Spotlight Series: Richard Wilson, Senior Partner, Apax Partners, took part in an expert panel debate entitled ‘Regulation. Assessing recent and forthcoming changes to the global regulatory landscape - Examining the burden of compliance, the impact on cross-border investing and how it will affect GPs and LPs

Other experts debating the issue were Urs Wietlisbach, Partner & Executive Vice Chairman, Partners Group, Didier Millerot, Deputy Head of Unit, Asset Management, DG Internal Market & Services, European Commission and Marco Wulff, Director, Capital Dynamics.  The moderator was Josh Lerner, Jacob H Schiff Professor of Investment Banking, Harvard Business School.

In an interview with Josh Lerner, Harvard Business School, Richard discusses the approval of the AIFM and looks at the potential impact of future legislation.

Daniel H. Mudd, Chief Executive Officer, Fortress Investment Group, took part in an expert panel debate entitled ‘Is this the End of the Mega Fund? How are GPs adjusting to a post-leverage world & how will they generate value.’

Other experts involved in this debate were Steven Costabile, Managing Director, Head of Private Equity Funds Group, Pinebridge Investments, Hisham El-Khazindar, Managing Director & Co-Founder, Citadel Capital and Steve Pagliuca, Managing Director, Bain Capital.
This debate was moderated by Josh Lerner, Jacob H Schiff Professor of Investment Banking, Harvard Business School.

In an interview with Josh Lerner, Daniel discusses how the hedge fund and private equity managers at Fortress Investment Group complement each other.

As SuperReturn Middle East closes in Abu Dhabi for another year, we would like to thank all the delegates, speakers and sponsors for making the conference a very sucessful and hugely enjoyable event.

In addition to the coverage of the event,  we’ve gathered the leading articles and commentary from the business news websites to give you a comprehensive review of big industry issues tackled this year.

We have captured a series of video interviews with some of the industry leaders including Karim El-Solh, Dr Ahmed Heikal, Daniel Mudd and Steve Pagliuca which will be posted on this site over the coming weeks.   To make sure you don’t miss out, either add the RSS feed to your reader or sign up for email alerts.

A Twitter round up:

@SuperReturnKate Thomas McHale of American Capital wins the SuperReturn Middle East QuickFire showcase #srme10

@AymanHAK Interesting discussion at SuperReturns on move away from blind pool funds&to co-investment models. Days of high management fees gone #SRME10

@hbgholdings Michael Toxvaerd of HBG Holdings joins SME private equity panel on Day 1 of SuperReturn Middle East in Abu Dhabi #hbgholdings

@SRAntonia Lord Charles Falconer gives his perspective on what govts need to do now #srme10 http://yfrog.com/mws30ej

@SuperReturnKate David Rubenstein mentions booming private equity conferences. I must say I agree with the great man. Biased? Moi? #srme10

@SuperReturnKate The shift in economic balance is perhaps irreversible. Karim Helal, CI on silk route as lifeline of global trade at SuperReturn ME #srme10

@SuperReturn PE funding levels won’t peak again until about 2014 so say industry elite #srme10

@SuperReturn AymanHAK 16% said distressed strategies and 15% venture capital #srme10

@SuperReturn David Rubenstein Carlyle Group shares top 10 leading global trends #srme10 http://yfrog.com/2faimkj

@SuperReturn Samir A Samaan Invest AD remains bullish about the industry in MENA #srme10 http://yfrog.com/6r975aj

@SuperReturn “Fund are diversifying by geography and type; it will make them stronger” Steve Pagliuca on PE’s contribution to new global economy #srme10

@SuperReturn Josh Lerner “not small is beautiful but focus is beautiful” for MENA PE investors #srme10

@SuperReturn Global PE titans get back to basics #srme10 http://yfrog.com/2sweivj

@SuperReturn Jon Moulton Better Capital gets things started on day 2 of SuperReturn Middle East #srme10 http://yfrog.com/12hx2ej

@SRAntonia Iraq is open for business as next hot market. Breaking news at #srme10 2:26 PM Oct 18th via Twitter for BlackBerry® Retweeted by SuperReturn

@SuperReturn Richard Portes “we wont return to normal, we don’t know what it is anymore.” #srme10

@SuperReturn Global imbalances dangerous? search for yield overwhelms financial intermediation systems - major cause of the crisis. #srme10

