Private equity firms in the Middle East, grappling with regional political turmoil and investor unease about the global economy, face a grim immediate outlook but are making preparations for a hoped-for recovery in deal flow next year.

Billions of dollars collected in previous years by regional funds sit untouched as firms nibble for deals, with many sellers still reluctant to offload assets at bargain prices.

'We have to prepare for a long winter,' said Karim El Solh, chief executive of Abu Dhabi-based Gulf Capital.

'You have to keep star managers while shedding unproductive staff. Help portfolio companies secure sufficient liquidity to survive.'

The Middle East and North Africa have been wracked by political upheaval and economic dislocation in 2011 as regimes fall or teeter in several states, including Tunisia, Egypt, Libya and Syria.

The region is home to private equity players such as the United Arab Emirates' Abraaj Capital, the region's largest local firm, Bahrain's Investcorp, and Egypt's Citadel Capital.

Only eight private equity and venture capital deals were closed in the Middle East during the first seven months of this year, according to a report by Al Masah Capital, compared to 24 deals in all of 2010.

Among this year's deals, Standard Chartered's private equity arm bought a minority stake in a unit of Saudi Binladin Group for $75 million in August, while Abraaj acquired the North African private equity platform of Amundi, a French asset manager jointly owned by Societe Generale and Credit Agricole.

US-based private equity giant Carlyle is close to taking a 42 per cent stake in a family-owned Saudi Arabian food products firm, according to two sources familiar with the potential deal.

Value slump

Even before this year's slump, private equity activity in the Middle East was hit hard by the global credit crisis of 2008-2009.

New private equity investments in the region dropped from 97 deals worth $7.5 billion in 2007 to 24 deals worth just $148 million in 2010, according to a Gulf Capital report.

Regional private equity managers have raised $23.13 billion over the past decade but only $14.75 billion has been deployed, the report said. Excluding withdrawals and cancellations, some $5 billion remains unused, Gulf Capital calculated.

'The most visible impact of the political upheaval is the ability to raise funds,' said Imad Ghandour, managing partner at fund manager Cedar Bridge Partners.

'Local LPs (limited private equity partnerships) are not interested in a blind pool of capital and the international investors are very risk averse when it comes to the region.'

The flip side to the market gloom, which has made banks reluctant to lend and left initial public offer activity stagnant, is limited competition for investments, creating a relatively clear playing field for the private equity firms.

'Now is the time to look for opportunities and the right time to get good valuations,' said James Tanner, head of private equity at Investcorp.

'We're seeing better deal flow at lower valuations, better businesses and no competition.'

Carlyle, which has put Egypt investment plans on hold because of the turmoil there, is set to close two private equity deals in Saudi Arabia and Turkey before the end of this year and hopes to close as many as three Middle East deals in 2012, according to its regional head.

Carlyle managing director Walid Musallam said solid economic performances in Turkey and the Gulf region, Saudi Arabia in particular, offered attractive investment opportunities.

Other private equity players are also on the prowl. Investcorp is looking to spend more than $400 million on stakes in companies in Turkey and the Gulf in the next two years, while Gulf Capital is in the final stages of acquiring majority stakes in four regional firms, with closing targeted for the first quarter of next year.

Another sign of deep-pocketed interest in the region is a business licence given to U.S. private equity firm KKR & Co LP by Saudi regulator Capital Markets Authority in June.

'Despite a gloomy big picture, the situation is good on a micro-level,' Tanner said. 'I'm pretty positive about the outlook but yet, it is going to be a long winter.'-Reuters