Direct Private Investing with Impact embeds in the culture and psyche of the UAE’s primary investors’ profile
Background of the direct investment culture in the UAE
The UAE’s largest investor class, the ultra-high net worth individuals, has always preferred direct investments in private markets.
When it comes to investing in private equity markets, the UAE investors’ profile consists of first or second-generation family offices.
If this class of investors wants to target short term returns through passive and impersonal investing, they trade commodities, stocks and such. But when it comes to private markets (private businesses and unlisted companies), they do not put their money into blind pools, a.k.a private equity funds.
This class of investor wants to be selective and thorough in identifying the opportunity. Third parties may identify opportunities, but once a target is identified, they prefer to know first hand about the companies, stay involved, engage directly and often negotiate individualised deal terms specific to their investment. This investment culture in the UAE is the natural consequence of its earliest and closest economic partners and allies in the region.
They prefer investing directly into promising new business ventures or partnering with growing companies projecting further growth.
The global surge in impact and sustainable investment
Impact investing refers to investments “made into companies, organizations, and funds to generate a measurable, beneficial social or environmental impact alongside a financial return.”
Volatility in traditional asset classes, liquidity crises, topped by the profound humanistic impact of the COVID pandemic, has all put ‘impact investing’ coupled with direct and co-investing structures on the forefront of viable investment strategies in this new era.
The recent 30% falls in markets are likely to place equity risk more than ever at the front of investors’ minds.
According to BlackRock, “In portfolio asset allocation terms, this now means investors need to find both yield and potential diversifiers that have the prospect of offering non-correlated returns in the event of a market downturn.”
Direct and co-investing provides that diversification.
The UAE investor is ready for the “New”
As an ADR lawyer, being perceptive and discerning comes with the territory, I think. My years of observation says that the non-financial impacts have constantly been influencing and sometimes decisive in the decision-making process of direct private investments.
For example, more than numbers and financial projections, many HNWI are influenced by the:
- the charisma and energy of the dynamic, passionate and determined founder, with untiring determination;
- The business idea has indeed identified a particular need and is then being able to meet it. Identifying a need means there’s a deficit, and where there is a deficit, there is demand. Creating a product or service in high demand and short supply has a strong business case.
As we focus on the UAE, this first and second generation of HNWIs did not have wealth handed over to them. Most of this private wealth has been accumulated through vigorous entrepreneurship and relentless pursuit of growth and success. Most HNWIs have “done the work, gotten their hands dirty, and solved hard problems.”
So it is not just that they have great admiration for the hot young blood; they have been there themselves. This type of investor has a keen eye for spotting tomorrow’s HNWIs. After all, things considered, a passionate, honest, transparent, committed, and intelligent business founder with a good product/service that meets a real need says heaps about that business potential of financial success.
It is not to say that non-financial impacts have a trade-off with financial gain. It means rather the opposite. On the contrary, our prototype HNWI investor has the entrepreneurial and life experience to appreciate that non-financial impacts contribute to a business’s long-term and sustainable profitability. They can identify and appreciate the benefit that non-financial impact investing can have on their companies. What is good for society and humanity is good for us and our business.
The Covid pandemic has been the most blatant and most beautiful illustration of this phenomenon. The production and distribution of facemasks and hand sanitisers were probably the most profitable business of this decade.
The business model which saved millions of life was also the most profitable one the world economy has seen in recent years.
Now think about what would have happened if the business whose impact saved humanity had not gotten the funding it needed. Without this business, millions of human lives would have perished, and many more millions would have suffered from ill-health.
When human lives perish, the demand for products and services perishes too. When people suffer from ill health, the workforce of the business suffers from ill health. We are all interconnected.
COVID-19 has given us a tiny sneak peek into the economics, commerce, and business world trajectory if the non-financial impact of business models is discounted.
Capitalize on the new resources, structures, and expert advisory
We in the UAE have always had the disposition for alternative and direct private investments. And now, like the rest of the world moves towards it, too, an extensive profile of investors in the UAE will have access to: a) mechanisms for transparent and thorough due diligence; b) expert advisors; and c) flexible investment structures; all resources that are being prepared to cater to the needs of direct impact investing.
As many fund managers and investment firms shift their focus to catering to the direct and co-investing HNWI, the quality of investment decisions and deal structures can improve significantly. While the HNWI will benefit from the technical know-how, it is the fund manager who has a steep learning curve ahead.
A fund manager perceives risk and profitability very differently from the experienced entrepreneur. Many fund managers are employees, perhaps with backgrounds in consulting, finance, or the law. By comparison, HNWIs make decisions more holistically. They hone flexibility if it serves the purpose. They are not sticklers to the textbook transaction terms, rigid about the investment cycle, or the private equity funds gold standard of the investment vehicle structure.
Each investment is different and unique; there are no standard solutions, so that none can be offered. But the few things the routine investors of direct private equity should demand from the market now:
- ask for higher transparency, not only at the time of due diligence but also during the life of the investment. A passive investor need not be an incognizant investor.
- Be mindful of the possibility that greater in-depth due diligence exists now, more than ever.
- Create varying liquidity and exit possibilities — here, the advice of private equity fund and investment managers will be a game-changer.
- Embrace the many possibilities of structuring just the suitable investment vehicles for your needs.
- Explore asset types: share classes, private debt placements, revenue-based financing.
From a cultural context, impact investing runs in the psyche of the UAE investor. I see no pain points or long adjusting periods for the UAE investor cultural profile to adapt two the new post-Covid route of making suitable investments.
For us, this is not a shift. Our investment style remains as it was, but now we will have access to better tools, structures, and insights from experts and advisors who previously served the other half.
