UAE private equity firm Abraaj Capital has allocated $28m out of the $500m Riyada Enterprise Development (Red) fund to invest in five companies as part of its plans to stimulate the growth of small businesses in the region.

Abraaj has personally invested $50m into Red, which the firm set up at the start of 2010 to help bridge the funding gap that small and medium-sized enterprises (SMEs) currently face in the Middle East.

“We have allocated $28m towards five companies we have signed up over the past two-three weeks,” says Tom Speechley, executive director of Abraaj Capital and chief investment officer of Red. “They are across a range of sectors, including healthcare, IT services, food, internet and media.”

The average ticket size of Abraaj’s investments will be $5m and it is in the process of “looking closely” at 15 other companies that it considers investment-worthy out of a total 180 that it originally reviewed, says Speechley. The firm’s strategy is to buy into profitable businesses with a good growth path.

“We are looking to acquire an influential minority position in companies across the region including the Maghreb, the Levant and Pakistan,” he says.

“We are hoping to close five more deals before the year-end, with a long-term goal of investing in 20-25 companies per annum over a four-year period.”   

Abraaj’s strategy is to hold on to investments for a four to six-year period, and that exits will “by and large be trade sales”, according to Speechley.

Dubai is also currently working to launch a second-tier market towards the end of 2011 to enable SMEs to access growth capital.

Abraaj research shows that SMEs currently account for 90 per cent of all businesses in the Middle East and more than 70 per cent of employment, but generate less than 30 per cent of its GDP.

Middle East-based SMEs currently receive 8 per cent of regional bank lending, while Gulf SMEs receive just 2 per cent, according to a report released in October by the Union of Arab Banks and the Washington-headquartered World Bank.