Gulf Capital’s CEO Karim el-Solh made a crucial decision at the end of 2014 as oil prices plunged and the outlook for the regional economy softened.

“At the end of last year, when we saw oil prices collapsing, we saw the writing on the wall. We decided to de-risk and reduce our exposure to energy investments and focus more on consumer-driven investments,” he says.

Founded in 2006, Abu Dhabi-based Gulf Capital has enjoyed considerable success over the past decade. It manages about AED11bn ($3bn) of assets with about 40 per cent in private equity, 40 per cent in real estate and 20 per cent in credit and mezzanine funds. “We are one of the largest alternative asset managers focused exclusively on the region,” says El-Solh.

Much of this success has come from oil and gas and infrastructure related investments.

“If you look at our second private equity fund, which was $533m, it was very focused on oil, gas, power, and infrastructure investments and backing companies that benefit from government spending. We had some beautiful exits, like our company Gulf Marine Services. We grew EBITDA [earnings before interest, tax, depreciation and amortisation] by 14 times and it has become a substantial global business that culminated in a global IPO [initial public offering] on the London Stock Exchange,” says El-Solh.

With the oil and gas market in such a depressed state, the market has changed since that lucrative deal was closed. “That deal is one of the most profitable deals in history of private equity in the Middle East, but that was a 2007-08 vintage and back then the theme was how to play the oil and gas and infrastructure spending.”

New strategy

The company’s third private equity fund reflects Gulf Capital’s new strategy of focusing on consumer-driven markets rather than oil and gas and government spending on infrastructure projects.

“Our third fund is much more focused on defensive and consumer driven sectors, food, FMCG [fast-moving consumable goods], healthcare, and education, sectors that leverage the fantastic growth in region,” says El-Solh. “The population is growing at 4 per cent – one of fastest in the world – and 55 per cent of population is under the age of 30. They are avid spenders, and private consumption is growing to tune of 10 per cent annually.”

Although the region still offers growth, expectations have been tempered.

“We are realists. The growth of the region is going to slow down, closer to 4 per cent from their heydays of 5-6 per cent across the GCC. That will reflect in valuations and the multiples we are bidding,” says El-Solh. “If you have less growth, you are not prepared to pay as much as you used to in 2013 and 2014, so we are dampening our bidding activity and the prices we are willing to pay reflect that slower growth environment. It is going to be a slow growth environment for the next two or three years, and we have to adapt as disciplined investors.”

Opportunistic approach

El-Solh has not completely turned his back on the oil and gas sector, and is still open to investment, as long as the price is right. “We will be opportunistic, maybe looking less upstream and more downstream with more maintenance-focused investments. It will be operations rather than drilling and exploration,” he says.

Those opportunistic deals have taken time to materialise, but after more than a year of lower oil prices, valuations are starting to look attractive. “Valuations take time to reflect the risk. We are looking for attractive deals and we are seeing more deals, bigger deals, and cheaper deals than you would have seen in boom years before the end of 2014,” says El-Solh.

Although government spending will be curtailed as oil prices remain low for the foreseeable future, El-Solh still expects the infrastructure sector to remain robust, as governments continue to invest in utilities and services for their growing populations.

“We have investments in the water and power sector, and social infrastructure, namely education and healthcare. These are predictable sectors and we don’t think in the current softening environment they will be affected,” he says. “They should continue to fare well because these are necessary sectors. Across the Gulf I don’t see government spending and budgets for these sectors being cut back severely. Because of that, growth will continue and we are encouraged, especially by social infrastructure investments.” 

Real estate investment

For real estate, Gulf Capital’s main investment is on Maryah Island in Abu Dhabi. In 2013 it opened the Galleria shopping precinct, and it is now developing the $1bn Maryah Central mall that will connect to the existing Galleria. The main construction contract was awarded to Canada’s Brookfield Multiplex in August and the mall is scheduled to open in March 2018.

“When you combine them the Galleria and Maryah Central more than 2 million square feet of retail and F&B [food and beverage outlets] and it becomes a regional or super regional destination. This critical mass is very important. It will be a significant player on the retail and F&B landscape in the UAE,” says El-Solh.

The company is also developing a residential compound in northwestern Riyadh known as Antara. Currently under construction, it covers an area of 157,000 square metres, and when completed will have 525 villas, town houses, duplexes and apartments. “We want to play the residential card in Saudi Arabia, because especially in Riyadh there is a very fast-growing population and sizeable market with a big demand for expatriate residential compounds,” says El-Solh.

Egypt population

Outside of the Gulf, the company is also investing in Egypt, where it is keen to increase its exposure to the country’s population of more than 90 million consumers.

“You cannot ignore Egypt in a Middle Eastern portfolio,” says El-Solh. “I like what we see; the confidence and the vision that the new government has. It is supportive of foreign investors, so we will be playing the rebound of the Egyptian economy through our funds.”

The company already has several investments in Egypt. “Our last deal from our second [private equity] fund was Middle East Glass. We bought a strategic stake in the largest glass-bottling company in Egypt that bottles for major beverage and drinks companies, and it is a play on consumption,” says El-Solh.

This year, Gulf Capital’s credit fund provided Carbon Holding with a $25m convertible five-year loan facility to finance the development and expansion of three petrochemical projects: Egypt Hydrocarbons Corporation, Oriental Petrochemicals Corporation, and Tahrir Petrochemicals Corporation. The deal also gives Gulf Capital a role in Carbon Holding’s plans to list on the Cairo exchange.

While some investors have been slow to move into Egypt, Gulf Capital has been quick to move and has found the market efficient and receptive when dealing with foreign investment.

“Our deployment of credit in Egypt has been quick and welcome. We are a private company investing in private companies and it has been smooth sailing. We have received a strong welcome and we have seen growth in the sectors where we are investing.”

New markets

As market conditions toughen and growth rates slow, new markets are key to Gulf Capital’s approach to growing the companies it invests in.

“We encourage our portfolio companies to travel outside the Gulf into the fast-growing African or Asian markets,” says El-Solh. “We are diversifying away from single country risk and creating regional platforms that grow on the back of emerging market growth. These larger diversified platforms are eminently more sellable to global trade buyers because they like the diversity across continents.”

Gulf Capital has already demonstrated that this approach works with its investments. Water company Metito operates in 22 emerging markets in Africa and Asia, power company Smart Energy Solutions has expanded from the Gulf into Africa, and offshore engineering firm Gulf Marine Services went from the UAE to Qatar and North Africa, and now operates in Norway and Denmark in the North Sea.

“We have managed to create global leaders,” says El-Solh. “We are very proud of this. The Gulf doesn’t just export capital or oil. We are exporting global leaders that operate with the highest standards and culminate with IPOs on the London Stock Exchange.”