The average size of private equity deals in the Middle East dropped significantly in 2011 as the industry focused on investing in smaller growth companies.

Average deal size fell from $43m in 2010 to $8m in 2011, according to the Private Equity and Venture Capital in the Middle East Report released on 11 June. Although deal size fell, there was a modest recovery in the number of deals completed in the year, rising from 70 in 2010 to 73 in 2011. The market is still a long way from the heights of 2007-08, when more than 100 deals were completed each year.

“There has been a move to smaller-scale investments and more than half of the 73 investments in 2011 were growth capital,” says Dale Gregory, partner at KPMG and one of the authors of the report.

The report also found that five of the 10 largest deals in 2011 were investments into Egypt. Samer Sarraf, UAE head at Riyadh-headquartered private equity firm Amwal al-Khaleej, says they remain focused on the UAE, Saudi Arabia and Egypt, despite the political turmoil that hit the Egyptian economy, largely because of the demographics in those countries.

The rise in the number of transactions was despite tough economic and financial market conditions, although these factors may help drive future deals. “The private equity industry is picking up as banks are selling off assets at strong discounts,” says Nasser Saidi, chief economist at the Dubai International Financial Centre. “We are seeing a pickup in funds raised and deals completed in some very difficult circumstances.”

Executives in the industry are also upbeat about the prospects for 2012. A survey of 26 private equity firms in the region found that 50 per cent were looking at new investments this year, compared with just 23 per cent in the same survey last year.

Last year, there was $672m raised by private equity funds in the region, and more is expected to be raised in 2012.

The challenge for the industry remains finding ways of exiting from investments. According to the survey, around a quarter of funds will be focusing on exiting from some of their investments in 2012. Flotations is one of the main ways private equity investors do this, but with activity on regional equity markets low, most will be forced to look for alternatives. This is likely to involve selling the investment to one of its competitors in the same industry, or to other private equity funds.

“Trade buyers are holding substantial reserves of capital and this region does present very substantial opportunities for growth and higher margins than available elsewhere,” says Samer Khalidi, executive director of alternative investments at NBK Capital.

Fortunately for the private equity industry in the region, most deals are not typically as highly leveraged as they are in the West. “Growth capital investing does not lend itself to leveraged buyouts, especially as most transactions in this region are small,” says Sarraf. That has enabled the industry to avoid the indebtedness that plagued private equity investments in the US and Europe.