MENA Start-Ups Contribute Second Highest Regional Deal Value in 2023

Start-ups in the Middle East & North Africa (MENA) region contributed to the second-highest regional deal value on record in 2023, according to a research by the US-based capital market company PitchBook.

The research entitled MENA Private Capital H2 2023,’ said that the countries which registered the bulk of deal activity included the UAE, Turkey, Egypt, and Saudi Arabia. During the past two years, outlier deals have underpinned the expansion of capital flows into the UAE.

Recent deals for major Venture Capital-backed MENA-based companies have displayed similar funding and scale characteristics to their European and US counterparts. The MENA Private Equity (PE) deal value and count grew amid challenging market dynamics for portfolio companies and investors last year, PitchBook said.

Despite gloomy outlook, the MENA PE deals were conducted as wider macroeconomic conditions have had divergent impacts on geographies and sectors. In the MENA region, PE deal activity has historically been concentrated in the UAE, Saudi Arabia, and Turkey.

In 2023, the UAE represented 45% of PE deal value and 23.8% of deal volume, equivalent to $7.1 billion across 50 deals. Government funding and policies have encouraged investments, particularly in Saudi Arabia.

Furthermore, diversification has been at the forefront of the investment push for MENA countries that have historically relied on natural resources to generate returns.

Globally, Venture Capital deal activity decelerated in 2023 as global market sentiment shifted towards bearish territory amid inflationary pressures and weaker growth forecasts. Venture Capital deal value grew six-fold between 2018 and 2022, with 2023 marking a reversal in this trend.

Image Courtesy: PitchBook

Exits

MENA’s quiet VC exit activity in 2023 mirrored VC ecosystems across the globe. Unfavourable market conditions due to volatility in public markets, inflationary pressures, and weaker growth forecasts drove the lack of activity.

Given the early stages of VC in the MENA region, exit activity has been lumpy and supported by liquidity events for Dubai-based ride-hailing app Careem in 2020 and Saudi-based food delivery app Jahez in 2022.

Experienced investors have continued to be bullish on the long-term opportunities VC presents, realising that ebbs and flows are part of the investment strategy for the asset class, the research said.

However, an extended period without meaningful exits could create liquidity bottlenecks for Limited Partners (LPs) and General Partners (GPs) needing to supply capital for start-ups.

In 2023, PE exit value and volume increased. Although MENA exit value has shifted from year to year due to outlier events, recent exits highlight that portfolio companies in the region can grow to multimillion-dollar valuations and deliver returns to investors.

Establishing exit routes and developing public markets for mature companies are further initiatives for the private capital environment. In recent years, the Gulf Cooperation Council (GCC) region has undergone capital market reforms, including improving local market infrastructure and applying measures to attract foreign capital.

Fundraising

The emerging nature of VC has translated into a limited fundraising environment that has grown in recent years, with large funds skewing totals. At the heart of the fundraising push has been Aramco Ventures, the corporate venture capital (CVC) arm of Saudi Aramco, one of the world’s largest integrated energy and chemicals companies.

In the past decade, non-traditional investors, including sovereign wealth funds (SWFs), family offices, PE firms, and hedge funds, among others, have increased their allocation to VC. However, with global VC activity slowing in the past two years, scrutiny around valuations and growth rates has increased.

In the long term, MENA-based Sovereign Wealth Funds (SWFs) will likely continue to invest heavily in VC. In 2023, PE fundraising slowed considerably from the decade high in 2022. State-backed financing to diversify away from oil and into emerging technologies to deliver greater financial returns has been key consideration in the MENA region, and we expect further initiatives moving forward.

In the future, developing capital resources outside of government coffers will be an interesting challenge for GPs. Office expansions into the region and new funds seeking external LP commitments could promote inward and outward investment flows within MENA.

“Recent forays into areas such as tourism, sports, and entertainment could entice added financial activity and interest in the region’s private market capabilities,” PitchBook said.