AsianInvestor Qatar report: Private equity

Asian Investor Qatar report, July 2013

Private equity has not yet entered the investment mainstream in Qatar – except at the very top, where one could argue that the country’s sovereign wealth institutions are highly sophisticated private equity players in their own right. A homegrown domestic market has been slower to evolve, and not much of the estimated US$15-18 billion of assets held in the GCC in private equity are believed to be from Qatar. But that may be about to change.

Several local Qatari institutions have developed private equity arms in recent years. QInvest, for example, had a busy 2012 which illustrates a common pattern of local businesses working both within the region and beyond it. It exited a private equity investment in the UAE, Butlers Dry Cleaning & Laundry Services; it invested £45 million of equity into a luxury residential development in London, and has so far syndicated £22 million of it to investors; and is undergoing due diligence on potential deals including a QAR166 million principal investment mezzanine financing facility for a Kuwaiti investor on an asset in Qatar, a £20 million mezzanine facility for a British fund manager acquiring a premier office building in London’s Mayfair, and a US$25 million mezzanine facility for a US real estate multi-family asset owner.

Elsewhere, Qatar First Bank has a dedicated principal investment team which is divided between a private equity focus, focusing on healthcare, real estate and industrial investment; and a strategic investments arm, concentrating on longer-term investments in energy and financial services. Qatar First Investment Bank, within which this business resides, only came into existence in 2009 so its activity has been recent, but its portfolio includes stakes in the Nobles Consortium in Dubai’s Burj Khalifa development; 71.3% of Emirates National Factory for Plastic Industries, subsequently exited in late 2012; 28% of Al Noor Hospital, also in the UAE, which has since been followed by a partial exit; 40% of Turkish healthcare business Memorial Health Group (alongside ARGUS Capital of the UK); 35% of Lebanon’s Al Rifal International holding; a $150 million convertible facility and $16 million of investment in Kuwait Energy Company; and 85% of Wasita Emirates for Services & Catering in the UAE, as well as several Qatari investments, notably a 41.5%  stake in Qatar Construction and Engineering Company (QCON) which was fully exited in 2012. Somewhat like QInvest, greater experience has brought greater interest in the UK: it bought 38% of the Westbourne House Building in 2012, followed by 40% of the Leinster Square Building, and 40% of English Home (although that, despite the name, is actually in Turkey). Although young, it has been able to boast some success: its exits from the QFIB Building, Al Noor Hospital, QCON and the Emirates factory business carried an IRR of 40%, 25%, 45% and 31% respectively, the bank says.

Other Qatar institutions with some private equity activity include Investment House, which says it handles venture capital, buyout and special situation investments in Qatar, the GCC and MENA; and Al Rayan, though it does not disclose details.

In the other direction, the Gulf more broadly has attracted considerable interest. “Many private equity players are looking to benefit from opportunities in defensive sectors with underserved demand such as local infrastructure, education and healthcare,” says Shashank Srivastava, CEO of the Qatar Financial Centre. International firms including Carlyle Group, KKR and Macquarie have set up in the GCC region, he says, facing competition from local businesses such as Abraaj Capital, HSBC Private Equity Middle East and Emerging Markets Partners. But in Qatar specifically, there still tends to be more outbound private equity interest than inbound. Warburg Pincus, for example, told Asian Investor that it had no activity in Qatar.

This is no surprise, as there is little imperative for most people to sell. “One of the challenges private equity faces in the region concerns sellers,” says Akber Khan, director of asset management at Al Rayan Investment. “A lot of businesses are owned by governments or families; governments don’t need to sell businesses to raise cash, for the most part, and for family businesses the concept of exiting is not at the top of their strategic list of things to do. Private equity is definitely growing, but it’s probably a bit of a struggle to find a sufficiently large number of assets.”

Instead, one could argue that the state’s big investment institutions are the clearest example of a private equity model in Qatar. “Some of the sovereign funds here almost act as a private equity house in their own right, in terms of their approach to the market and their investment profile,” says Rod Ringrow, head of the EMEA region for State Street. “There is more of a private market than a public market bias.”

In this respect, Qatar is the leader in an emerging trend. “A big theme we’ve picked up in our work across the region is how private equity is becoming more important to these state funds,” says Nick Tolchard, head of international development at Invesco, and head of Invesco Middle East. “In particular you see it with the development funds that are looking to have an input into economic growth plans and diversifying industries. These funds will go full octane private equity.” Invesco’s recent Middle East Asset Management study found that allocations to private equity by investment-styled Middle East sovereign wealth funds (as opposed to development-led funds) had increased by 8% on average over the past three years, from 5% in 2011 to 13% this year with many of them having started out with a model of investing into funds before moving into co-investment or direct models. For development-themed SWFs, the proportion is likely higher. (Invesco doesn’t disclose whether it considers QIA a development or investment-styled fund, but it’s probably a bit of both.)

