looking at the region,' says Haydee Celaya, director of private equity and investment funds at the International Finance Corporation (IFC), the private sector arm of the World Bank. 'It hasn't happened before. Carlyle has such a network and strong connections to companies. But if you have big global groups, it's important for them to be successful.'

A protracted run of high oil prices has drawn the spotlight onto the Gulf. The regional equity market has little experience of fund management but is now beginning to bristle with new players. Many believe the Gulf is finally beginning to buck the trend of exporting its capital.

'The paradox is that the region is home to the largest pools of capital in the world,' says Celaya. 'But there's an amazing tradition of investing outside, primarily in the US and Europe. This is the beginning of a new trend. Emerging markets are more credible and comfortable for large institutional investors and they are allocating funds.'

The arrival of large funds will help push the industry toward critical mass in the Gulf, but their interests are spread across the region. 'There's a big space for a regional fund. You can't have a country focus there's not enough deal flow and it is not concentrated enough,' says Celaya.

Private equity investment in the Middle East and North Africa (MENA) region has reached $3,700 million since 2002, according to the IFC, but remains small at 0.17 per cent of nominal gross domestic product (GDP) compared with 1.6 per cent in the US, 0.49 per cent in Europe and 0.34 per cent in Asia. However, the sector is growing. The region saw an eight-fold increase in fund raising from 2003-05.

Where the Carlyle Group has led, others are expected to follow. But whether the region is ripe for development is still in question. The faltering pace of privatisation in many countries keeps the lid on a treasure trove of potential investment opportunities, as does the traditionally closed nature of family businesses that populate the small and medium-sized enterprise segment. Across the region, transparency and

disclosure requirements are weak

and standards vary.

'Private equity has developed only to a limited extent,' says Celaya. 'A lot of positive change has been happening in the MENA region but there's a lot of work to be done.'

The development of the private equity industry requires a dynamic private sector, but opportunities for equity investments remain tight without more liberalisation. A functioning industry also needs a more stable macroeconomic environment, a predictable institutional and regulatory framework and exit avenues. All these conditions are gradually falling into place, boosted by the return of successful entrepreneurs, the promise of reform, strong economic performance in the Gulf and high liquidity.

But Celaya identifies the scarcity of fund managers as a key impediment. 'The issue is how to get expertise into this market and attract managerial talent.

You can't grow the private equity industry by bringing in expats. [Managers] have

to be local. There's money in the GCC.

If you can channel that to other parts of the Middle East and bring in managerial support, it will get the industry going.'

Other obstacles remain, including the established practice of businesses siphoning capital from retained earnings rather than seeking external investment. Further problems include political instability, a regional brain drain to the West, limited access to credit and under-develope