@SuperReturn Richard Portes “we avoided the great depression & executed the great escape” #srme10 http://yfrog.com/11f7laj

@SuperReturn but there is some long term damage #srme10

@SuperReturn Need to differentiate the information question into data and insight. Data is so difficult the insight question get puts aside. #srme10

@SuperReturn Why is it so hard for the GP/ LPs to agree on the single format for communication and metrics to view the portfolio? #srme10

@SuperReturn DD and fund raising never stops… keep your GP/LP relationship for the next fund raising by developing trust/ transparency. #srme10

@SuperReturn Need segmentation not just in PE but in Family Office – one size will not fit all. #srme10

@SuperReturn Financial engineering & operational excellence are the key value adds that the PE model brings to MENA’s privately held businesses. #srme10

@SuperReturn Look for your opportunities in your biggest challenges. #srme10

@SuperReturn Omar Lodhi Abraaj tells delegates how to take companies to the next level. #srme10 http://yfrog.com/51uikj

@SuperReturn “We are not a retirement destination, seek out those who seek challenges” Dr Heikal Citadel tip for mgmt training & recruitment #srme10

@SuperReturn 11 lessons from Dr Heikal Citadel Capital. #srme10 http://yfrog.com/meqmhxj

@SuperReturn Ammar Alkhudairy addresses the delegates on new paradigm shifts. #srme10 http://yfrog.com/71t6ij

@habibahamid Abu Dhabi is awash with private equity folks, who are in town for the region’s Super Return conference http://ow.ly/2UKKs

@Reuters_Deals Arabtec seals joint venture deal with Egypt’s Amer http://reut.rs/c4RtpH

@SuperReturnKate Patricia Dinneen advice to LPs when GPs are having problems: infiltrate! At SuperReturn Middle East #srme10

@Yeseniaws PREVIEW-Mideast PE eyes return to SME roots * Mideast PE sector gather at annual SuperReturn conference http://tiny.ly/iIbQ

@SuperReturnKate Talk to the junior investment partners. Gordon Hargraves on due diligence at SuperReturn Middle East today #SRME10

@SuperReturnKate There is a fine line between sharp elbows and unethical business behaviour. Gordon Hargraves at SuperReturn Middle East #SRME10

@ame_finance Deloitte releases Mena Private Equity Confidence Survey 2010 http://bit.ly/9HgcnS

@SuperReturn Mark O’Hare interviews Mark Boyle Northwestern Mut Cap about LP opinions #srme10 http://yfrog.com/j4w0blj

@SuperReturn “The best time to invest is when its hardest to raise money” Catherine Weir’s message to MENA LPs at summit in Abu Dhabi #SRME10

@SuperReturn Catherine Weir, Citibank at LP summit to look at what investors are looking for #srme10 http://yfrog.com/edm0cj

@ame_finance Abu Dhabi plans new export agency http://bit.ly/caUg6Z

@SuperReturn Will trend for LP direct investment increase or disappear? Jury’s out at LP summit. #srme10

@SuperReturn Do intl LPs see MENA as just a source rather than a destination for capital? Education need to showcase opportunities? #srme10

@SuperReturn LPs were happy with public market + 2% in 07. More like >4% now. But belief in PE mrkts is still strong #srme10

@SuperReturn 19% Fund mgrs closing in 09 achieved target. Improved this year to 35% #srme10

@SRAntonia Is lack of competition between GPs the biggest problems for Middle Eastern LPs? Live at LP summit #srme10

@SuperReturn Mark O’Hare Prequin says deals and exits in MENA recovering. #srme10

@SuperReturn Its clearly an ill wind! MENA PE firms can now attract great senr mgt talent in the fallout from the financial crisis. #srme10.

