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Matteo Castelli on Private Equity Opportunities in The Middle East

Matteo Castelli is an Associate in the investment banking division of Credit Suisse in London, with focus on M&A transactions in the TMT sector. Until June 2011, he was an associate in the Private Equity team of National Holding, a diversified investment group based in Abu Dhabi. In 2009 he joined Emirates International Investment Company, the investment arm of National Holding, after three years in the investment banking division of Lehman Brothers / Nomura in London and Milan. His prior experience also includes periods at Mediobanca in Milan.

Matteo holds an MSc in Corporate Finance and a BSC in Finance from Bocconi University. He also attended an exchange program at Kelley School of Business, Indiana University.

I have been doing private equity for past two years in the Middle East.

MENASA excluding India makes up $2.3 trillion of GDP. Middle East has the most significant gas and oil reserves. The largest percentage of oil reserves is in Saudi Arabia and the largest percentage of gas reserves is in Qatar.

The Middle East driving forces include:

· Petrodollars – 57% and 41% of global oil & gas reserves.

· Supply/Demand imbalances – poses growth opportunities.

· Demographics – growing work force with two-thirds of the population under 30.

· Regional contiguities – platform plays.

· Reform policies – catalyst.

Middle East has lots of capital, tremendous entrepreneurial talent, and a supportive business environment. Over the last few years the countries have become friendlier. The UAE and Saudi have shot up in World Banking Business index since 2007.

Value adding investment strategy is the best for four areas in private equity and investors can push companies in all these areas which include:

· Strategic (strategy development, follow-on acquisitions, strategic partnerships, exist and realization)

· Team (Recruitment, COO, CFOs, regional and business line, board members)

· Finance (Improves financial analysis and reporting, debt and capital, public markets, hedging and risk management, cost optimization)

· Operational (Customer & vendor, new technology, efficiency improvements, branding and marketing, HSE)

The drawback is that the track record of management in the area is very short.

The three main private equity value-investing propositions:

1. Make companies more competitive

2. Allow exists for investors and allow inexpensive capital to flow

3. Help companies get better with international standard systems

Drivers of returns / value creation:

1. Use of debt

2. Arbitrage

3. Market/ sector appreciation

4. Better management practices

Contrary to some non-regional perceptions, the region of Middle East is not just an oil play as only 29% of the region’s GDP is due to oil and the sovereign wealth funds (SWF) are not crowding out the private sector. USand EU investments make up 57% of the investments in the private sectors. Sovereign wealth funds are looking to diversify out of the region instead.

There is a need for private equity investors in the region due to the changing corporate landscape as private equity activity in the region has gone down significantly since 2008. Funds are not making investments since the crash. Number of GCC IPO’s went from 23 in 2007 to 5 in 2010.

The most important message is that private equity can really benefit from investments while helping the region to evolve its corporate landscape through better access to talent, improved corporate governance, sophisticated business practices, increased business networks and enhanced control.

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website


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