From a record deployment of capital to a record slowdown in new deals, the last few years have been a rollercoaster ride. We saw this clearly in the data from our platform with our worldwide and European investment reports, but were interested at how investment trends are playing out in other regions, so today we’re diving into the Middle East.
This is a region with a different narrative—one where sentiment is more positive, capital continues to flow, and an increasing number of global investors are knocking on the doors of LPs. The challenge for many Venture Capitalists (VC) is how to maximize this opportunity to find and close the best deals faster than the competition.
Let’s take a closer look at trends driving investment decisions in the Middle East, and the technologies that will enable firms to capitalize on opportunities for success.
Trend 1: The Middle East has a uniquely positive outlook
The economic headwinds affecting VC have been well documented. In the US, VC-backed companies raised 48% less in Q2 of this year compared to 2022. In Europe, the first quarter of 2023 was the slowest fundraising quarter in more than six years.
This is not the case in the Middle East. The region was unique in seeing a year-on-year growth (2021-2022) in private capital investment. This positive trend is reflected in investor sentiment. Survey data from Preqin showed that at a global level, 94% of investors agreed that the ‘macroeconomic cycle was starting to decline or near the bottom’. This contrasted with just 19% of Middle East investors who agreed with the statement in February 2023.
Opportunities are out there and investors feel positive about acting on them. In such a market, it’s a combination of technology and relationships that separates the best from the rest. Existing relationships will help open doors with the right introduction to new opportunities, but it’s technology that can most efficiently identify who the warmest introduction is.
Using Affinity, firms in the Middle East can get ahead in this period of abundance with fast, automated access to the most important sourcing and due diligence information like:
- Industry, firmographic, and biographic data
- Context about who really knows who across a firm’s collective network
- Background information about previous contact with a prospect company.
Learn more about how the Affinity platform supports the entire deal flow process.
Trend 2: A rise in popularity for private debt
When it comes to preferred asset classes in the Middle East, private debt has emerged as a winner. Half of the region’s investors surveyed by Preqin plan to increase their capital commitments to this asset class in future—likely due to the fact its performance met or exceeded expectations for almost 80% of Middle Eastern investors over the past twelve months.
Private debt offers private capital firms a way to diversify their investments with an asset class that typically performs well in both high- and low-interest rate environments—making it an appealing choice at a time of market volatility.
As Victoria Mesquita, Partner at Addleshaw Goddard observes, there’s a particular sweet spot in the Middle East: “There’s a funding gap that private debt can address, in particular in respect of leveraged acquisition financings, which are typically not covered by the commercial banks unless the deal is about AED 500m (USD $136m) or upwards and it can be referred to the banks' investment banking teams. That leaves many of the SME mergers and acquisitions without debt financing."
As with all types of deals, firms can only understand and maximize their impact with actionable data-driven insight. Affinity makes it easy for deal teams to use enriched data and filtered shortlists to quickly find companies who are ideal targets for private debt deals. For example, dealmakers can use fully-integrated Dealroom.co data to filter for insights on bootstrapped companies that are often hesitant to dilute their ownership.
For more on ways to use data as a competitive advantage, read our guide to becoming a data-driven GP.
Trend 3: From oil and gas to tomorrow’s tech boom
The Middle East is a region ‘flush with cash’ as a result of rising oil prices since the end of global pandemic-imposed restrictions. This added to the coffers of some of the world’s biggest sovereign wealth funds.
At the same time, there is broad political will to move away from economic dependence on hydrocarbons. Oil and gas are finite resources, and leaders in countries like Saudi Arabia and the UAE are keen to build a future with less reliance on this sector. Law firm Ashurst reported: “Facilitating the development of sustainable VC ecosystems, backed by their powerful sovereign wealth funds, has been a key pillar of the economic diversification strategies of the region’s oil exporting nations.”
