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Winning over both worlds

The Middle East market features large sophisticated institutional investors and smaller, less experienced family offices. Courting both requires two decidedly different approaches.

The market of Middle Eastern LPs is, broadly speaking, divided into two distinct groups: one is the roughly twenty large sovereign wealth funds (SWFs), including institutions that have been investing in private equity for years; the other is comprised of dozens of family offices that are just starting to diversify their wealth. The two could not be more different in their approach to strategy or due diligence. The former emulates the best institutional LPs in the world and in some cases, have been involved with the asset class for over a decade. The latter is still educating itself on the industry and making commitments on a much smaller scale.

Private equity placement agents treat the two as separate worlds each requiring a specific strategy. The large institutions demand the same things as do their Western counterparts: track record, a stable team and a compelling strategy. Communicating those qualities are the same as in the US and Europe, with some even having offices in the West to visit. The smaller family offices are tapped by relationships alone, and in some cases, the messenger is more important than the message. Both groups are maturing, but given their starting points, in a few years the larger institutions may be playing general partner themselves while the family offices may have one or two professionals devising an allocation strategy.

?Both the large institutional investors and the smaller family offices may be flush with capital from the current oil boom, but that's where the similarities end,? says Alexander Apponyi, a placement agent in the London office of BerchWood Partners. ?The SWFs and the institutions are looking at these investments on merit alone, where the family offices are more relationship-driven in their investment decisions.?

Merit matters
?Trust me, the institutional investors are like any other major LP ? if they think it offers sound prospects for attractive returns, that's the main criterion,? says Remy Kawkabani, global co-head of the private funds group at Credit Suisse.

?Institutions like ADIA [Abu Dhabi Investment Authority] have a lot of the capital to deploy and are very selective, so if you're a $200 million middle-market fund, this might not be the best audience,? says BerchWood's Apponyi.

Apponyi stresses that size is not the only factor, but the strategy for smaller funds should be unique enough to grab their attention. ?These groups were investing in Blackstone long before Western European institutions, so they're sophisticated and loaded with ex-pat expertise that will be able to indentify a truly novel offering.?

Kawkabani finds that GPs thinking a single visit to the Middle East will be sufficient will come away disappointed. ?If you're a hot fund, the Mideast may not be for you; they are patient and process-oriented in their diligence, akin to Northern Europeans, and are happy to wait for the next fund if the relationship isn't right because of an abundance of opportunities,? says Michael Hoffman, a president of San Francisco-based Probitas Partners.

?The other factor to keep in mind is whether this large institution is exploring direct investing in a fashion that would make them a competitor with the fund in the future? says Apponyi. ?We don't see many institutions pursuing their own deals, but we do see the stirrings of such a trend,? says Kawkabani.

Break bread, seal deals
While SWFs may have the size and experience to mull the possibility of doing deals, there are plenty of smaller family offices in the Middle East considering their first commitments to the asset class. ?At these smaller family offices, I'd say with a billion or less under management, who brings in the opportunity can be more important than the opportunity itself,? says Kawkabani.

?These high net worth family offices often invest with their gut, and making the right impressions means spending considerable time in the region,? says Apponyi. Kawkabani explains that cultivating and maintaining relationships with 50 or 60 family offices takes enormous leg work, so if you are not using an agent or an agent doesn't have a dedicated staff, hiring local expertise might be the most efficient.

?Make certain that whomever you hire has a track record that includes relationships with these family offices,? says Hoffmann. He explains that occasionally agents will set up meetings with these family offices to build their own book of contacts, rather than with a genuine intent to win a commitment. ?There are new LPs in Saudi Arabia and Bahrain that make sense to meet with, but plenty of these programs are still in their infancy, even after a year or two.?

The one advantage these family offices offer GPs is speed. ?My experience with family offices taught me they tend to act quickly ? they either back you or they don't,? says Kawkabani.

Regardless of which type of investor a GP chooses to court, most agents advised to expect a competitive process. ?LPs in Abu Dhabi and Dubai are probably seeing more funds than investors in Chicago,? says Hoffmann. ?Part of that has to do with the currently restrained allocations of many Western LPs and part of that is simply that there's abundant capital here looking for a place to deploy it.?