With the right balance between investment returns and startup potential, PEs and VCs are more intrigued by regions like MENA
According to statistics, over US$612 billion in venture capital activity was invested globally in 2021, a 108 per cent increase in 2020 despite the pandemic challenges. Investments rose in every major region, with North America and Europe seeing investment activity more than double in 2021. Yet, for the Middle East and North Africa (MENA) markets, the growth trend is even stronger, with investment value increasing by 165 per cent in 2021 as compared to 2020.
Although most PE and VC investments still originate from North America, the MENA is rapidly gaining traction. More startups and institutional investors, and PEs choose to reside in the region. We are also seeing increasing inbound investment and activities from Middle Eastern sovereign wealth funds.
Meanwhile, the actions of governments and certain characteristics of the region have contributed to this rise.
The strong government supports
MENA-based startups attracted over US$1.2 billion in the first half of 2021, representing 64 per cent year-on-year growth, among which 71 per cent was invested in the UAE (mainly through the various financial centre free zones, such as the Dubai International Finance Centre and the ADGM), Saudi Arabia and Egypt.
The UAE and Saudi Arabia have implemented fiscal reforms and unleashed large-scale programmes to privatise assets, increase public-private partnerships, unlock value by monetising real assets and infrastructure, improve public benefits and services, develop social and human resources, and optimise government operations.
These initiatives, together with complementary legal and regulatory reforms and social changes, ultimately make these countries more attractive destinations for foreign capital with more diverse, efficient and sustainable economies.
The MENA markets recognise the importance of the venture capital sector to achieve higher economic aims. Government-led initiatives have therefore been a key driver of growth in the venture capital sector in the region, evidenced by the development of startup ecosystems.
The strong sector supports
Saudi Arabia’s Public Investment Fund (PIF) has been supportive of the ecosystem mission. PIF’s support of fund managers has also formed a key aspect of its strategy. For the sole purpose of promoting the development of a venture capital ecosystem, two years ago, PIF established Jada, a fund of funds company. By funding venture capital funds and private equity focused on the Saudi market, Jada’s mandate is to create a self-sustaining growth platform for local SMEs.
On the other hand, PIF’s Sanabil Investments commits approximately US$2 billion in capital per annum in private investments that include venture, growth capital and small buyouts.
With this commitment, Sanabil aims to partner with originators of good business ideas: entrepreneurs who harness the innovations of mind and matter to fulfil societal needs in ways that are scalable and sustainable.
Taking the newly-established eWTP Arabia Capital (eWTPA) as an example, the company launched its first fund (Fund I) in 2019, backed by the sovereign wealth fund of Saudi Arabia, Public Investment Fund (PIF) and eWTP Capital (Alibaba Group and Ant Finance Group).
Within a short period of time, this US$400-million-fund has already invested into 16 companies across digital infrastructure, core technology and platform, and consumer and enterprise services which span enterprise services, cloud services, cyber security, fintech, cross-border supply chain, retail and consumer, e-commerce, logistics and digital entertainment and others, which are to work together and build a unique digital ecosystem in the MENA region. Currently, 13 out of the 16 portfolio companies are already operating and growing the MENA markets.
The unique MENA offering
Housing 7.5 per cent of the world’s total population, the MENA region has a predominantly young population. Of the 600 million people in the region, more than 50 per cent are under 25 years old. This enables a customer base that welcomes disruptive business models and a growing culture of entrepreneurship.
Traditionally, MENA also benefits from its geographical location as a gateway to both Africa and Asia. Given that one-third of the world’s population lives within a four-hour flight of Dubai, the region’s proximity to Africa and Asia is an attractive attribute for startups looking to capitalise on these vast emerging markets.
In H1 2021, 31 per cent of MENA-based venture capital transactions involved investment from outside the region. Some of the larger acquisitions in the Middle East by foreign investors in recent years have shown the extent of opportunities that exist there. These include Uber’s acquisition of MENA ride-hailing business Careem in 2020 for US$3.1 billion and Amazon’s acquisition of MENA online retailer Souk.com in 2017 for US$650 million.
These high-profile deals indicate an increasing strength in the underlying M&A market in the Middle East, creating more exit opportunities for both founders and investors. The challenge for the region is for local equity markets to mature so that listings on local exchanges such as the ADX or DFM become a viable and commonplace exit strategy.
With the right balance between investment returns and startup potential, PEs and VCs are more intrigued by regions like MENA, which offers an interesting mix of investment options. We are also seeing another wave of startups of Chinese origin expanding into the region for the same reasons. Likewise, Southeast Asian countries which offer a similar welcoming and flexible environments also are attractive to investors and entrepreneurs.