With capital and politics on the same page, local startups are seeing the benefits. Fintech leads the way, taking 61% of total venture investments from 2018 to 2022 ($332m). Ecommerce, transportation and logistics, enterprise software, and healthcare make up the remainder of the top five industries across the region. The exception is Saudi Arabia, where ecommerce is heavily tied to the objectives of Saudi Vision 2030 as a way to boost the national economy. There, fintech is held in second place.
The broader trend in the Middle East is reflected in Europe, where fintech and transportation also dominate. At the global level, fintech takes the top spot but funding has dropped significantly over the past year and a half. Energy and security were identified as sectors to watch due to global macroeconomic trends and it will be interesting to see how these develop in the Middle East.
As Middle Eastern investors pick up the pace to locate their next big opportunity, tools like Affinity Pathfinder can dramatically reduce the time it takes to find the right deal. The Affinity CRM’s Chrome extension, Affinity Pathfinder surfaces relationship intelligence and relevant deal information from the places dealmakers work the most, their browser and email.
Trend 4: Liquidity draws investors to the region
While the availability of capital is fuelling the growth of local industries like fintech, ecommerce, and transportation, it has also piqued the interest of investors from outside the region.
This can be attributed to the effect that fewer exits is having on firms in North America. PitchBook reported: “The dearth of listings and sales means fewer returns to LPs and less cash available for commitments to new funds. US VC fundraising totaled just $33.3 billion in the first half of the year, on pace for the lowest annual total since 2017.”
Things look quite different in the Middle East. While historically there has been little need for international investors to engage LPs in the region, the tide is turning. Ibrahim Ajami, Head of Ventures at Mubadala Capital, part of Mubadala Investment Company, a $284bn Abu Dhabi sovereign wealth fund, commented on the shift that is taking place: “We came to San Francisco looking for them in 2017. Now . . . everyone is coming to [us].”
A Partner at a US-based VC fund illustrated the point, saying “The Four Seasons in Riyadh is basically Palo Alto.”
This speaks to a wider move towards the globalization of private capital, and positions the Middle East at the forefront of the shift. Being able to manage relationships at scale is critical as a firm expands its LP network. Affinity automatically creates and updates every contact in a firm’s collective network, highlighting the strongest introduction paths and helping to facilitate expansion into new regions or LP circles.
A benchmark for deal sourcing and management strategy
The data shows that investors in the Middle East have funds to deploy and a wealth of opportunities to choose from. But the relative youth of the industry means many firms are still grappling with best practices around deal sourcing and deal management.
European neighbors like Notion Capital provide a valuable reference point for the technology that firms need to optimize their operations. Based in London with an investment strategy focused on early-stage European SaaS and Cloud companies, Notion Capital is a Venture Capital firm that has transformed the way it surfaces deal opportunities and manages relationships.
Kamil Mieczakowski, Principal at Notion Capital, recalled the challenges the firm faced when trying to evaluate new opportunities with their previous, difficult-to-use CRM: “If I wanted to know who the investors were in a business, I'd have to leave the CRM and go into Crunchbase, or if I wanted to see who was the founder of that business, I'd have to go on LinkedIn... it was like an elevated spreadsheet rather than a CRM.”
This issue is familiar to firms that haven’t yet adopted an easy-to-use solution that proactively sources relevant data. Now with Affinity, Mieczakowski and the team can move faster with “a good combination of UX and more of an opinionated layer, where you have a system that you can embrace when working with some readily available data sources inside of the CRM, such as PitchBook, CrunchBase, and Dealroom.”
For Middle East investors who have dry powder and their pick of promising opportunities, Mieczakowski summarized why moving to a CRM built for private capital is critical: “In this business, you’re never finished with leads. The number of leads and companies is infinite. So it's not about getting money or time back. It is about being able to process more deals faster, so we can be the ones who get to an opportunity before anybody else does.”
The CRM built for private capital
It’s an exciting time to be a Middle East investor—or an international investor looking beyond their traditional LP pool for their next fund. Whether your firm’s priority right now is deal sourcing or fundraising, Affinity can help. Speak to our team about bringing on the technology you need to source more deals, manage deals effectively, and accelerate your next fundraise.
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