Sign in
While the rest of the world is seeing a lull in dealmaking, the Gulf is emerging as a bright spot, UAE-based private equity firm Gulf Capital CEO Karim El Solh (LinkedIn) tells EnterpriseAM UAE. Plenty of sectors are ripe for growth and investment, from AI to healthcare and renewables, and private equity firms here in the UAE and the wider region are capitalizing on the momentum.
Whether it’s the IPO boom that has sustained itself despite global headwinds, new forms of capital — like private capital — gaining a foothold in the region, or the focus on growth capital as opposed to leverage buyouts, the region is fast becoming a hotspot for investors looking to make substantial returns.
When it comes to exciting industries in the region, Gulf Capital is all in on five: Fintech, healthcare, business services, consumer, and sustainability — which it defines as water and food security, renewables, and the energy transition.
As the firm prepares to reach first close on its fourth fund, which El Solh hopes will help it cross the USD 3 bn mark in assets under management, we sat down with El Solh for coffee in Dubai to discuss what the firm has in store over the coming year, which markets he’s bullish on, and why dealmaking in the Gulf is booming.
KEY TAKEAWAYS:
- Gulf Capital plans to achieve first close on its fourth fund in 2H 2024, with an eye to raise more than USD 800 mn;
- Asia and the Middle East are bright spots for investors for the next few decades;
- The momentum in the regional stock market scene is fueling more exits in the region;
- The firm will be doing most of its fundraising from LPs in Asia and the Gulf.
Enterprise: How has the Gulf managed to sustain its dealmaking momentum despite a global liquidity crunch and economic headwinds?
Karim El Solh: It’s a story of sharp contrast. When the US and Europe are slowing down, we’re having our best year ever here. The region is growing very fast, and Europe is entering recession. Diversification of the economy and the expansion of non-oil sectors is working very nicely. Countries in the region are launching a number of new industries that are really paying off, from tourism, to healthcare, to banking, to technology.
Even though there’s a lot of clouds on the horizon globally, the only bright spot today is in the Gulf region. Another one is India. Those two markets are very promising both from a growth and exit perspective.
We’re working on four exits this year — probably the most we’ve ever done in a year. This is at a time when exits in Europe are slowing down, and it’s very difficult to sell companies. We started the year in January with the strategic sale of Amcan, a leading sports and nutritional supplements distribution company, and we have three exits in the pipeline. That’s refreshing for global LPs.
The average growth in profitability for all of our portfolio companies in 4Q 2023 was 46% on the previous year. For the full year, we grew 33% on the previous year. That kind of growth excites global investors because they’re not seeing it anywhere else.
Part of it is the growth of the economy, but the other part is us working with our operating partners to grow our companies. We don’t rely on leverage. The way we make our money is by doubling and tripling profitability.
On all of our exits, we increase profit by 224%. That’s how we generate our returns. When people ask if we’re impacted by the high interest rates, I say not really, because I never put leverage on companies. This is in sharp contrast to your typical US leverage buyout and European leveraged buyouts; they put a ton of leverage, and when Libor — the London interbank offered rate — was close to zero, it was very easy to make money on cheap financing. But now Libor is over 5%, and the cost of borrowing is over 11%. It becomes very onerous, and their companies are very stressed because of it.
E: How do you make sure your companies are making returns?
KS: We’re a control buyout fund. 80% of our acquisitions have been control buyouts, and I think looking ahead, it will be 100%. We insist on control because we bring a deep bench of operating partners. We clean, fix, and grow our companies — we’re an active owner. We cannot transform a company with a small minority stake.
E: Looking ahead, what’s your preferred exit strategy? Are you looking at IPOs or strategic sales?
KS: Historically, we were very focused on selling to strategic buyers because we have controlling stakes and market leaders. The sectors we focus on are growing fast. They attract a lot of global investors and strategic buyers. With Chef Middle East, we held an auction and got a bid from Thailand and Germany, but it was eventually sold to a US company — the Chef’s Warehouse, which is listed on Nasdaq. We got a 2.5x return on that investment.
But now I’m seeing a lot of global investors coming here, and they’re approaching us. We’re speaking to three or four of them, so that’s a new exit avenue which we didn’t have before. They’re investing out of big funds, USD 20 bn funds. They need a minimum equity check of USD 300 mn. For me, that’s great, because we write checks of USD 50-100 mn. We double, triple the size of these companies, and we can sell to them.