@SuperReturn Exiting MENA? Egypt tends to be most open & most dev market #srme10

@SuperReturn Why is only 10% of capital directed at Emerg Mkts coming to MENA? Are all levers of value in place? #srme10

@SuperReturn Dry powder in MENA $28 billion? Closer to $7 billion according to Stephen Murphy Citadel Capital. #srme10

@SuperReturn Richard Rivlin Bladenmore and chairman of the LP summit welcomes delegates #srme10 http://yfrog.com/5zy0wwj

@SuperReturn Delegates arrive for morning coffee at special LP summit #srme10 http://yfrog.com/4c4gmaj

@zulfi_hydari Private Equity Summit: SuperReturn Middle East 2010 in Abu Dhabi Oct 17 - 20 http://t.co/MkF4cFe via @PrivateEquityME

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Press coverage

Amwal AlKhaleej happy with Damas deal

Amwel AlKhaleej, which earlier this year sued Damas Loading… in a $22-million (Dh81 million) claim, is satisfied with the recently concluded out-of-court settlement, its top executive said.  Ammar AlKhudairy, managing director of the Saudi-based private equity firm said they were able to get their “money back” in a deal that was in line with the initial compensation sought by the firm.  Part of the settlement was the transfer of 20 million shares to Amwal AlKhaleej on August 19 at a price of 16 cents a share or a total value of $3.2 million and an increase in Amwal’s shareholding in the company to 13.26 per cent from 11.23 per cent after the transaction.

“That is only a part of a bigger settlement, which was done to our satisfaction,” AlKhudairy said, during the sidelines of the SuperReturn Middle East conference yesterday. He declined to comment on the wider settlement.  (more here)

MENA soveriegn funds should invest closers to home says Citadel Capital Chairman.

Speaking at the SuperReturn Middle East conference in Abu Dhabi, Heikal, whose firm was the beneficiary of a $100m commitment from US trade agency the Overseas Private Investment Corporation earlier this year, said that the wealthy MENA state investment bodies are missing deals in the region which are being picked up on by Western investors. (more here)

Gulf Capital Looks To Close Saudi Food Deal By Year End

ABU DHABI (Zawya Dow Jones)-Abu Dhabi-based private equity firm Gulf Capital, which raised the largest fund in the Middle East last year, expects to close a deal in Saudi Arabia’s food sector by the end of the year, its chief executive officer said Monday.

“We have a forthcoming deal in the food sector” in Saudi Arabia, Karim El- Solh told Zawya Dow Jones on the sidelines of the Super Return Middle East conference.  The firm’s GC Equity Partners Fund II is 37% invested, Sold said. “The food deal will take us to the 40% mark.” (more here)

Middle Eastern entrepreneurs can expect a knock at the door from regional private equity bosses

When the region’s leading deal makers and investors gather in Abu Dhabi for the 4^th Annual SuperReturn Middle East Private Equity Summit from October 18th - 20th, we can expect some discussion about the next big trend in Middle East private equity.   In previous years the focus was largely on mega leveraged buyouts but this year attention will most likely turn to small and midmarket private equity. A confluence of factors is forcing the shift from larger to smaller deals. The most obvious factor is the collapse in fundraising activity. Fund managers raised only US$1.06bn in 2009 compared to a near-record US$5.4 billion in 2008. This has led to smaller funds being raised that are taking almost twice as long to close. It is estimated that average fund size will shrink from pre-2008 levels of $350m down to approximately $200m. The impact on regional PE firms of smaller funds combined with limited availability of debt finance will be to shift their focus from larger deals to smaller deals with average deal size of approximately $25 million. (more here)

Citadel Capital Chairman speaks of investing closer to home at SuperReturn Abu Dhabi

Arab sovereign wealth funds seeking to maximize their returns in a still-shaky global economy need to examine opportunities at home and in their own back yards, not only in the West, an industry veteran told a gathering of top regional private equity leaders in Abu Dhabi today. (more here)

Citadel Capital Looks Outside ME For Funds; PE Risk Appetite Weak

Cairo-based private equity firm Citadel Capital has sourced most its funds this year from outside the Middle East as risk appetite for private equity investment in the region remains weak, the company’s chairman said Monday.

“Citadel Capital this year raised $3.5 billion in debt and equity and 80% has come from outside the region,” founder and chairman Ahmed Heikal told the Super Return Middle East private equity conference in Abu Dhabi. “At this point in time risk appetite is not there yet.” (more here)

Buyout figures take on fees

ABU DHABI, United Arab Emirates—Two of the private-equity industry’s biggest names have called for an overhaul of buyout firms’ lucrative fee model, with the best charging more and the weakest conceding ground to investors.

