The majority of the region’s wealth is either in the hands of business families or governmental institutions. This capital has usually been allocated to a range of traditional financial assets such as equities and bonds, and non-financial assets such as property.
The asset classes that conventionally the investor in this region has invested in are beginning to look over-priced. In particular, property has been a popular and successful investment area. However, there is an increasing apprehension amongst investors that this market is over-priced which led to the recent correction in early 2006. Hence, an increased amount of capital should be invested into private equity and venture capital to diversify away from such risks and further contribute to accelerating the regions economic growth.
Family offices in the region are increasingly looking to allocate capital to professionally managed organizations. This is an opportunity for Khazaen to provide such family offices with new professionally managed local venues.
With funds being injected in the region at a much higher rate than viable business opportunities (i.e. deal flow), an investment gap is created (Figure 1). The gap between funds raised and investments made represents an opportunity for Khazaen to capitalize on its deal flow.
As shown in Figure 2, private equity in the Middle East is substantially under-invested in compared to other global regions. The little private equity that has been invested into the region has been typically focused on the buy-out, real estate and restructuring of existing mature companies.
Private equity and venture capital has the potential to earn investors substantial returns. Top quartile private equity returns have typically generated returns in excess of 25% (Figure 3). Khazaen’s fund will target similar returns.
