There has been a severe slowdown in regional private equity (PE) activity as a result of the global financial crisis with the value of funds raised falling from $6.9bn in 2008 to $1.1bn in 2009.

“The private equity industry has been badly hit by the downturn,” says Rick Dallas, managing director of private equity at Gulf Capital.

“The value of Middle East and North Africa (Mena) funds has fallen to $1.1bn, while the value of investments made has fallen from $3.4bn to $2.2bn over the same period.”

Dallas says the PE industry is facing some key challenges today, namely a lack of bank financing, as well as a shortage of both volume and quality of deals.

But he believes it is ripe for growth and is currently situated between the nascent phase of development and the take-off phase.

“The industry has a large potential for future growth – its penetration ratio as measured by Mena PE investments to GDP stood at 0.11 per cent in 2009,” says Dallas.

“Cumulative raised funds as a percentage of GDP stood at 1.3 per cent in the same year.”

Dallas thinks that family businesses will increasingly turn to PE firms in the coming years to help them restructure and address succession and management concerns.

“These businesses face inter-generational ownership transition issues,” says Dallas. “It tends to be that the third generation that seek out private equity help as they have conflicts of interest in terms of management style.”

Today, family firms control an estimated 90 per cent of GCC commercial activity. These firms number more than 5,000 and hold combined assets of more than US$500bn.

Dallas said that the UAE and Egypt are the most “commercially open” markets today for PE firms, while Saudi Arabia is “less penetrable”.

Today, Mena private equity industry still represents only a niche segment of the regional capital markets, comprising just $22bn of the capital raised for Mena corporates during 2001 to the first half of 2010.

This compares to $53bn raised through initial public offerings (IPOs), $215bn raised through corporate bonds and $393bn raised through syndicated loans.

Gulf Capital has worked on a number of PE-backed IPOs, including Depa, Sipchem, Arabtec Holding, Aldar, Finance House, DanaGas, MIS and Aramex.

Dallas was speaking at MEED’s Middle East Capital Markets 2010 conference held on Yas Island in Abu Dhabi from 25-26 October.