ADDIS ABABA (Reuters) - Flush with cash from oil and stuck with few options for growth in developed markets, Middle East investors are increasingly looking to nearby Africa.
While the fast-growing continent offers plenty of opportunities, bankers say there are also a raft of challenges for Middle East investors, particularly due to the relatively small size of potential deals.
"We're seeing more interest. I think it's fair to say that we haven't seen a lot of that crystallise into deals so far," said Diana Layfield, Africa chief executive at Britain's Standard Chartered Plc.
"The Middle Eastern sovereign wealth funds are very interested in Africa, the challenge that they face is the increment at which they need to invest is way too large for the continent at the moment," Layfield told Reuters in an interview on the sidelines of the World Economic Forum on Africa.
Held this week in the Ethiopian capital of Addis Ababa, the forum highlighted Africa's attractions: it is home to some of the world's fastest growing economies and rapidly rising disposable incomes. A decade of relative political stability has also helped the case for African investment.
"Definitely there will be more (investment) coming to Africa," Saudi Arabian Minister for Agriculture Farad Balghunaim told Reuters. "With the clear vision that is building up in African leadership now, there will more and more investors from Saudi Arabia," he said in Addis Ababa.
But tapping that growth is not so easy, given the lack of liquidity in public capital markets. For private equity bankers, there is often a shortage of deals that can meet their mandate on size.
For instance, emerging markets private equity firm Actis told Reuters last month it is aiming for individual deals of $50 million or more in Africa, meaning it has to focus on the continent's biggest economies - South Africa, Egypt and Nigeria - to find deals.
SMALLER DEALS
Some Middle East investors, therefore, are focusing on smaller deals to gain exposure to Africa. Dubai's Abraaj Capital is in the process of acquiring UK-based private equity firm Aureos Capital, which invests in small and medium-sized businesses in Africa, Latin America and Asia.
"We tend to have a sweet spot at around $10 million, but we have investments as low as $2 million and going up to about $35 million," Davinder Sikand, Aureos' regional managing partner for Africa told Reuters. "Our focus has been to build regional champions.
So we'll take positions in businesses that can demonstrate management vision and build (them) out, recognising that each of our markets other than Nigeria and South Africa are fairly small markets, and you need to build that scale."
Due to the constraints in their home markets, Middle East investors are familiar with Africa's challenges, such as the shoddy infrastructure, the scarcity of a highly trained workforce and the lack of liquidity in capital markets.
"The Middle East, part of which is rich in capital, is starting to look at Africa as an investment destination," said Frederic Sicre, a partner at Abraaj Capital. Sicre said he was "definitely" seeing more interest in African private equity from Middle East investors.
"Behind us are 200 of the wealthiest merchant families, royal families from the Middle East, sovereign wealth funds from the Middle East. We can pull them in to looking at the infrastructure development space, or the big utility development space, into looking at the opportunities here."
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While the fast-growing continent offers plenty of opportunities, bankers say there are also a raft of challenges for Middle East investors, particularly due to the relatively small size of potential deals.
"We're seeing more interest. I think it's fair to say that we haven't seen a lot of that crystallise into deals so far," said Diana Layfield, Africa chief executive at Britain's Standard Chartered Plc.
"The Middle Eastern sovereign wealth funds are very interested in Africa, the challenge that they face is the increment at which they need to invest is way too large for the continent at the moment," Layfield told Reuters in an interview on the sidelines of the World Economic Forum on Africa.
Held this week in the Ethiopian capital of Addis Ababa, the forum highlighted Africa's attractions: it is home to some of the world's fastest growing economies and rapidly rising disposable incomes. A decade of relative political stability has also helped the case for African investment.
"Definitely there will be more (investment) coming to Africa," Saudi Arabian Minister for Agriculture Farad Balghunaim told Reuters. "With the clear vision that is building up in African leadership now, there will more and more investors from Saudi Arabia," he said in Addis Ababa.
But tapping that growth is not so easy, given the lack of liquidity in public capital markets. For private equity bankers, there is often a shortage of deals that can meet their mandate on size.
For instance, emerging markets private equity firm Actis told Reuters last month it is aiming for individual deals of $50 million or more in Africa, meaning it has to focus on the continent's biggest economies - South Africa, Egypt and Nigeria - to find deals.
SMALLER DEALS
Some Middle East investors, therefore, are focusing on smaller deals to gain exposure to Africa. Dubai's Abraaj Capital is in the process of acquiring UK-based private equity firm Aureos Capital, which invests in small and medium-sized businesses in Africa, Latin America and Asia.
"We tend to have a sweet spot at around $10 million, but we have investments as low as $2 million and going up to about $35 million," Davinder Sikand, Aureos' regional managing partner for Africa told Reuters. "Our focus has been to build regional champions.
So we'll take positions in businesses that can demonstrate management vision and build (them) out, recognising that each of our markets other than Nigeria and South Africa are fairly small markets, and you need to build that scale."
Due to the constraints in their home markets, Middle East investors are familiar with Africa's challenges, such as the shoddy infrastructure, the scarcity of a highly trained workforce and the lack of liquidity in capital markets.
"The Middle East, part of which is rich in capital, is starting to look at Africa as an investment destination," said Frederic Sicre, a partner at Abraaj Capital. Sicre said he was "definitely" seeing more interest in African private equity from Middle East investors.
"Behind us are 200 of the wealthiest merchant families, royal families from the Middle East, sovereign wealth funds from the Middle East. We can pull them in to looking at the infrastructure development space, or the big utility development space, into looking at the opportunities here."
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