned, it is important to realize that the aforementioned industry is still in its early stages and hence very few transactions have been “exited”. The Annual report by GVCA and KPMG on MENA private equity 2006 indicates that only 5% (US$0.3bn) of deals since 1998 have been realized on exit. It is now that we expect some private equity deals have reached the maturity stage and private equity managers will be looking at ways they can exit these investments with highest returns feasible. A very important factor that has helped the private equity managers realize impressive returns on their investments is the vibrant IPO market in the MENA region.
As mentioned above, the governments in the MENA region in general, and the GCC in particular, have taken massive efforts to regulate their financial markets and enhance the privatization efforts. This have reflected positively on the IPO market in the MENA where demand for new offerings by local and regional investors continues to outstrip supply, and all IPO’s have been oversubscribed by several folds. Going forward, it is expected that the charged IPO momentum in the GCC will proceed, albeit not with the same vigor experienced in 2005. Nevertheless, the general trend indicates a vibrant IPO market in the GCC, which consequently prepares the playground for private equity managers to exit their investments that are fast reaching their maturity stages.
Oil price-led liquidity in the economy was positive for the Kuwait banking sector, which saw excellent growth in the last few years. The strong growth also came on the back of high credit and deposit growth on the back of relatively benign interest rate environment, high oil prices and a flourishing economy. Significant mega projects in the oil and gas sector underpinned the strong growth in the banking sector. The increasing demand for and supply of raw materials, consumables and other consumer items resulted in trading sector too registering strong growth. Real estate sector continues to expand as more and more real estate development projects are already under implementation or are in the pipeline.
Consolidated assets of local banks grew by 24.9% y-o-y to reach KD27.0bn at the end of 2006, thanks to the credit facilities to residents growing by 26.3% to reach KD14.9bn. During the period 2003-06, the consolidated assets of local banks grew at a CAGR of 12.8% from KD18.8bn in 2003 to reach KD27.0bn in 2006. Private sector deposits (both sight deposits in KD and quasi-money) continued to register strong growth during the last three years. Private sector deposits increased from KD9.9bn in 2003 to reach KD15.3bn in 2006, recording CAGR of 15.5% as compared to the overall liabilities of local banks' growth of 12.8% in the same period.
The contribution of private sector deposits to total balance sheet increased from 52.7% in 2003 to 56.6% in 2006. Sight deposits increased from KD2.1bn in 2003 to KD2.9bn in 2006, registering CAGR of 11.0% for the period under review. Proportion of sight deposits to aggregate balance sheet declined from 11.3% in 2003 to 10.7% in 2006. Quasi-money deposits increased from KD7.8bn in 2003 to KD12.4bn in 2006, recording CAGR of 16.7% for the period 2003-06. Share of quasi-money deposits to total balance sheet increased from 41.4% in 2003 to 45.8% in 2006.
Foreign assets too witnessed strong growth during the period 2003-06. Foreign assets registered a CAGR of 29.3% as it grew from KD2.4bn in 2003 to reach KD5.2bn in 2006 resulting in higher contribution towards overall consolidated assets of local banks. Share of foreign assets to consolidated assets of local banks increased from 12.9% in 2003 to 19.4% in 2006.
Credit facilities to residents increased by 26.3% y-o-y in 2006 as compared to the previous year. Deployment towards this segment increased from KD8.4bn in 2003 to KD14.9bn in 2006, registering CAGR of 21.0%. Within this segment, credit for personal facilities and real estate contributed 62.8% of the total credit facilities to residents. The contribution of these two segments stood at 57.9% in 2003.
Over the next four years (2006-2010), we expect the overall banking assets for the banks under review to register a CAGR of 13.3% to reach KD47.9bn in 2010. Deposits are likely to grow at a CAGR of 15.7% for the banks under review to reach KD31.0bn in 2010. Net loans are likely to record a CAGR of 17.0% for the period 2006-2010 to reach KD28.1bn in 2010. For the banks under review, we expect profits to grow at a CAGR of 18.0% for the period 2006-2010 to reach KD1.56bn in 2010. This is likely to be on the back of a 15.5% CAGR in core income to reach KD1.44bn in 2010. In a nutshell, core underlying banking income is likely to remain strong. Government thrust towards providing further impetus to economic growth is likely to benefit the banking sector. In our opinion, the long-term outlook for the banking sector is positive on the back of buoyant core banking activities.
© 2007 Al Bawaba (www.albawaba.com)
