Private Equity as Agent of Change in MENA

DUBAI, UAE, August 7, 2014 /PRNewswire/ --

White paper published by MBA graduates of Harvard Business School in collaboration with Growthgate Capital exposes myths surrounding PE 

Following a period of contraction and consolidation, the private equity (PE) industry in the MENA region is beginning to show signs of a recovery, both in terms of deal volume and size. However, PE's challenge has been the perception that PE investors focus excessively on short-term results, and have a negative effect on job creation and the long-term health of the economies in which they operate.

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The white paper published by MBA graduates of Harvard Business School (HBS) in collaboration with the GCC-based PE firm Growthgate Capital, seeks to debunk some of the myths surrounding PE, by reviewing how local and international PE firms have been able to add considerable value to portfolio companies and the broader economy. The analysis of this paper suggests that many of the beliefs surrounding the impact of PE firms, such as job destruction and an excessive focus on short-term profitability, do not hold.

The white paper demonstrates that PE funds globally have improved performance of target companies by reducing constraints for companies in need of external capital, focusing on investments in innovation, increasing capital expenditures, and instilling better corporate governance and operational practices.

Referring to a number of recent academic studies, the paper also confirms that companies acquired by PE funds grow significantly more than comparable firms in terms of sales and capital employed, and often in employment. For instance, a comprehensive study using data from 3,200 deals in the United States reveals that on average, private equity buyouts raise firm productivity by over 2% in the two years after the buyout.^[1] Across both good (2005-2007) and bad times (2008-2012), PE makes a net contribution to employment growth. The study also shows that PE increases not only employment but also labor productivity as it increased by over 7% a year from the time PE acquired companies in the sample to the point of exit.^[2]

Another study, using data from 839 European deals over 1994-2004, shows that between the four years preceding the transaction, and the four subsequent years, employment, assets, and sales growth of PE targets are, respectively, 18%, 12%, and 12% higher than the non-PE backed firms.^[3] These transactions were largely growth equity deals rather than the leveraged buyouts that dominate the U.S. market, and those may be more representative of the PE transactions that dominate emerging market regions such as MENA.

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1. Davis, Haltiwanger, Hanley Jarmin, Lerner, Miranda, 2014, "Private Equity, Jobs, and Productivity" (American Economic Review).

2. Ernst & Young,  2013, "Myths and challenges: How do private equity investors create value? A study of 2012 European exits"

3. Boucly, Sraer, Thesmar, 2011, "Growth LBOs" (Journal of Financial Economics)

Furthermore, the white paper tracks the evolution of the PE asset class in the MENA region. While the PE landscape in the region has been challenging, LPs have now consolidated their bets on 10-15 PE firms that have demonstrated an ability to generate superior returns. PE firms that continue to innovate in terms of their funding model and deal sourcing and build portfolio operation capabilities are likely to continue doing well. As the evidence shows, through such investments, businesses in the region are likely to grow faster, and become more efficient and competitive on an international stage.

As a general observation, PE in MENA has proven to be a "sticky" form of investment, while investments in public equity proved feckless. PE investments in MENA are long term, and often enhance the companies that they finance. As the industry matures, the true impact of PE involvement in the region will become clearer, but the evidence from other regions suggests that it is likely to play a very positive role.

The white paper was supervised and co-edited by Prof. Josh Lerner, the Jacob H. Schiff Professor at HBS and Director of the Private Capital Research Institute.  

About Growthgate Capital 

Growthgate Capital focuses on growth equity capital investments in middle market companies operating principally in the GCC and in other select markets in the MENA region. Growthgate Capital was formed in late 2007 with $200m in permanent capital contributed by a handful of shareholders including State-owned banks, public pension funds, and single-family offices. As of December 31, 2013, Growthgate Capital has circa $1.7bn in Assets-under-Monitoring. The firm has conducted several investments in various sectors including: logistics and transport, building materials, steel fabrication, waste management, animation and themed entertainment, private jet management, biometrics, food processing and catering. The firm is managed by Growthgate Partners.

For more information, please visit http://www.growthgate.com

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SOURCE Growthgate Capital