CAPITAL CRIMES™: The New PE Playbook

Conventional private equity wisdom is failing in the Middle East and North Africa (MENA). For years, PE firms in the region leaned on easy tricks – buying low, piling on cheap debt, and counting on rising valuations to do the rest. But that playbook is now obsolete. In a world of higher interest rates and tepid growth, MENA’s dealmakers face a harsh reality: multiple expansion and leverage can no longer be the primary engines of returns. As one global analysis notes, nearly half of historical PE deal returns came from multiple expansion – a lever that is now stalling amid higher financing costs (bain.com). The message is clear: unless General Partners (GPs) radically adapt, their capital will commit the crime of underperformance.

The Failure of the Old Playbook

Traditional PE relied on three pillars – cheap debt, multiple arbitrage, and passive holding. These pillars are crumbling in MENA and GCC markets:

• High Valuations, Low Upside: Asset valuations in the region have been bid up by abundant regional liquidity (sovereign wealth funds and family offices), leaving little room for further multiple expansion. Globally, multiple expansion drove ~50% of deal returns historically, but this lever “is unlikely to power returns in the years ahead” (bain.com). In MENA, where markets are smaller and less liquid, expecting to sell an asset at a much higher earnings multiple is often a fantasy. Investors can no longer assume a lofty exit multiple will bail out a mediocre company.
• Debt No Longer a Silver Bullet: The era of ultra-low interest rates is over. MENA firms that gorged on cheap loans now find the cost of debt eating into profits. Globally, private equity thrived on low rates and easy leverage; now GPs must adjust to “higher interest rates and inflation and lower levels of financial leverage” (eatonvance.com). In the Gulf, where many currencies are pegged to the US dollar, local borrowing costs have risen in tandem with the Fed’s hikes. Leverage in a deal amplifies risk in today’s climate, not returns.
• Passive Ownership = Missed Opportunities: The old model of buying a stake and waiting for macroeconomic growth or a strategic buyer is yielding diminishing returns. MENA’s PE landscape is littered with minority investments that stagnated. As one industry veteran quipped, “sitting and praying is not a strategy.” With fewer mega-deals and longer hold periods (exits in 2024 are down 41% from the 2021 peak globally (bain.com)), doing nothing is deadly. Approximately 4,000 to 6,500 PE exits have been delayed worldwide in the last two years due to macro conditions (pwc.com) – a logjam that is keenly felt in MENA where exit options are even narrower.

Where True Returns Are Being Generated

If the easy money isn’t coming from financial engineering, where is it coming from? The new sources of alpha in MENA/GCC PE lie in old-fashioned value creation and novel deal approaches rather than financial sleight of hand. Nebo Capital’s analysis highlights several areas where real returns hide:

1. Operational Transformation: Earnings growth driven by real improvements – not accounting maneuvers – is the surest path to high multiples at exit. We see forward-thinking GPs rolling up their sleeves and running companies better. Whether it’s adopting digital tools to cut costs, streamlining supply chains, or professionalizing management at family-owned firms, operational alpha is the region’s new gold. In fact, diligent value creation through EBITDA growth is now viewed as crucial to delivering target returns (eatonvance.com).
2. Sector Rotation to Growth Markets: The savviest investors are redirecting capital to sectors with structural tailwinds. Traditional sectors (real estate, construction) face saturation, whereas technology, healthcare, logistics, and education are underpenetrated and ripe for growth in MENA. Notably, 2024’s standout deals included a $3.3B acquisition in education and a major investment in a Saudi healthcare group (arabnews.com).
3. Innovative Deal Structuring: When traditional buyouts don’t work, invent new models. In 2025 and beyond, MENA dealmakers are crafting creative structures to unlock value: revenue-sharing arrangements, earn-outs that pay sellers only if targets are met, minority deals with control rights, and partnerships with strategic corporates. These structures reduce upfront cost and risk, aligning incentives for value creation.
4. Value-Focused Exits: In a tough exit environment, how you sell is as important as how you buy. Leading GPs are exploring beyond the IPO: secondary buyouts, sales to strategics, and GP-led continuation vehicles (more on those in a later article) all feature in the new arsenal. Crucially, sellers now prepare companies for exit like never before – cleaning up financials, securing key contracts, and even pre-pitching to likely buyers.

Beyond Multiple and Leverage – A New Playbook

In summary, the new PE playbook for MENA/GCC is about skill, not luck. It’s easier to raise money than ever – dry powder globally hit a record $1.6 trillion (eatonvance.com), and the Gulf is awash with capital – but turning that capital into returns requires contrarian thinking.

The Final Verdict

The new rules of private equity are being written now in the Middle East. Adapt or die is no longer just a cliché – it’s a daily reality in investment committee meetings across Dubai, Riyadh, and Manama.