Recent transactions reflect an increasingly agile deal-making environment across the Middle East. The large IPOs in late 2017 by Emaar Development and ADNOC Distribution were the first to test the new UAE Federal Commercial Companies Law (2015). ADNOC Distribution's IPO signalled a new and more commercial approach to monetising non-core assets and to ownership by the Abu Dhabi government; Emaar Development's IPO marked a step forward in terms of sophistication in corporate governance structures.
These listings, as well as developments in the debt capital markets that have often recently been driven by either oil price fluctuations or political volatility, have given comfort to regional entities seeking new ways of tapping the capital markets. They also create new investment opportunities. The region's financing market has also seen innovations in shari'a-compliant products, project financing and other types of funding platforms.
As for Abu Dhabi's AD Invest, the company has been doing its own ground breaking. In April 2018 it completed the sale of the Queen Alia International Airport. This marked the first significant investor exit from an asset under Jordan's PPP programme and possibly the first successful investor exit from a privatised infrastructure asset in the region.
While volatility, institutional reform and restructuring may have damped deal flow for now, AD Invest believes that long-term prospects look enticing.
What is your broad assessment of the Middle East and its investment climate?
We are seeing a continuing maturing of Middle East economies, particularly those traditionally based on energy exports. Despite a relatively healthy and stable oil price in recent times, governments are still cautious with regards to spending and want to avoid the booms of the past. They are instead continuing to undertake necessary fiscal and institutional reforms and restructuring to try to mitigate the impacts of energy price volatility on their economies in the future. However, given continuing population growth, amongst other factors, there remains a robust, underlying need for investment in infrastructure and new industry, which in turn will require diversified funding sources, particularly private/foreign, and some recent reforms have been geared towards attracting such sources.
What is the typical role you play in transactions and what is your investment remit and scope?
Alongside our asset management and treasury and capital markets businesses, we are a principal investor in real economy sectors typically covered by private equity, infrastructure private equity and real estate, with a geographical mandate focused on the Middle East region. I head a team of professionals managing an existing portfolio of such investments, grooming them for eventual exit, and screening new opportunities to be sourced in line with our institution's overall asset allocation strategy.
What insight has that given you into how deal making and investing structures have been developing in the region?
Invariably, we co-invest with a range of partners, local/regional and/or global, strategic and/or financial investors (such as ourselves). In that respect, finding the right partner(s) is critical to maximizing the success of our investment, both in terms of complementary skills/offerings and also aligned thinking and expectations. Being in an emerging market with still evolving legal structures and frameworks, it has been important to learn the experience of other developed markets, albeit maintaining a healthy balance between not re-inventing the wheel and not assuming one-size-fits-all. An important change in recent times has also been the development of new and more geographically local investment jurisdictions such as the ADGM and DIFC, with recognisable legal frameworks for international investors, which is increasingly removing the need to go to much further offshore jurisdictions, some of which are also becoming more challenging from a global compliance perspective.
What did your investment into Jordan's Queen Alia International Airport mean to Invest AD?
As one of the longer established regional financial institutions, we pride ourselves on being involved in ground-breaking deals and this very much fell into that category, being one of the few non-utility infrastructure deals of significant size that has taken place in the region. We were the largest shareholder in the consortium that was privileged to be awarded the project, and as mentioned earlier with regards to partnerships, being able to partner with a diverse group of internationally renowned companies from across the region and Europe was important not only to us but also to showcase such investments to the market. Of course, as brothers to the Kingdom of Jordan, it was also important for a UAE institution such as ourselves to be able to successfully deliver on a new state-of-the-art international gateway for the country. Indeed, the success of our investment speaks for itself in the regular citing of the deal by His Majesty King Abdullah II and the World Bank Group/International Finance Corporation (IFC) as an important model for FDI in Jordan and regionally.
What were the key challenges in successfully selling the asset?
The most important challenge was to align interests and expectations, not only of a diverse shareholder group but also a wider stakeholder base that encompassed the Government of Jordan and a consortium of project lenders led by the IFC and the Islamic Development Bank. This was successfully achieved given, first, the timing of the sale, which came after the completion of an extended capital development programme, and second, that it promoted the theme of demonstrating the recycling of private/foreign investment. Another key challenge was the potential differing views on geopolitical risk, given that potential airport investors by nature typically tend to be global and Jordan is of course located in a geopolitically volatile region. It is therefore testament to the strength of the business and the Jordanian authorities with regards to their support and strong adherence to the contractual framework that the new shareholder base has increased in its European presence from 28.5% to 83%.
What were the key considerations relating to the finance pieces? Was it easy to unwind existing financing arrangements and reassign the project lenders to the airport's new owners?
For the purposes of the transfer of ownership, there was no need to unwind the existing robust arrangements that were put in place at the commencement of the concession in 2007 (for the construction of the new terminal) and added to in 2014 for an additional capital works programme (expansion of the new terminal). Furthermore, the acceptance by the project lenders of the transfer of ownership was relatively straightforward, given the continued and now substantially expanded commitment of the airport operator, Aéroports de Paris, in moving from a minority to majority shareholder, and the introduction of new internationally renowned infrastructure financial investors (Meridiam and IDB Infrastructure Fund II).
Is the region well-equipped for such deals involving cross-border consortia?
Very much so, on the whole. As an emerging market, it has long been recognised by governments for the need for import and transfer of technology and skills to allow for economies to grow and evolve, and there is now plenty of precedence from a legal/contractual perspective that should hopefully shorten the timeframe for such deals to come to fruition as well as thereafter be able to demonstrate of robust investment risk management, thus making such investment more attractive going forwards.
What is your outlook for the region and its investment opportunities?
In the short term, I believe there will continue to be a more measured pace of opportunities arising, primarily due to the ongoing prioritising of fiscal, institutional and regulatory reform programmes, including positive changes in foreign ownership regulations across the region. This, however, in turn should lead to significantly higher opportunities and deal flow in the longer term and starting in the not so distant future. It is definitely a case of 'watch this space'!
|About the author|
Nasir Hasan is head of direct investments at Invest AD (Abu Dhabi Investment Company), a regional financial services company owned by the Government of Abu Dhabi. He has over 20 years of professional experience, with extensive experience of originating, structuring, negotiating and financing principal investment deals.
At Invest AD, Nasir is a member of the senior management team, overseeing the firm's direct investments (in private equity, infrastructure and real estate) and sitting on a number of boards and board committees of portfolio companies. He has also led the firm's M&A activities on a variety of bids/transactions.
Prior to Invest AD, Nasir was a director at PricewaterhouseCoopers, specialising in infrastructure and corporate finance mandates and public private partnerships (PPP), initially based in London and then relocating in 2003 to Dubai to develop the firm's infrastructure finance and PPP advisory practice in the Middle East and Eastern Mediterranean region.
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