Private equity groups see Saudi Arabia as a deep

As head of investment banking at Emirates Investment Bank (EIB), one of the UAE’s best-known financial services groups, Husam Kutaifan’s resume ticks most of the appropriate boxes in the current Middle East investment scene.
He has experience of privatization — an essential part of Saudi Arabia’s transformation plans — from his early banking days in his native Jordan; and he worked in the Kingdom for the investment banking arm of financial services group Samba during the boom years ahead of the global financial crisis.
With EIB, he has direct access to the clients who will be key players in helping the Saudi plans work, as well as getting involved in the other ambitious initial public offerings (IPOs) in the region: Big investing institutions, family groups and high net worth individuals (HNWIs) that will be looking to take up the shares in any state sell-offs in the region.
I met Kutaifan on the day that news broke that a strategically repositioned version of Saudi Arabia’s National Transformation Program (NTP) 2020 was being issued by the government to recalibrate the plan for diversification away from oil dependency and public spending.
“I think flexibility is a good thing. It would be the first time Saudi Arabia has amended such a long-term plan, but if it helps manage expectations in the markets and in the country, that’s 
“Our clients are saying ‘finally we can plan with some certainty.’ It’s good to have a dose of reality in the plan, that definitely helps. We’ll have to see how much of an adjustment takes place, but I think all the main elements will remain as part of the Vision 2030 strategy.”
The view of Saudi Arabia from the sharp end of the investment banking business is that circumstances have changed significantly since the transformation program was first announced in May 2016. Lower oil prices have persisted, and growth prospects have not lived up to the most optimistic expectations. The International Monetary Fund said recently that economic growth would be close to zero this year.
Flat energy revenue was the main factor, but Kutaifan said there was another reason: The higher fees imposed on expatriate workers in the Kingdom. “These affect family members and this in turn affects consumer spending and sectors like education. These fees were introduced to boost government revenues, but they could turn out to be somewhat counter-productive,” he said.
He said that the introduction of value-added tax (VAT) early next year could also also affect spending.
But flexibility was the key to making the Vision 2030 strategy a success, just as it has been key to Kutaifan’s investment strategy throughout his career. Since the hectic mergers and acquisitions (M&A) and IPO activity of the Samba years, followed by the turbulence of the global financial crisis, Kutaifan’s global overview has changed.
“There are some challenging areas. The oil price, geopolitics, and the broader macro picture have all become more complicated. So the momentum for investment has slowed down a bit,” he said.
It is not all bad news, however. “It has also got more focused over the last three to four years. Before, there was interest in just about any sector across the board, now it’s become more selective and refined.
“We see value in areas like health care, education and food. It’s a lot to do with the demographic of the region, as with the other emerging markets. These sectors are less affected by cyclical factors than areas such as construction, real estate and building materials,” Kutaifan said.
And there is a big plus: Asset valuations have got much more realistic. “The numbers just are not the same as they were three or four years ago,” he added.
The one exception is technology, he said, where valuations have continued to rise, and where the Middle East has seen some pretty big deals for apparently scarce assets, especially in the e-commerce space.
Earlier this year, US e-commerce giant Amazon paid $580 million for the region’s Souq.com, after an auction drove the price up. Then, Mohamed Alabbar’s online retail platform Noon bought a controlling stake in rival Namshi in a deal that valued it at around $300 million.
“Technology is a sector that has a dynamic all of its own, relating to forward-looking figures. This is a worldwide phenomenon, but also very noticeable in the region,” Kutaifan said.
Despite some experts’ fears that there is a “bubble” inflating in technology assets, Kutaifan thinks there is still potential appetite for the sector, especially in Saudi Arabia. “The big funds are still going after them. We hear the Public Investment Fund of Saudi Arabia has earmarked billions to invest in Saudi-focused tech sectors. A lot of these are still in the startup, high-growth phase. There has been lots of talk about fintech (financial technology), but so far we have not seen something of real size in the region. Most of the big action has been in the e-commerce sectors,” he said.
But that will not deter his clients from looking seriously at all aspects of the Saudi privatization program.
“They are all very interested in what’s happening in Saudi Arabia. For example, the Al-Futtaim Group — a long-standing client — has already done deals there in automotive and construction markets a few years back, and they are still looking at the Saudi market. Private equity groups too see Saudi Arabia as a deep and diverse market. Lots of them — regional and international — will want to be more involved in Saudi Arabia.
“Health care and education are parts of the privatization plan and they will attract international interest. We’ve already seen banks from Kuwait and the UAE doing transactions in these sectors in Saudi Arabia and I’m sure that will accelerate,” he said.
It is not all in the demographic-related sectors of health and education, nor necessarily in privatization. Kutaifan described how EIB recently advised on the acquisition by Saudi investors of a controlling stake in a chain of sweetshops run by an expatriate businessman in Riyadh, which he regards as a typical kind of deal that will continue regardless of the privatization program.
There are other incentives to get involved in Saudi Arabian investment, he believes, including upgrades to the international market status of the Kingdom. By the end of this month a decision is expected on whether to include Saudi Arabia in the FTSE Russell Emerging Market (EM) Index, which would be a boost for the Riyadh market and also a possible precursor to eventual inclusion in the MSCI Emerging Market Index, which some observers expect to happen as early as next year.
“It will be interesting to see how much money goes into the FTSE EM index if that happens. It will enable us to judge the appetite among global investors for the Saudi privatization program,” he said.
The program of state sell-offs will bring other benefits too, he believes. “For Saudis, there will be benefits from privatization from efficiency and productivity, but I think it’s essential that citizens are offered some kind of incentive to get involved in the privatization program.
“I worked on the sale of Jordanian assets between 2000 and 2006, when key parts of the economy were privatized, like telecoms, electricity, refining and minerals. A key element was the fact that there, shares were sold at a discount to the public. It worked there, and I’m pretty sure that will be the strategy in Saudi Arabia, to offer preferential terms to Saudi citizens wanting to buy shares,” he added.
The big one, of course, is the forthcoming IPO of Saudi Aramco, going ahead as planned under the Kingdom’s reform plans. “It’s too early to talk about valuations, I believe, but the IPO will be a healthy thing because it builds more transparency and puts Aramco on a global level with its peers in the oil industry,” Kutaifan said.
But Saudi Arabia is not the only game in town. There are some multibillion-dollar IPOs coming up too in the UAE, which is EIB’s home market. Big corporations like Emaar Properties, Emirates Global Aluminium, the Abu Dhabi conglomerate Senaat and education business GEMS are all considering IPOs — in the UAE and on foreign exchanges — in the near future.
“For offerings of that amount and that scale the companies have to tap the international markets, and maybe look at listing venues beyond the region, like London,” Kutaifan said.
EIB’s business model mixes proprietary investments like fixed income and loans with fee-driven income from asset management and investment banking. Some evidence of the benefits for EIB that would come from a sustained boom in IPO and M&A activity came in the last half-year, when Chief Executive Khaled Sifri was able to report a jump in net profits, boosted by the effect of a single transaction in the UAE education sector.
“The half-year figures were boosted by success fees for one deal. That was a big fee generator. But the figures also reflected building the assets under management and the fixed-income business, and all of these contributed to the figures,” Kutaifan said.
Once the region’s IPO spree gets under way, he is obviously looking to many more such profit leaps.