The other thing that is new is how vibrant and exciting the regional stock markets have become. Historically, we had to go to London to do IPOs of companies like Gulf Marine Services, because the markets here were not open. Now, it’s much more exciting to do IPOs here than internationally. I think the IPO route for the next two years could be an exciting one.
E: Global investors coming here is an interesting opportunity for you. But is there concern over competition?
KS: We are in the midmarket space, while most of the ones coming here are in the big check space, so we are not overlapping. They will never spend time like we do on a USD 40-60 mn transaction when they are a USD 20 bn fund. It doesn’t move the needle for them. They need bigger tickets.
E: What do you have in line this year in terms of investments and funds?
KS: We became more and more sector-focused after 2016. After 2015, there was an oil crash. Oil prices dropped by 70%. It was then — as we launched our third fund — that we shifted from being a generalist and investing a lot in oil and gas to looking into the future.We mapped out 45 sectors and we picked the five fastest growing sectors. We’re now building a pipeline from these sectors for our fourth fund.
We hope to achieve the first close on our fourth fund in the second half of the year. Fund III is 90% deployed, so we have 10% left.
E: Do you have a certain goal for the size of the fourth fund?
KS: We’ve been growing steadily. Our first fund was USD 160 mn, the second was USD 533 mn, and the third fund was USD 750 mn. Hopefully, our fourth fund cover is USD 800 mn or more. We’ll typically invest in 12 companies per fund, and the average ticket is USD 50-100 mn.
E: What does your LP mix look like right now?
KS: Historically, we’re backed by a number of sovereign wealth funds, pension funds, funds of funds and family offices, around half from the Gulf and the other half from outside the region — a lot from Asia, and some from Europe.
I think for this upcoming fund, the most fertile grounds for fundraising would be the Gulf and Asia. The economies are doing well; they’re liquid, they like the Gulf, and they’re keen to put money here. I see much less appetite from Europe because Europe is going through a lot of issues, from economic recession to lack of liquidity. With that context in mind, I see European investors pulling back, maybe going back to looking at their countries, while the Asian sovereigns are coming here en masse. We’re much more excited to look east rather than west when it comes not only to investments, but fundraising as well.
E: And speaking of Asia, you were recently on a roadshow there. What’s exciting to you about Asia right now and which countries and sectors specifically are you looking at?
KS: I think the pleasant surprise I found was Japan. It was very nice to see the strong revival Japan’s going through. Local players are very excited to invest in Japanese private equity and there’s more activity and more take-private. You feel they’re going through a generation shift, after being a sleepy destination. That was a bright spot.
India is very exciting as well. China is facing some issues, but I think they’re stabilizing and you can already see a rebound in the Hong Kong stock market. I think 2024 could be the year where they turn the page and resume the growth they had before.
Asia is a very exciting consumer market, with a big population that’s growing fast. Our head of Singapore has a consumer background, used to work at firms like LVMH, Zegna and Nike, and has a unique network of potential investments in that sector, so that’s an interesting play.
We’re also looking at bringing our healthcare companies to Asia. We own the largest fertility platform here — ART Fertility. We’ve expanded to India, and opened 10 centers, and we will soon open 15 new centers.
I think the corridor we’re investing in from the near to Far East today is the fastest growing corridor in the world. It’s an exciting region, and if you look 30 years from now, the European economy will increase 1.5x, the US 1.8x, the Gulf will triple in size, Southeast Asia will quadruple, and India will quintuple. If you want growth, you have to be in this corridor where we’re playing. It’s not in Europe, it’s on the near to far east — the new Silk Road.
E: Since healthcare is one of your focal sectors, can you tell us more about the growing consolidation trend in the industry here in the UAE?
KS: There’s a lot of action on hospitals now, but this is not a sector we look at because hospitals tend to be very capex-heavy and take a long time to scale. We prefer asset-light businesses, like clinics and our fertility platform. In four years, we went from one to 15 centers across the Gulf and India. You can scale and build faster and will have generated a much higher return investing in clinics and asset-light healthcare opportunities than in hospitals.
E: Back to your strategy and priorities for the year: What will your investment-to-exit ratio look like? And can you give us a breakdown of the investments you plan to make per market?
KS: I think this year we will see much more exits than new investments. We’ve been growing our companies for a long time, and we’ve reached record profitability. It’s an excellent time to be harvesting our portfolio. I expect the exit-to-investments ratio to be 2:1. That’s where we are in the life cycle of our fund.
Fund IV will be probably 70% Gulf, 30% Asia. But as we do more bolt-on acquisitions — acquisitions of smaller companies — most of which come from Asia, it could become 50:50.