Why the increase? “A number of investment SWFs cited international investors with higher allocations to alternatives to support their increasing exposures,” says the Invesco report. “Examples included sovereign pension funds in Europe and endowment funds in the US. Diversification was cited as a key driver for increasing private equity allocations, although many noted that alternatives had turned out to be more correlated to equities than the industry had hoped prior to the crisis.”

Though Tolchard does not name an individual fund, the Qatar Investment Authority is clearly the most striking example of a sovereign fund that has opted for the direct investment model rather than the diversified allocation into an investment portfolio that one would associate with the Abu Dhabi Investment Authority, for example.

The QIA has three departments: strategic and private equity, asset management and real estate. Its private equity holdings are held within the wholly owned subsidiary Qatar Holding. QH’s more renowned investments are in big-name listed heavyweights like banks (Barclays, Credit Suisse), industrials (Hochtief, Volkswagen, Porsche) and retail (J Sainsubry), but it is also an active private equity participant through a number of models. One is its investment in top private equity funds, in which it aims to invest alongside general partners; it has, in recent years, done so with groups including Carlyle, Riverstone, 3i and CVC.  It also takes stakes in leading unlisted companies, most famously the UK luxury store Harrods.

Some QIA subsidiaries also exhibit private equity characteristics. For example, Hassad Food, which falls within Qatar Holding’s portfolio, was launched in 2008 with a dual mandate to make profits as a global investor, and to support Qatar’s long-term food security needs. It takes a long-term focus – its own literature says 50 to 100 years – with investments in agribusiness and food production. This can take place in start-ups and greenfield developments, or in joint ventures, or through acquisition. It has an active subsidiary in Australia focusing on livestock and grains.

There are many other institutions in Qatar that invest internationally with something of a private equity approach. Qatar Foundation for Education, Science and Community Development has existed for many years to nurture Qatar’s future leaders, but has more recently been joined by Qatar Foundation Endowment, legally formed in 2010 as a distinct entity to fund the foundation in perpetuity. It came to public attention in May when it was the vehicle through which Qatar bought a US$1.26 billion stake in Bharti Airtel; in the accompanying announcement, the endowment was described as “a long-term global investor with a broad mandate to make direct and managed investments.” Someone close to the endowment tells Asian Investor that direct investments could be a large part of its investment approach. Elsewhere, Qatar Petroleum International and its 51% subsidiary Industries Qatar (which is 20% owned by Qatar’s General Retirement and Social Insurance Authority, giving it something of a role of wealth distribution) are active international investors seeking strategic stakes around the world.

It’s also interesting to note the models through which international asset managers have thrived in Qatar, and in particular the agreement with Barclays struck in April 2012. Through this deal, Qatar Asset Management Company invested US$250 million in Barclays Natural Resource Investments’ current and future portfolio companies, and BNRI agreed to set up an office – its front office, in fact – in Doha. BNRI is itself a global private equity business focused on natural resource investments. Freddie Lee, head of investor relations for BNRI, said at the time of the deal: “We’ve developed close relationships with a substantial number of sovereign funds, institutions and ultra high net worth individuals who are interested in co-investing with BNRI and benefitting from the proprietary opportunities we can bring them.” Aventicum Capital Management, the joint venture formed between Credit Suisse and Qatar Holding, is understood to be focusing more on publicly traded securities in the Middle East, North Africa and Turkey (see interview p xx)

In future, it may be that Qatar’s development will give more opportunities for private sector private equity activity. “Qatar’s substantial infrastructure investment programme is likely to open up considerable opportunities for PE firms and related types of financing such as public-private partnerships,” says Srivastava. “An estimated US$140 billion is expected to be committed to infrastructure over the next five years.” Adding in the investment necessary to host the 2022 World Cup, project spending may exceed US$200 billion, he says.

On top of that, asset management broadly – private equity included – is a QFC priority. “There is a strong commitment to creating a favourable environment for asset management to develop,” Srivastava says. “The QFC, with a world-class and highly competitive legal, regulatory and tax environment, allows licensed firms to be 100% foreign owned, with full repatriation of profits and operations in any currency.”

Srivastava argues that as Qatar is expected to remain the fastest growing economy in the region – the IMF expects 5.2% average annual growth from 2012-2017 compared to 3.5% for the GCC as a whole – more asset management businesses will be attracted to cater for the wealth. “PE will possibly be the key asset class with the highest growth potential, and within this sector, growth capital, small and medium enterprises and infrastructure seem the most interesting asset classes,” he says.

If they do come, the source of funds may not be the obvious PE heavyweights of America and Europe. “International and regional institutional investors will be the main sources of capital for PE funds,” says Srivastava. “Asian investors, particularly institutional investors from China, are more likely to consider PE investment platforms. There are already strong indications that institutional investors from China are contemplating participation in PE funds from the GCC region. And as Qatar’s economy expands and its private sector becomes more sophisticated, the opportunities for PE activity in the country are also likely to increase and attract Qatari firms and investors who more and more are tending to invest closer to home than they did a few years ago.”