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UK tipped to see record levels of Middle East capital in 2022

Liz Truss and Kwasi Kwarteng Reuters/Dylan Martinez/Pool
Liz Truss and Kwasi Kwarteng, the UK's new prime minister and chancellor, photographed on Friday after unveiling their economic plan. Sterling has plummeted since the announcement
  • Tumbling sterling makes UK a ‘highly attractive destination’
  • Knowledge economy sectors will be top targets, says Lumina
  • Tech creator businesses set to do better than tech user ones

Outbound investment from the Middle East to the UK is forecast to rise sharply this year, particularly for deals up to $250 million.

Corporate finance specialist Lumina Capital Advisers said the strong dollar, weak sterling and the UK’s uncertain economic outlook made it a “highly attractive destination” for Middle East capital. 

Sterling tumbled to a record low on Monday as traders scampered for the exits on speculation that the new government’s economic plan will stretch Britain’s finances to the limit. The pound’s drop helped the safe-haven US dollar to a two-decade peak against a basket of major peers.

George Traub, managing partner of Lumina, which advises clients in Dubai, London and Riyadh, told AGBI that knowledge economy sectors such as healthcare, education and food security would be particularly attractive to investors.

“This is where the Middle East is looking to invest in order to transfer the know-how and skills back into the region for the benefit of delivering those services regionally, so this is a highly active space in what we are seeing from a cross-border perspective from the region into the UK,” he said.

While technology is still a favourite sector for investors in the UK-Middle East corridor, Traub said things were changing.

Tech creators in areas such as deep tech, AI, metaverse and cybersecurity continue to attract capital because they “have real intellectual property value, and are capable of licensing their technologies for many different applications”. 

However, the appeal of what Traub describes as the “technology user” sector – including e-commerce and logistics – has diminished. 

“Sectors that are users of technology to drive scale are to a large extent also users of capital, reliant on funding rounds from A to Z. In other words, if they fail to raise the next round of capital their value is zero.

“In the heady days of 2021, this ‘refinancing risk’ was minimal with ample funders available driven by cheap money and investors in one round had a decent chance at an exit on the next round. Those days are over, with investors now demanding a path to profitability in the very near term,” he said. 

To have a chance of raising money, he added, companies need to “deliver a credible story through restructuring” and have “a solid restructure plan in place. Those who can’t are on a straight path to zero. 2021 was the year of the FOMO [fear of missing out]. This year no one wants to be left holding the baby in the technology user space.”

Clean energy is another interesting sector for UK-Middle East investors, according to Traub. ADNOC, the UAE’s largest energy company, has a 25 percent stake in the design stage of BP’s blue hydrogen project, H2Teesside, while Masdar has signed a memorandum of understanding to acquire a stake in the proposed green hydrogen project, HyGreen Teesside.

In March, Saudi Arabia’s Alfanar Group unveiled plans to invest $1.3 billion in a sustainable aviation fuel project on Teesside, which aims to produce fuel from household and commercial waste.

Will these types of investment continue or disappear when oil prices are not so elevated? Traub said this was a “highly relevant dynamic, given the circular argument that in order to develop the clean energy sector, the cash generated from traditional energy sectors [is required] to fund it. I think the jury is still out on this one for the next 12-18 months.”

Trade deal or no deal

Traub also downplayed the impact that a UK-GCC trade agreement would have on the number and value of deals between the two regions.

“While this provides a backdrop and an overall ‘warm and fuzzy blanket’ for the two regions’ co-operation initiatives, I don’t see a huge amount of impact on dealmaking between the UK and Middle East,” he said.

“Rather, the dealmaking will be driven by economic, commercial and financial factors.”

The first round of discussions to broker a trade agreement began last month, with the trade commissioner for the Middle East, Simon Penney, describing the Gulf as an “important region” for the UK.  

Government analysis shows that a free trade deal with the GCC is expected to increase trade by at least 16 percent, add at least £1.6 billion ($1.7 billion) a year to the British economy and contribute an additional £600 million or more to UK workers’ annual wages.

According to Lumina’s latest data, M&A activity between the UK and Middle East is continuing to rise this year, with cash-rich conglomerates snapping up tech firms at rebased prices. 

“Tech M&A is mainly being driven by strategic and trade buyers acquiring tech companies at much reduced valuations and bringing them in-house,” said Traub.

“This is a very different investor pool to private equity or VCs backing management teams with funding rounds and capital, which for all intents and purposes is no longer readily available.”

He added that M&A was also on the increase in the infrastructure services, energy and related services.

Significant repricing of deal valuations is likely to continue, he said, driven by the rising cost of capital, which necessitates higher returns and rising inflation and concerns about recessionary pressures particularly in consumer and commodities sectors.

“These build further uncertainty and dampening of growth projections which are being reflected in reduced valuations.”

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