Gulf private equity faces family company challenge

MANAMA May 12 (Reuters) - Private equity houses are eyeing acquisitions in the Gulf Arab region, but deal-making is challenging in a region dominated by family owned conglomerates, bankers said.

The Gulf Arab region has been a hunting ground for private equity firms raising oil money from rich individuals and institutions to finance deals elsewhere.

But private equity firms are now looking to snap up companies in the region starved of capital by the global financial crisis. U.S.-based Kohlberg Kravis Roberts & Co [KKR.UL] on Monday said it has set up shop in Dubai to do deals in the Middle East and North Africa. [ID:nN1152820]

Businesses in the region are mostly owned by state-affiliated institutions or sprawling families, in which large numbers of grandsons, cousins and nephews can have a say in what happens to the company. "To be able to mediate through and wade through those different voices, it's not straight forward and does require certain skills and understanding of cultural sensitivities and understanding of the dynamics of each family," said Azmat Taufique, co-head of private equity in the Gulf Arab region at investment house Investcorp INVB.BH INVBq.L.

He said it was key to identify the influential family members who could make decisions.

Taufique was on the team for the Investcorp-led acquisition of a 70 percent stake in Saudi gold and jewellery maker L'azurde in March. The company was controlled by the Al Othaim family.

Bahrain-based Investcorp is still looking to deploy $800 million in private equity deals in the region.

Dealmakers said they have largely given up seeking majority control, as founding entrepreneurs often remain emotionally attached to the company which they see as means to preserve wealth for following generations.

"We've skirted around the issue of using the word control... we talk about governance issues, we talk about board rights and investor rights," said Jonathan Squires, head of private equity for the Middle East and India at Bahrain-based Islamic investment house Arcapita.

Even without majority control, buyers can bring in governance requirements, can limit dividend payments to owners and can veto decisions to raise capital or debt through their seats on the board.

"Family run businesses aren't used to having somebody from the outside dictating those," said Squires.

THE WAY IN

To overcome the trust issue, investment houses such as Arcapita and Investcorp are seeking buyout opportunities amongst their regional investor base, where they have long-established relationships.

Well-connected families typically started their businesses as trading agents decades ago and have since expanded to become conglomerates spanning several industries.

Consultancy Booz & Co said in a recent report that Gulf Arab family businesses face the dual challenge of a tougher economic environment and passing control to a third family generation.

To survive and grow, these firms "must tame the 'restless entrepreneur' syndrome and develop and enact a long-term strategy to manage both the family and the business," it said.

"Dissent is very hard in our region for family members, but if you bring in a trusted external partner you can begin to have a debate around the family in the context of the business that can be more constructive and less emotional," said Taufique.

Besides acting as a catalyst to overcome inter-generational conflicts, private equity firms hope the pioneers who built businesses from scratch will now recognise the need to hire in their capital markets and mergers and acquisitions skills.

NO WAY OUT?

A harder argument to win is convincing a founder to let go of his cherished company, or parts of it, when he doesn't know who will replace the private equity company when it cashes in its investment after a few years.

"You have to talk about it from the beginning," said Tariq al-Samahiji, chief executive for the Middle East and North Africa at BNP Paribas Investment Partners (BNPP.PA).

"A listing is in most cases the preferred option because then shares will be held over a wide array of investors and the first owners can retain significant control," he said.

But from the private equity point of view, a sale to strategic buyer is more lucrative, as they could realize a premium for the control right, bankers said.

(Reporting by Frederik Richter; Editing by Erica Billingham)