The regional head of private equity and sovereign wealth fund practices at Bain & Co. predicts that M&A activity in the Middle East will increase by about 39 percent in 2022 due to the region’s sovereign wealth funds.


In an interview with Arab News, Gregory Garnier attributed the increase in mergers and acquisitions (M&A) activity in Saudi Arabia and the Middle East region as a whole to the “acceleration of a long-term trend started a few years back.”

The chief executive of the American management consulting firm said that the region’s “high economic growth” had created “financial headroom to invest,” which in turn had led to an increase in merger and acquisition activity.

According to the company’s most recent report, only a small percentage of deals are participated in by private equity investors, while 84% are conducted by sovereign wealth funds and companies.

“For deals in the region, several positive factors have fueled that growth,” Garnier continued, “including increasing appetite from regional private owners to divest or welcome a strategic shareholder (sometimes as a step before the initial public offering, another underlying trend), privatization agenda of some countries of the region also offers some deal opportunities, and active scouting of local investors on deals.”

He argues that in order for foreign firms to establish local operations in the GCC states, a number of enabling conditions must be met, such as “minimum demand to reach the minimum critical scale,” enabling regulations, and incentives that promote long-term domestic production rather than relying on foreign suppliers.
If they provide direct support and coordinate with the relevant government bodies, “sovereign wealth funds can play a critical role in securing those key success factors,” said Garnier.


Decreased Participation in Physical Education
The report found that private equity activity in the region dropped by 36% in the first 10 months of 2022, although there were signs of revival from companies preparing for initial public offerings.

When compared to the rest of the world, private equity is less developed in the region. Garnier noted that while sovereign wealth funds can create competition in some local deals, they can also serve as a source of deal stimulation in the market.

Increased merger and acquisition activity in the region can be explained by the availability of “high economic growth,” or extra capital for investments.

Private equity investors participated in only a small percentage of deals, while 84% of all transactions were made by sovereign wealth funds and companies.

The “minimum demand to reach the minimum critical scale,” supportive regulations, and incentives for economic sustainability are all necessary for the localization of multinational corporations to be a success.

“We expect private equity funds in the region, including international private equity funds, to increase activity due to the high growth prospects of the GCC economies,” they wrote.

There are two main forces at work here. A first requirement is a desire to improve ties with regional sovereign wealth funds, which supply significant capital as limited partners in their global funds. Second,” he went on, “there will be more incentives for regional sovereign funds to invest in the region.

Since initial public offerings (IPOs) have increased in the region over the past few years, “we also see a trend from business owners to open the capital to private equity funds in order to be IPO-ready.”

Economies in flux
By utilizing mergers and acquisitions (M&A), sovereign wealth funds are able to diversify their investment portfolios, fortify existing partnerships, make strategic investments, grow the regional economy, and train up new leaders in the area.

Garnier emphasized the various archetypes through which sovereign funds invest, such as entering new verticals at scale by constructing local platforms in underdeveloped sectors, fortifying ties with partners, funding emerging industries, raising public awareness, and cultivating local leaders.

In August 2022, for instance, the Public Investment Fund of Saudi Arabia invested $1.3 billion in four Egyptian companies, including Abu Qir Fertilizers and Alexandria Container and Cargo Handling.

“This corresponds to one of the archetypes of investment where GCC sovereign wealth funds invest in targeted neighboring countries with the objective to both make investments in attractive assets in large and growing economies to meet targeted countries’ need to privatize some of their assets and strengthen the bilateral ties,” Garnier said.

This frenzied drive to expand internationally creates prospects for businesses and investors throughout the world, not just in the Middle East.

Even more importantly, the report states that family-owned businesses and conglomerates will be able to sell off non-essential assets and reinvest the proceeds in long-term strategic projects within their core businesses.
According to Garnier, international mergers and acquisitions are often a more efficient and rapid means of expanding into new markets than would be the case through organic growth.

Foreign mergers and acquisitions (M&A) “provide access to critical capabilities in the related sector and typically incorporate some localization plans in the home country,” he said. This is especially true of emerging industries driven by technology, such as pharmaceuticals, automobiles, aerospace, etc.
Regional businesses are also participating in international M&A and overseas investment activity. In Egypt, for instance, FAB of Abu Dhabi merged with Bank Audi Egypt to form one of the country’s largest banks.

Techniques that are not the same
To further the region’s long-term push to diversify beyond hydrocarbons and globalize its companies, Saudi Arabia is placing a greater emphasis on mergers and acquisitions.
Financial services, certain industrial sectors, private education, and real estate development are just some of the areas where he predicts further consolidation and local M&A in the Kingdom.

When asked whether dealmakers’ strategies for completing M&A transactions in Saudi Arabia differ from those in other parts of the world, Garnier said, “M&A in the GCC presents a few specifics as the deals tend to take longer from origination to realization, patience is a key success factor for potential acquirers.”

“Also, M&A deals are typically non-competitive because the family owner retains a majority stake, making trust in the potential investor paramount. “However, the situation is changing, and the trend is increasingly converging towards the norms of the rest of the world,” he said.