Heavy industries replace tech in Middle East funding rounds

Lumina

• M&A will dominate tech sector in 2023, predicts adviser Lumina
• Strong dealmaking activity recorded in manufacturing and energy
• 2022 could be ‘a record year for foreign direct investment’ in Gulf

More traditional industries such as manufacturing and oil and gas services have replaced technology as the driving force behind capital flows between Europe and the Middle East, according to new research

The switch comes as technology giants including Alphabet, Microsoft, Meta and Amazon reported disappointing third-quarter results and the tech-heavy Nasdaq stock market has lost almost 30 percent of its value this year.

This tech slowdown has led to a marked reduction in funding rounds for technology companies as the fallout spreads to the Middle East, said corporate finance adviser Lumina. 

George Traub, managing partner at Lumina, told AGBI: “We expect that, given the lack of capital for cash-burning tech companies is no longer available, and investors and venture capitalists are demanding a path to profitability, mergers and acquisitions and consolidation in the sector will be the theme for 2023.”

He added that trade buyers and rescue funds would increasingly look to buy at “near distressed” valuations. 

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However, not all capital will vanish from the tech sector as funds will still be available for deep tech, AI, digital transformation, cybersecurity and other technology creators, Traub said.

In its latest quarterly report, Lumina said a weak pound and the need for capital in Europe were driving a two-way street of capital flows between the regions.

Traub added that in an inflationary and high-interest-rate environment, sentiment in 2023 would prioritise investment yield and structured returns.

He predicted that family conglomerates and private equity will continue to use the IPO boom in the GCC’s public markets to facilitate exits and raise capital.

EY analysts reported last month that the Mena IPO market continued to “forge its own path” during the first nine months of 2022, showing significant growth while the global landscape remained subdued.

The region witnessed a 288 percent year-on-year increase in the number of companies listing between January and September, raising $14.7 billion in total – up 550 percent on the same period last year.

The Lumina Private Company Index, which tracks private company M&A transaction multiples across a range of sectors in the GCC, showed an overall increase from 6.2x to 6.6x, as sectors such as manufacturing, oil and gas services and industrials showed strong levels of activity. 

Transaction multiples are a type of financial metric used to value a company. In an M&A deal, the valuation of a company is reached by various methods, including discounted cash flow and multiples.

Consolidation in the region’s construction industries

Lumina pointed to significant plans for infrastructure spending in the Mena, saying consolidation in the construction and contracting sectors was “gathering pace”. These deals aim to build regional champions with the specialist skills to deliver increasingly large-scale, complex projects.

In October, two of Saudi Arabia’s leading giga-project developers merged. The Red Sea Project and Amaala combined to form Red Sea Global, which is now the master developer for both regenerative tourism projects that plan to transform how tourism destinations operate.

Traub added: “Key investment themes for 2023 will prioritise preference for investment yield and structured returns over capital stocks in an increasingly higher-interest-rate and inflationary environment.”

In terms of dealmaking, Lumina said the region represented a rare “bright spot”, supported by government initiatives, strong GDP growth forecast and attractive risk-adjusted returns. 

Another key trend is the “noticeable increase” in capital being deployed into the GCC region as multinationals and funds seek boots on the ground to identify direct investments.

Funds such as Millennium Management and ExodusPoint Capital Management have recently established a presence in the UAE and Dr Thani Al Zeyoudi, minister of state for foreign trade, said earlier this month that he hoped up to 40 international firms would announce their relocation to the Emirates before the end of the year.

“As a result, we anticipate 2022 being a record year for foreign direct investment into the region,” said Traub.

Lumina data suggests FDI inflows into Saudi Arabia could touch $16.3 billion, a level last seen in 2011.

In September, Lumina said outbound investment from the Middle East to the UK is forecast to rise sharply this year, particularly for deals up to $250 million.

Significant repricing of deal valuations is likely to continue, Traub 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.