David Rubenstein, the co-founder of U.S.-based private-equity firm Carlyle Group LP, and Better Capital LLP founder Jon Moulton added their voices to the fee debate, in some of the strongest comments made by buyout managers about their lucrative income stream. (more here)

Day 2 of SuperReturn Middle East saw a gathering of a particularly august panel of private equity leaders.  Joining Josh Lerner, Harvard Business School was Steven Costabile, Pineridge Investments; Hisham El-Khazindar, Citadel Capital; Steve Pagliuca, Bain Capital and Daniel H Mudd, Fortress Investment Group to debate the trend to “back to basics”.

First up was Steve Pagliuca to review issues in portfolios and how GPs are resolving the problems.  Steve said the difference between the issues of the ‘80s and ‘90s and now is that the debt is structured in a more patient way.   In the ‘90s if you defaulted, the banks would move in straight away.

This patience has allowed companies like Bain Capital to send in specialists to work with the portfolio companies on working capital and cost reduction programmes, to great positive effect.  Now the companies are running lean and well.  The big fear is a double dip recession and how would the companies cope.

Hisham commented that the MENA region was relatively insulated from the crisis with the exception of Dubai but that operationally there are lessons to be learned.  A shift from minority holdings to significant or majority holding in PE companies shows an increased understanding of the importance of control and involvement.

He argued that not all operational improvements are about cost cutting and downsizing but about making sure you get financing to bolt on businesses that can expand and improve your portfolio.

Additionally, local GPs firms are learning the importance of management experience that extends beyond the financial expertise to do deals to the ability to develop and grow the portfolio businesses.  The acquisition of talented managers with backgrounds in engineering and management consultancy should be fast tracked.

Josh then turned to Daniel Mudd and asked what private equity has learned from the crisis. For Daniel, the bulk of the “selling at gunpoint” deleveraging has past so now its time for corporations to look at their portfolios and decide what business they are in, what business they want to be in and start to restructure their portfolios accordingly, which may often involve sales to private equity firms.  Another positive outcome of the crisis is that banks are better able to look at private equity companies, assess them and re-term the loans constructively.

Steven Costabile took up the discussion on whether we could expect an extended period of smaller deals.  He believes that most institutional investors now understand that just because you can do a deal, doesn’t mean you should.  While many institutional investors say they are looking for absolute returns, what they are really looking for is relative returns, relative to the public markets.  And there the bar has been lowered.  It will be 3-4 years before we get back the old levels.  This is the perfect time for platform acquisition and there are lots of opportunities.

So to summarise in the words of Josh Lerner, the immediate future for private equity is “not small is beautiful but focus is beautiful”

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Josh Lerner, Jacob H Schiff Professor of Investment Banking, Harvard Business School, will be presenting new research at the SuperReturn Middle East conference in Abu Dhabi (18 - 20 October 2020) on risk management.

This talk will grapple with what is in many respects the most challenging questions in private equity today.  There are no firmly established answers as to how risk and reward should be assessed in this industry.  This arena is a rapidly changing one, with new ideas and approaches emerging every year.

Why should the decision to allocate money to private equity pose more difficulties than other asset classes, such as government bonds or European equities?  The crucial problem lies in the nature of the investments that general partners make.  What makes private equity particularly tricky to evaluate is the fact that private firms affected by three essential problems:

• First, the firms receiving capital from private equity funds very often remain privately held for a number of years after the initial investment.  These firms have no observable market price. In addition, the private equity funds themselves, which are typically structured as private partnerships, do not typically trade on an organized public market.  Hence, investors cannot observe their valuations.
• Second, valuations assigned by private equity firms to their own portfolio of investments are often based not on quantitative metrics (such as price-to-earnings, market-to-book, or discounted cash flow), but rather on complex, frequently subjective assessments of a venture’s technology, the market opportunity it can expect and its management team.
• Finally, private equity valuation levels, as a whole, appear to rise and fall dramatically over time in response to the fundraising environment.  For example, when considerable capital is flowing into private equity funds, valuation levels rise significantly, and vice versa.  Work exploring the U.S. venture capital industry makes this point explicitly, showing that each doubling in the level of fundraising was associated with between a 7% and 21% increase in valuation.  These results suggest that more than the forty-fold increase in venture fundraising between 1991 and 2000 in the United States alone led to a six-fold increase in valuation levels.

