With the global markets on the mend last fall, a private equity consortium moved to sell its 93 percent stake in the Egyptian drug maker Amoun Pharmaceutical. In January, the consortium of American investors, including a Citigroup fund, seemed hopeful they could sign a deal for $1 billion, more than triple what they paid in 2006.
But as student protests in the country turned to revolutionary upheaval, buyers never materialized. Now, the deal is up in the air, a person with knowledge of the situation told DealBook, speaking only on the condition of anonymity.
After two years in a state of paralysis, foreign investors slowly began returning to the Middle East late last year, with deal volume showing a modest uptick. But in the wake of the uprisings in Egypt and Tunisia, deal makers in the region have once again grown cautious, concerned about economic instability and market volatility.
“Deals are being put on hold, but not necessarily abandoned,” said Sarah Alexander, the president and chief executive of the Emerging Markets Private Equity Association, based in Washington. “There is a wait-and-see attitude, as even pricing is difficult to judge at the moment.”
That private equity players are getting spooked reflects just how new the territory is for them. Deal volume, which amounted to just $148 million in 2004, reached $3.7 billion three years later, according to data from Bain & Company, a consulting firm. But during the financial crisis, firms retrenched and deal-making all but disappeared.
Late last year, private equity started to show signs of life. Egyptian and Saudi Arabian companies accounted for most of the recent purchases. In the largest deal, Abraaj Capital agreed in December to buy a 49 percent stake in Network International, a credit card service provider in Dubai, for $544 million.
But then unrest in Tunisia erupted, quickly spreading to Egypt. It touched off concerns that countries with similar economic and political profiles, like Jordan, Syria and Lebanon, could be next, says Jérémie Le Febvre, the head of emerging markets for Triago, a global private equity firm with a base in Dubai.
Although hard numbers are not available for such a short time frame, private equity executives, industry consultants and financial professionals in the Middle East say deal makers are playing it safe for the moment.
“Investors need some form of reassurance that their interests will be protected,” said Nasr-Eddine Benaissa, managing partner of the Eastgate Capital Group, one of the largest private equity firms based in Middle East.
Such reluctance is likely to flow through to fund-raising efforts, which have already been complicated by the crisis. Last year, Abraaj Capital said it would reduce the planned size of its fourth buyout fund to $2 billion, half its initial goal.
Initial public offerings, too, will remain weak, as long as the markets are volatile. Amid the revolt in Egypt, the 13 Arab bourses lost nearly $50 billion in value in the last week of January, according to a report by Kamco, the asset management arm of the investment firm Kipco, based in Kuwait.
“When the stock markets fell across the region following the unrest in Egypt and Tunisia, it implied that the I.P.O. market will sour — which means exits are very difficult for private equity companies until conditions improve,” said Jochen Duelli, head of Bain’s private equity practice in the Middle East.
Still, the Middle East, like many emerging markets, holds great promise for private equity. Economic growth is strong, propelled by oil exports. But the corporate landscape is underdeveloped, in need of outside investments and operating expertise.
That’s why private equity has expanded its efforts in the region. Egypt alone now counts 17 buyout firms with headquarters or satellite offices there to scout investments, according to the research firm Preqin. Today, there are a total of 14 private equity funds committed to investing in Egypt, either exclusively or as part of a wider geographic focus.
In the short term, for foreign investors, “there is uncertainty,” said Mr. Benaissa of Eastgate. “But if one takes a mid- to long-term view, the fundamentals remain attractive.”
Across much of the region, private equity firms have mainly concentrated on deals in consumer goods, tourism and commodities — the main industries driving the local economies. Citadel Capital, a private equity firm based in Egypt, sold the Egyptian Fertilizer Company to a consortium led by Abraaj Capital in a deal worth $1.4 billion in June 2007; it was the largest private equity sale ever in the Middle East.
Infrastructure also looks promising. InfraMed Infrastructure, founded in 2010, is looking to raise more than $1 billion to buy transportation, electric power, water and waste treatment companies. Bain & Company estimates that the value of infrastructure deals could reach $10 billion a year, more than double the amount for more traditional areas.
“The overall economy is in pause mode right now, and it does mean that foreign investment has disappeared,” said Mr. Le Febvre of Triago. But “there is still a need for schools, hospitals and infrastructure, so long-term private equity opportunities remain unchanged.”