American Investors & Middle East Private Equity

Private Equity Legal Issues

The current economic climate has forced American investors to reassess their general investment strategies in the Middle East private equity market (MEPE). Legal protections are becoming more pronounced due to the tightening of credit. Vested parties are conducting critical due diligence, assessing both the creditworthiness of the debtor parties and Return on Investment (ROI).

In this capacity, legal conditions have become more nuanced than ever. Investors want iron-clad financing contracts, which are affecting the increased use of vendor financing and earn outs. Vendor financing refers to a loan from one company to another which is used to buy goods from the company providing the loan. The benefits to the vendor include increased sales and earned interest, while the risk involves potential payment delay or default. Earn outs, by way of example, involves the acquiror company paying 60–80% of the purchase price up front, with the remaining 20–40% structured as an earn-out and paid out over time as the acquired company achieves certain levels of sales or profitability.

In both vendor financing and earn outs, financial sponsors are seeking to increase value-added investments in tight debt markets. One solution may involve larger equity checks and the use of mezzanine financing, although both will result in higher transaction costs and decreased leveraged returns.

Incorporating legally accurate and umambiguous definitions and provisions is therefore highly encouraged, particularly when defining the parameters of measuring future financial performance. This will minimize disputes, present and future costs, while preserving strict contracting.

Improving Corporate Governance.

Corporate governance refers to a set of processes, customs, policies, and institutions affecting the way a company is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed.

Applying the concepts behind corporate governance to the Middle East private equity market, companies and institutions serving as investors must continue to provide meaningful minority protections, enhanced risk management systems and timely and reliable information flows. In this financially volatile climate, private equity must manage working capital and cash flows, while focusing on the operating results of portfolio companies.

Financial sponsors will therefore pay greater attention on contractual rights to facilitate leadership and oversight, thus ensuring prompt financial reporting.

However, investors should be cautioned that insolvency laws in the Middle East are poorly understood and rarely tested. The learning curve remains steep, with sponsors and investors continuously seeking guidance on various alternative scenarios. The widen breadth of such analysis may impact the structuring and documentation of deals. The investor will need to pay strict attention to contract rights regarding exits, deadlocks, dispute resolution and rescue funding.

Increasing Value-Added Legal Services

Value added advisory legal services in these difficult times are highly recommended due to the need for thorough documentation and advice regarding new private equity structures. The Middle East has seen a sharp increase of legal services over the past decade due to the increasingly sophisticated private equity client base. International best practices and industry standards have been adapted to a region characterized by family ownership, minority investments, carve outs and foreign ownership restrictions.

This year has presented a new set of legal challenges for private equity. While deal pipelines and investment risk may have weakened, private equity should gradually emerge into a formidable force for Middle East financing, particularly in sectors that are relatively recession resistant such as healthcare and education. Depressed sectors such as hospitality and real estate may allow for bargains. As long as price volatility and credit tightening continues, private equity players should continue to retain legal services as an integral component of their business strategy.


By, Sheheryar T. Sardar, Esq.
Sardar Law Firm LLC
New York, New York