Commercial due diligence in the Middle East

By Vincent Schuller

Commercial due diligence to support private equity and corporate investors on transactions can be more an art than a science. In markets like the UK, the US and Western Europe, information on companies and markets is often readily available. Analysing the underlying drivers of a business’ outlook in light of market, customer trends and competition is helped by a healthy dose of data. Analysis therefore turns to more complex issues like robustness of customer relationships, competitive differentiation and other strategic issues relevant to a business’ outlook.

Lack of robust data
Private equity investors looking to acquire businesses in more opaque markets are often faced with greater difficulties in understanding market trends and competitive positioning. The Apex Insight team has supported investors looking at potential targets in countries like China, Russia, the United Arab Emirates and Saudi Arabia, and it has become clear that commercial due diligence in the Middle East needs to be approached differently.

As there is no obligation to file accounts in a tax-free region, conducting due diligence on target businesses requires more primary research and less analysis of readily available market data. The same hurdles exist for business looking to enter the region and are compounded by the highly relationship driven culture, and ownership restrictions.

Primary research
Where data is less readily available, interviews with customers and other market participants are at a premium.

In order to validate business plans, management ambitions and to stress test the quality of company performance, it is often important to conduct interviews, especially where there is little data on the business, customers and markets. In a region, which is more relationship driven than Western economies, this tends to require local introductions and a degree of patience.

Country differences
The Middle East market has some peculiarities, critical for investors in the region to understand. While many investors think of the region as one cohesive region, countries like Saudi Arabia, the UAE, Qatar and Oman differ markedly from each other.

There are significant differences in ownership structures, local hire obligations, business culture, economic underpinnings and demographic profile. The UAE tends to be where regional headquarters are based, Saudi Arabia offers huge untapped potential in many industries and Qatar’s economic ambitions are high. Economic drivers and degree of diversification from oil-related revenues differ as well.

Private Equity in the Middle East
The Private Equity community in Middle East market is developing, but is still small compared to European and American markets. The region is host to a wide range of houses, benefiting from the vast amounts of investment capital in the region. Many of the houses are keen to professionalise and with a more crowded investor market, approach to investing turns to more detailed due diligence.

Our experience of Commercial Due Diligence in the Middle East
Apex Insight Director, Vincent Schuller, spent two years in the Middle East; helping one of the Big Four global accounting firms to develop a Commercial Due Diligence practice. While working in the Middle East, Vincent worked with clients including LVMH, Ericsson, Emap and Thomson Reuters, as well as a range of locally-based organisations.