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But despite these difficulties, practices in this arena seem far from ideal. A recent example is from the buyout industry following the September 2008 financial crisis. During the fourth quarter of 2008, private equity funds reported returns of -16%, according to Cambridge Associates. This might seem bad enough, but many observers were skeptical about these reported returns. In particular, they pointed out that over the same period, the S&P 500 declined by nearly 22% and many other benchmarks did even worse. Moreover, in most cases the equity of the buyout funds was highly leveraged, and thus the effect of any losses should have been magnified.

Based on these vignettes, many readers might end up agreeing with Bob Boldt, the head of University of Texas’ endowment, who when discussing the private equity performance numbers that the University had disclosed, noted “I hope when people write about these numbers, they include some sort of warning like on cigarette packages.  They can be harmful to your health if you pay attention to them.  To be sure, the calculation of private equity returns is not an easy challenge. But as we will discuss in the session, there are ways to look systematically at these issues.

In general, it is hard to be convinced that there is a definitive answer about thinking about the risk and returns of private equity. In general, it is fair to say that most studies conclude venture firms match or slightly exceed the benchmark, while most suggest that buyout funds lag returns. But few studies have included the boom period for buyout funds in the mid-2000s and the subsequent bust, and thus, subsequent funds may differ.  Moreover, the results seem incredibly sensitive to assumptions made while modeling the evolution of the value of private equity portfolios.

Nonetheless, the importance of the topic cannot be understated.  As the recent financial crisis has underscored an understanding of the risks one is assuming is absolutely essential.  Thus, investing in understanding the key issues in this arena will pay substantial dividends.

About Josh Lerner

Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School.  His focus is on the world of alternative investments, with a particular emphasis on venture capital, private equity, and sovereign wealth funds.  He also examines how public policies can boost entrepreneurship, most recently in the book Boulevard of Broken Dreams. In the 1993-94 academic year, he introduced “Venture Capital and Private Equity” has consistently been one of the largest elective courses at Harvard Business School.  He is leading an international team of scholars in a multi-year study of the future of alternative investments for the World Economic Forum.

Sev Vettivetpillai, CEO, AUREOS presented a session entitled “Portfolio companies & the war for talent: How can you evaluate portfolio companies in Emerging Markets & how do they deal with specific challenges that these markets generate?”

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, Sev looks at the slow changing attitudes of the LP community to Emerging Markets outside China and India.

Howard Chao, Head Of Asia, O’MELVENY & MYERS moderated an expert panel debate entitled “Exploring The New Wave Of China Sponsored Private Equity Funds”.  Joining him were Andrew Yan, Managing Partner, SAIF PARTNERS; Yibing Wu, President, CITIC PRIVATE EQUITY FUNDS MANAGEMENT; Derek Sulger, Managing Partner, LUNAR CAPITAL MANAGEMENT; David Pierce, CEO, SQUADRON CAPITAL and Hao Wu, Partner, SINO-CENTURY CHINA PRIVATE EQUITY.

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, Howard discusses the growth of domestic funds and the longer term (10 years) role of the international Private Equity community.

David Wilton, Chief Investment Officer, IFC presented new research entitled “Comparison of performance between first time fund managers & established managers moving into a new market. How important is track record?”

In an interview with Josh Lerner, Jacob H Schiff Professor of Investment Banking, HARVARD BUSINESS SCHOOL for the Spotlight Series, David explained that globalisation and market based economies in emerging markets has improved their situation but that education on Emerging Markets potential for boards to make the shift remains a big challenge for the investment professionals.

Spotlight series: Jon Moulton, Better Capital, gave the opening remarks from the Chair and also took part in an expert panel debate entitled ‘Where Are The Opportunities In Investing In Distressed Assets? Distressed For Control, Turnarounds, Distressed Debt & Real Estate.’
Other expert panelists were Tom Attwood, Managing Director, Intermediate Capital Group, Scott Vollmer, CEO, Drum Capital Management and Anilesh Ahuja, CEO & CIO, Premium Point Investments.
The moderator for this debate was David Abrams, Managing Partner, Apollo Management.

Jon was also the moderator for an electronic polling panel entitled ‘Outlook For Private Equity Investments, Deals, Valuations & Exits.’ Expert panelists were Mustafa Abdel-Wadood, Managing Director, Abraaj Capital, Josh Lerner, Jacob H Schiff Professor OF Investment Banking, Harvard Business School and David Rubenstein, Co-Founder & Managing Director, The Carlyle Group.