Mena VC exit route remains uncertain in young sector

Reuters

• VC exits rare in Mena
• $15bn invested to 2023
• ‘Jury is still out’ on returns

The Mena region’s venture capital industry has blossomed over the past decade as firms have raised $14.5 billion from investors since 2015 and spent a similar amount buying into early-stage companies over the same period.

Yet returns on these outlays remain uncertain, and the sector is still in its infancy.

From 2015 to September 30 2023, VC firms in the Middle East, North Africa and Turkey invested $14.9 billion in 4,615 deals, data from Pitchbook shows. In that time, 164 funds closed.

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The venture capital investment lifecycle is typically about 10 years, and Mena’s VC industry is barely a decade old.

As such, it remains too soon to see clear patterns emerging in terms of founders or early investors exiting from companies, says Tamer Azer, a partner at Shorooq Partners, one of the region’s major VC firms with about $350 million of assets under management.

European VCs achieved an annual net return of 23 percent in the 10 years to 2022, eclipsing the 21 percent annual return of their US counterparts over the same period, Sifted reported, citing a September 2023 study by Invest Europe.

Without public data, returns that funds run by Mena VC firms such as Wamda Capital, Beco and Middle East Venture Partners will achieve cannot be gauged. But it may be tough for them to outperform US stock exchange-traded funds. For example, the S&P 500 and Nasdaq are up 78 and 111 percent respectively over the past five years.

“The jury is still out on returns,” says Azer. “By virtue of Mena being a nascent market, you’re taking bigger risks. 

“So, even though the upside might be a little lower today because the road ahead isn't smoothly paved yet, you should be able to get in on better value deals and therefore make better returns in the long term as the market becomes more sophisticated.”

'You should manufacture exits'

Mena exits – in which VC investors sell some or all of their stake in a startup – “have been opportunistic,” adds Azer.

“There are very few that are manufactured or intentional. That's a common pitfall in the VC industry – you shouldn't sit and wait for exits; you should manufacture exits.”

In other markets, that would often mean doing an initial public offering, but listings are difficult in Mena because of market regulations that usually require companies to show sustained profitability. 

Such rules could be eased in future, experts believe.

“You can put the regulations in place, but you also need a quantum of private companies that see the value in going public,” says Ibrahim Masood, senior director of equity portfolio management at Mashreq Capital in Dubai.

Omar Billeh, a senior investment associate at Jordanian VC firm Propeller, has compiled data on the valuations of all partial or full exits in Mena since 2012.

These total 203, but only 44 deals disclosed the value according to Billeh, who hypothesises that undisclosed sales were for small amounts.

Of the 44 disclosed exits, the mean valuation was $264 million, although Careem’s $3 billion sale to Uber and an IPO by Saudi Arabia’s Jahez, which valued the online delivery company at over $2 billion, distort this figure.

Excluding Jahez and Careem, the mean exit valuation was $145 million, Billeh estimates.

“One of the biggest challenges for the industry is also that the first generation of angel investors – those that were investing in 2015-17 – still haven’t been able to exit and so haven’t then recycled that money into new startups,” says Azer.

“Opportunities for a clean exit are rare and there aren’t many companies that have provided opportunities for angel investors to exit yet either.”

VC funds will usually start considering their exit opportunities in year five after investing, Azer explains, and so potential exits this year would be from positions placed around 2018-19.

“It’s not a red flag that there haven’t been many exits yet. Many investors really aren't ready to exit their positions yet,” he adds. “There’s considerable opportunity for secondary investors to buy out angels on good terms, but that market isn't well developed yet.”