For all that the GCC states rely on hi-tech systems to ensure the smooth functioning of their banking operations and capital markets, investment in information and communications technology (ICT) has been neglected.
With its young demographic – 38 per cent of the GCC’s population are under the age of 14 – and a growing realisation on the part of the region’s governments of the need to diversify their hydrocarbon-dependent economies by creating jobs in emerging industries such as IT, this is starting to change.
For example, the value of Saudi exports of IT and ICT goods and services rose from $4.7bn in 2000 to $7.9bn in 2007, according to the UN Conference on Trade & Development (Unctad) Information Economy Report 2009. The report says the kingdom is also importing more ICT goods, up from $1.4bn in 1998 to $7.1bn in 2007.
The sector has received limited investment from private financiers, especially the private equity market, which has focused on other sectors, particularly real estate. But the bursting of the real estate bubble, and the consequent slowdown in the construction market, combined with volatility in the price of commodities, is helping to bring the Gulf’s technology sector to the attention of private equity firms.
“A few years ago, local investors just weren’t interested in the technology market because it didn’t offer the same quick, high returns that could be found in real estate,” says Imad Ghandour, executive director of UAE private equity firm Gulf Capital. “But the picture is changing, and they are now starting to express an interest.”
Gulf Capital’s research shows that three of the 12 major private equity investments made in the Middle East and North Africa (Mena) region over the past nine months were in the technology sector.
“That is a significant increase compared with previous years,” says Ghandour. “The economic crisis has had the effect of increasing the attractiveness of technology to investors, mainly because so many other sectors have shut down.”
Nevertheless, there are some experienced private equity firms in the region’s IT market. One of the most active is Injazat Capital, a sharia-compliant investment bank specialising in management buyouts, private equity, venture capital and leveraged debt. It has invested in 12 IT companies across the GCC and Egypt through its $50m Injazat Technology Fund (ITF), which it launched in 2002.
“We seek to capitalise on the growth of the sector by assisting small, regional technology companies,” says Rami Bazzi, principal of private equity at Injazat Capital.
The ITF’s highest profile transactions include buying a 17.78 per cent stake in Jordan’s Rubicon, an animation and multimedia software development company, in August 2003 for an undisclosed sum. With this, ITF achieved a rate of return of 48 per cent for its investors after selling its stake in 2007.
In December 2006, the fund acquired a 19 per cent stake in Atos Origin Middle East, an IT services provider. In November 2007, the fund exited this investment through the sale of the company to the US’ Hewlett-Packard, achieving a 75 per cent return on investment
“There was very little competition when we launched the fund,” says Bazzi. “In emerging markets like the Mena region, it is quite rare to find deals in knowledge-based industries, because they require knowledge of local market dynamics. So investors tend to focus on more familiar business models, such as real estate, which is very easy to manage and sell.”
Today, says Bazzi, there are a growing number of companies in the market, but there is still room for more.
“I think there is the potential for investments to triple or quadruple in the near term,” he says. “The speed at which this will happen depends on the recovery of the global credit markets, so it could be any time from one year to five years.”
Khazaen Venture, a venture capital firm set up in Kuwait in 2002, is another institution that has been investing in the sector for some time. Since inception, the company has invested in about 10 companies, some of which have been involved in communication and software development.
Mansour al-Khuzam, managing director of Khazaen Venture, says a 15-20 per cent rate of return before exiting the investment is easily achievable in the technology sector, but investors’ interest is constrained by the small size of the companies operating in the sector, which has prevented it from realising its full growth potential.
“Historically, the region has not nurtured technology as an industry,” says Al-Khuzam. “Therefore, regional IT companies are at the early stage of development, which makes it difficult for private equity investors to find an exit through flotations, so these companies are perceived as high-risk.”
Some GCC governments are attempting to address the region’s lack of IT development by investing in educational facilities. At the end of September this year, Saudi Arabia’s King Abdullah University of Science & Technology (Kaust) opened its doors to its first 350 graduate students. Located 80km north of Jeddah, Kaust has a faculty of 60 scientists and engineers and is fitted with state-of-the-art laboratories. Its aim is to aid the advancement of science and technology in the kingdom.
In early September, Abu Dhabi inaugurated the Masdar Institute of Science & Technology, with an intake of 92 graduate students. The non-profit research institute, developed in collaboration with the US’ Massachusetts Institute of Technology, is providing a two-year master’s programme dedicated to the research and development of alternative energy and environmental technologies.
The institute’s mandate is to feed both Abu Dhabi and the region with research expertise, thereby enhancing economic development and diversification through technological innovation. Abu Dhabi in particular has begun talking more openly about its ambitions to become a technology hub.
At the second annual Abu Dhabi Investment Forum, held in London in early October, Nazem Fawwaz al-Kudsi, chief executive officer of state investment company Abu Dhabi Investment Company (Invest AD), said the Abu Dhabi Education Council (Adec) had this year carried out a study to identify gaps in its education system.
“Adec is moving away from government-run to private schools, with a focus on science and engineering, in order to be able to cater for advances that require a special skill set,” said Al-Kudsi. “We are currently working on a five-year-plan with the aim of opening one of the largest semi-conductor factories in the world by 2014.
“Last summer, Adec sent 40 students to a semi-conductor factory at Dresden in Germany to learn at first hand how they operate. We are also working with the local universities to put a curriculum in place.”
Abu Dhabihas also been investing in technology firms overseas. Through its state-owned investment vehicle Mubadala Development Company, it acquired an 8.1 per cent stake in US’ microchip manufacturer Advanced Micro Devices (AMD) with a $622m investment in November 2007. The deal makes Mubadala AMD’s third-largest shareholder.
In November 2002, Kuwait’s sovereign wealth fund, the Kuwait Investment Authority, established National Technology Enterprises Company (NTEC) with an initial capital of KD100m ($350m). NTEC seeks to promote a sustainable transfer of technology to the region, through a corporate venture capital model and investment in a range of sectors, including biotechnology, IT and telecoms. To date, the company has invested in nine companies in these sectors.
GCC states are clearly striving to boost their underdeveloped technology industries. In prioritising the sector in this way, it is likely that the GCC will start attracting more investment from international funds.
In October last year, UK-based Investcorp invested AED360m ($98m) in Redington Gulf, a distributor of IT and telecoms products in the Middle East and Africa, through its $1.1bn Gulf Opportunity Fund. The investment will enable Redington to look at acquisitions.
In February this year, US-based Intel Capital invested in three UAE-based technology companies: Conservus International, an IT/Media marketing company; Pulse Technologies, a manufacturer of building automation systems; and Vertex Animation Studio, a 3-D animation and multi-platform games company.
The funding was provided by the $50m Intel Capital Middle East & Turkey Fund and will help companies grow regionally and extend their product offerings.
These investments are evidence that private equity managers see future growth opportunities in various segments of the technology market. “In particular, I think there will be opportunities in services communication, electronics, lighting systems, renewable energy and green-building technology,” says Al-Khuzam.
Bazzi says there will be opportunities in telecoms infrastructure, alternative energy and IT management of power and wastewater plants, a sector where capacity is predicted to triple by 2015, thanks to $10bn worth of government investment.
Through investing in high-growth companies, the private equity market can play a vital role in supporting the evolution of the IT industry in the region, and GCC governments have begun taking major steps towards raising the profile of the technology sector.
“Science and technology needs to be given more prominence in the education system, not only at the university level but lower down the chain as well,” says Al-Khuzam. “Hopefully, the recent opening of Masdar and Kaust will help to transform scientific innovation from theory into practice.”