One positive outcome of the stock market repricing that took place this spring in the Gulf is that the region’s cash-rich investors are becoming more savvy. It is only once you have been burnt yourself that you can truly appreciate the lessons that others – such as those investors badly hit by the rupture of the dot com bubble in 2001 – can offer.
The trouble, though, is that for many of these investors, genuine opportunities for diversification within the region remain limited. This is why many are jumping at the prospect of regional private equity funds. An environment where your money is locked up for as long as seven years that promises an internal rate of return of about 25% might not be as exciting as the promise of making the same amount in just one day on the stock exchange but, as investors are beginning to realize, it is clearly less risky.
But as private equity firms rush to take advantage of this newly positive reception of their product, investors must be sure to do due diligence about the credentials of the fund and its managers before handing over their cash.
As the region’s private equity pacesetters are quick to point out (see Collapsing stock markets boost private equity), the pool of local private equity professionals is relatively small and, in an industry such as private equity where talent is a crucial ingredient, assessing a fund’s managers is vital.
And a fund’s ability to raise money in a highly liquid environment is not necessarily indicative of its ability to invest wisely and then exit its investments further down the line. Given the nature of private equity it might take a few years before scare stories begin to emerge, but some eventual failures are inevitable.
Liquidity in the region is so robust that investors must be careful that, by suddenly changing tack in favour of private equity, they do not inadvertently create a new bubble in their enthusiasm for a new product. Rigorous examination of individual funds and their strategies remains paramount.
