Equity Funds Tempt GCC Arabs.

Private equity funds begin to make waves in the GCC as investors seek to expand limited opportunities to invest the huge capital pouring into the area because of record oil prices. Until recently private equity funds operating out of the GCC states tended to target firms in Europe or the US. The big state-owned funds have continued to pursue high-profile foreign acquisitions. However, smaller private firms are now focusing their strategies closer to home, following a five-year trend, partly set off by closer scrutiny of Arab money after 9/11, in which unprecedented sums have been invested in regional markets.

Fund managers think the trend will accelerate as GCC governments begin to pour about $200 bn of annual surpluses into new infrastructure projects, as economic reforms deepen and as trade liberalisation encourages cross-border transactions. Shirish Saraf, the managing director of Dubai-based Abraaj Capital, the region's leading private equity firm, on May 17 was quoted as saying: "There has been a paradigm shift in the mind set of GCC governments. This is the first time they are privatizing...when oil prices are high". He thinks the recent collapse of stock markets - driven to unsustainable highs last year partly by the region's limited number of investment opportunities - will do little to change the dynamic, adding: "Neither the stock markets nor the real estate sector are barometres. The economic boom is here to stay".

According to Abraaj, there are 29 private equity firms operating in the Middle East, with a total of $5.2 bn under management. But 16 new private equity funds are seeking to raise $2.2 bn, with the average size of funds more than doubling each year. Benchmark rates of return in the region are nearly double those in Europe and the US, at 25-30%.

The GCC is at a turning point with private equity funds to act as a catalyst for economic change, providing best practice, introducing corporate governance and enhancing value realisation. Abraaj, which has raised a series of funds from a combination of institutional and high net worth investors, is one of the few firms seeking majority stakes in target firm and concentrates resources in post-acquisition management; its returns on investment range from 35 to 84%.

Many other funds have sought smaller stakes, sometimes in firms ready to go public. Global Investment House, the Kuwaiti investment bank with its own private equity arm, sees growing interest in this area.

IPOs, when privately or state-owned companies list on the stock market, have been hugely oversubscribed. In practice that has restricted the profits of large investors seeking to buy up big parts of firms or obliged them to pay a premium in fast-rising secondary markets.

Kuwait Serious About IPO In $6 Bn Refining Venture: The state-owned Kuwait Petroleum Corp (KPC) is "very serious" about an IPO of a stake in a new $6 bn refinery venture, it CEO Hani al-Hussein told reporters late on May 27. He said the government will push for more partial downstream sector privatisation, especially as two private firms now run nearly two-thirds of the gasoline retail stations which were once operated by the state.

Asked about a plan by KPC's refining unit - Kuwait National Petroleum Co (KNPC) - for an IPO to float 20% in the new refinery firm, Hussein said: "This is an orientation by the Supreme Petroleum Council (SPC), so we are very serious. We are looking at the best ways of doing that and we are talking to several parties about doing it. This is something we are very keen to do". Hussein was speaking on the sidelines of a National Bank of Kuwait (NBK) energy forum. KNPC Chairman Sami al-Rushaid said the state refiner would offer a 20% stake to local private investors, but may also allow international oil companies (IOCs) to take part with an additional stake. Rushaid did not give a date for the IPO, but said any offering now may be complicated by the downturn which has hit Kuwait's once high-flying stock market.