A growing number of private equity funds are opening offices in the Gulf, hoping to deepen their ties with cash-rich sovereign wealth funds and families in the region as funding for buyouts has dried up elsewhere.
While the Gulf had previously been a place where buyout groups would go to raise money to invest in other markets, increasingly they are looking to build teams on the ground, invest in local businesses and help develop the region's asset managers, private equity funds and advisers said.
Global fundraising for alternative investments, which include private equity, dropped 21% to $972 billion in the year to Nov. 1 from the same period a year earlier, according to research firm Preqin. Rising interest rates have pushed up the return investors can make in rival assets classes such as bonds.
As their money becomes more vital, Gulf funds are encouraging private equity firms to invest locally in plans for a post-oil future. These include diversifying into other energy sources like hydrogen, building state companies into regional champions, attracting foreign investment, and creating jobs.
"Building a partnership based on reciprocity is nowadays necessary to succeed in the Gulf," said Francois Aissa-Touazi, co-global head of investor relations at private equity fund Ardian.
Ardian opened an office in Abu Dhabi in January and currently has a team of 12. "The objective is to reach 25 people by end of next year. We will soon have a hydrogen investment team based in our office," Aissa-Touazi said.
On the sidelines of last week's Future Investment Initiative (FII) - dubbed Davos in the Desert - the deputy governor of Saudi Arabia's sovereign wealth fund emphasised the need for foreign investors to be based in Saudi Arabia if they want to raise money from the country's wealthy funds and families.
"(It will soon be a) prerequisite to have your people here in order to manage PIF money," said Yazeed A. al-Humied of the Public Investment Fund (PIF). "We are saying this is an incentive. In the near future, we want to see the people here, on the ground. The market is here."
Private equity funds are getting the message.
Canadian asset manager Brookfield recently opened an office in Riyadh and plans to open another in Abu Dhabi, a person with knowledge of the matter said. Brookfield declined to comment.
European buyout groups Tikehau Capital and Ardian opened offices in Abu Dhabi this year, while CVC opened an office in Dubai last year.
Bruce Flatt, chief executive of Brookfield, was among the investors who thronged to Riyadh last week for the FII.
"We have $150 billion of businesses. We have just under $10 billion in this region. We're building out every one of those businesses in Saudi Arabia," Flatt said from the stage.
"We will be much, much bigger in the future," he added, without giving details.
In a separate development, Saudi Arabia will set a January 2024 deadline for foreign firms that want to secure government contracts to establish their regional headquarters to Riyadh, finance minister Mohammed Al Jadaan told Reuters last week.
"You will see private equity open offices in the region because they want to be close to limited partners for fundraising but also to partner with them on doing new deals," said Anthony Diamandakis, chief of Citi's alternatives business.
Moreover, Saudi Arabia's privatisation efforts - from soccer clubs to flour mills - are unlocking prime assets previously inaccessible to foreign investors.
"Gulf governments and their associated sovereign wealth funds are wanting investors to come and invest alongside them into assets that serve both a strategic purpose for the region and also deliver a financial return," said Rishi Kapoor, co-CEO of Bahrain-based alternative asset manager Investcorp.
The bulk of the deals done so far have been in infrastructure, from oil and gas pipelines to real estate, but buyout firms are also looking at how to participate in the energy transition, such as hydrogen and carbon capture, as governments strive to meet net zero emission targets.
Another area of development is asset management, with funds helping local institutions to develop their skills. In turn private equity funds can use these pools of capital to fund large private debt or equity transactions, according to Tikehau Capital's Deputy CEO, Frédéric Giovansili.
"There is an alignment of interest, where they want to accelerate their asset management capabilities and we want to find a complementary pool of capital," he said.