‘The region is becoming increasingly sophisticated in its approach to financing and we think the energy market in particular is ready for this,’ says Gary King, regional head of SBL’s energy group. ‘The aim is to raise money in the region, invest it in the region and generate good long-term returns. The fund will be a unique financial vehicle offering long-term senior debt and equity-type instruments to projects, concentrating on energy, power and energy-related projects in the Middle East and North Africa [MENA].’
SBL will provide seed capital for the fund, which will be managed out of Dubai, and has already started approaching potential core investors in the region. ‘The aim is to obtain finance on a fully committed basis for the MENA fund by the middle of next year. We will begin investing as quickly as possible after that,’ says King. ‘We’ve been extremely encouraged by the responses from the institutions we’ve shown the fund to so far. For example, we have the support of companies such as ENOC [Dubai-based Emirates National Oil Company], and we will be announcing shortly a number of other major institutions supporting the initiative.’
The aim is to get five or six core partners into the fund initially – which will help in defining its investment strategy – before taking the fundraising to a broader regional market. ‘We are going to start by getting a good footprint in the UAE. The objective is to get the core partners, who we expect to provide about 30 per cent of the capital in total, in place by the end of the first quarter of next year,’ says King. ‘There will be active marketing within the MENA region, and we expect some funds to come from outside the region as well.’
Those that do choose to invest will be presented with a novel opportunity. The fund is to be divided into two segments. The first, expected to be worth about $300 million, will be dedicated to investing in senior long-term debt financing, and the second, of about $450 million, will be for equity participations. Although the debt and the equity sides of the fund have been divorced – and subscribers can specify whether they wish to participate in one or other, or both – both sides could be used on the same transaction and each side will be managed by the same fund management company. In addition, SBL is considering adding a Sharia component to the fund, which could raise the size of the fund to $1,000 million.
‘We are expecting to have the fund fully invested within about three years of starting,’ says King. ‘There are a number of loose parameters defining the fund’s diversification. For example, no more than 10 per cent of the fund can be invested in a single project and no more than 20 per cent in a single country. We are aiming to make $25 million-75 million investments on the debt side and take $10 million-50 million positions on the equity side, on average.’
The fund also has loose targets for sector diversification. Between 30 and 40 per cent is expected to be invested in primary energy projects, oil and gas transportation and gas distribution. A similar amount will be used to finance power generation, transmission and distribution projects. About 10-20 per cent will go to energy-related projects such as aluminium smelters, desalination plants or petrochemical projects. About 10 per cent will be placed in environmentally friendly energy projects.
‘Within these sectors, most opportunities will be considered including, for example, pre and post-privatisations, mergers, acquisitions and industry consolidations, brownfield developments, concessions, greenfield projects and refurbishments,’ says King. ‘The fund will be diversified across sectors, project maturity and geography.’ The likelihood is that, with the equity portion of the fund aiming to generate dividends as soon as possible, initially it might focus on part-acquisitions, refinancing or the expansion programmes of existing projects.
As both the size and the style of investments suggests, the fund is aiming at the small-to-medium-sized projects that are beginning to fall beneath the investment floors of some of the larger international banks. By doing so it will be presenting itself as a new funding source at a time when the need for diversification is being felt more strongly in the region. Regional bank liquidity may remain strong at present, and some recent project finance deals suggest that the international banking community retains a good appetite for project lending in the MENA region, but such avenues might not always be open. And, with capital markets in most Arab countries shallow and immature, alternative financing sources, such as the MENA fund, stand as important innovations. In addition, by raising the fund in the region, a strong pattern of inward investment is being promoted. Initially at $750 million, the fund is, in absolute terms, small, but it might set an important precedent.
‘This fund is mainly about investing in the Arab world and getting good commercial returns for doing so,’ says King. ‘It will be a unique strategic partner for energy projects within the MENA region. The fund will offer a unique investment product and an initiative for new Arab investments.’
SBL may not be among the high-profile project finance banks active in the region, but it has a well-established track record of emerging-market fund management, particularly in sub-Saharan Africa. ‘We are an emerging-market bank and a resource bank,’ says King. ‘This is what we do.’ And by doing so it is creating new opportunities.