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Investment in alternative assets continues to grow in the Middle East

Tuesday, November 16, 2021
Opalesque Industry Update - Investment in alternative assets continues to grow in the Middle East, according to the Alternatives in the Middle East 2021 Report, published by Preqin, the global leader in alternative asset data, tools, and insights.

The report-which explores some of the key initiatives and issues faced by the alternatives industry in the Middle East-found that private capital assets under management (AUM) in the region rose 11% from 2019 to 2020, with stronger growth in dry powder (14%), suggesting renewed investor appetite for commitments to local managers. Preqin data also reveals an increased focus on early-stage investment, with 33 venture capital-focused managers having established themselves in the region between 2018 and 2020.

Globally, sovereign wealth funds (SWFs) account for around 2% of AUM for private capital investors-in the Middle East they account for 44%. While local SWFs have typically invested outside the region, they are increasingly moving capital towards more regionally and domestic-focused investments. The Preqin report also found that government agencies are playing an important role, accounting for 11% of investor AUM in the Middle East, compared to 3% globally.

UAE and Saudi Arabia lead the charge, with venture capital on the rise

The regions' two main economies have led growth in alternative assets. The emergence of new fund managers in recent years has been dominated by the United Arab Emirates (UAE) and Saudi Arabia, which host 46% and 24% of fund managers, respectively. The UAE is also home to more investors than elsewhere in the region, with 40% based there. Kuwait has also fostered a growing base of fund managers, with active growth throughout the 2000s.

Alternative assets in the Middle East are moving up the risk spectrum overall, embracing venture capital strategies and promoting innovation to deliver growth beyond private markets. The aggregate value of venture capital deals in the Middle East increased significantly in Q3 2021 and was up nearly 320% on the previous quarter. In addition, Preqin deals data shows that software, internet, and financial services industries make up the majority of venture capital activity in the Middle East. This success is helping the region develop its alternatives investment industry by drawing capital from international investors, setting a precedent that will shape the future of alternatives in the region.

A shift to greener initiatives

As economies in the Middle East continue to develop, investment in their built environments will be key to sustainability. The region's traditional dependency on oil is slowly being undermined as the world looks to decarbonize. Middle Eastern governments in the region are acknowledging this and are looking to transform their economies to be more service-based and focused on technological innovation. The opportunity for local investors and managers to demonstrate progress in environmental aspects is therefore emerging. According to Preqin data, the aggregate value of renewable energy deals in the Middle East between 2011 and 2021 stands at $13bn, with over 60% of this secured since 2017. What is more, attention on ESG transparency will continue to increase, and managers need to resource efforts to ensure progress and stay ahead.

Alex Murray, VP Research Insights at Preqin says: "As economies recover from the pandemic, supply chains are switching back on with added pressure to expand output. This is driving heightened demand for oil and gas, pushing prices to highs not seen since 2014. The onus will be on re-investing in domestic economies; some Middle Eastern states will seize this revenue opportunity, investing via innovative sectors. Additionally, fund managers will be increasingly trying to attract overseas investors into the region to advance the application of alternative models to new sectors such as real estate."

Key Middle East 2021 Facts:

• Saudi Arabia and UAE are home to 46% and 24% of private capital fund managers respectively.
• Aggregate value of renewable energy deals in the Middle East between 2011-2021 stands at $13bn, with over 60% of this secured since 2017.
• Globally, SWFs account for around 2% of AUM for private capital investors; in the Middle East they account for 44%.
• 33 new firms established in the Middle East between 2018 and 2020 are focusing on venture capital.


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