David Rubenstein

Private equity activity in the wider Middle East region in the near future will be especially strong in Saudi Arabia and Turkey, a top executive of The Carlyle Group said on Tuesday.

'The Gulf is not only a source of capital, I think it will be a source of dealflow,' said David Rubenstein, co-founder and managing director at Carlyle, one of the world's biggest private equity players.

'I suspect in Saudi Arabia more deals will be done.'

Rubenstein was speaking at the Super Return conference, the annual gathering of the private equity industry in Dubai.

Rubenstein's comments reflect the general mood among private equity specialists about growth opportunities in Saudi Arabia, the Arab world's largest economy.

Oil-rich Saudi Arabia is attractive to investors because of its fast-growing population, the potential of thousands of family-owned businesses and the government's large-scale investment plans in transport and infrastructure.

Rubenstein also singled out Iraq, which in coming years could become a more important investment target.

'As the economy recovers from the war you'll see more capital flowing in,' he said.

Capital to invest in the Middle East will mostly come from local investors, followed by Europe and Asia, Rubenstein said, adding that American capital is unlikely to find its way here.

Rubenstein expects sovereign wealth funds to play a more regional role.

'There will be more political pressure on sovereign wealth funds to invest in the region,' he said.
Rubenstein went on to say that the private equity industry will grow larger than before its bubble burst, as it transforms itself over the next two to three years.

Private equity firms struck ever larger deals during the 2005-07 period, fueled by cheap debt. But since the credit crisis, they have been unable to strike deals of such scale and have had problems keeping their portfolio companies healthy.

'Private equity contributed to the problem; I think we made some mistakes ourselves,' Rubenstein said.

“Clearly we contributed a little by paying higher prices. We rely on very cheap debt. It was intoxicating to get debt with no covenants -- people wanted to do more and more deals and there was a greater focus on very large deals,' he said.

Rubenstein said the industry will transform itself -- investments will be smaller and less frequent, equity levels put into deals will rise, debt will be more expensive than before and holding periods will rise. Ultimately, however, the industry will grow larger than before, he said.

The emphasis will be more on changing companies rather than leverage in the future, he said.

'Private equity will probably come up with a new name. It went from bootstrap deals in the early days to leveraged buyouts to management buyouts to private equity,' he said.

'Maybe it will go to change capital or value-added equity,' he said.

Private equity firms have been constrained from doing deals from a lack of cheap financing. Rubenstein said the largest deal that could be done right now as a pure private equity deal would be in the $3 billion to $5 billion range.

D.C.-based Carlyle, one of the largest private equity firms in the world, with more than $86.1 billion under management, has investments in companies such as fast food chain Dunkin' Donuts, semiconductor firm Freescale Semiconductor and pharmacy chain Alliance Boots. – Reuters