Saudi Technology Ventures (STV) will approximately double the money on its October 2018 investment in Careem after Uber agreed to buy the Dubai ride-hailing company for $3.1 billion (Dh11.38bn) last week.
Chief executive Abdulrahman Tarabzouni said the one year-old venture capital fund plans to replicate its early success by “doubling down” on hyper-local start-ups in future investments.
“Our thesis that empowering local champions to think big will yield dividends” was proven right with Careem, said Mr Tarabzouni, who is also managing director of STV, a Riyadh venture capital firm anchored by Saudi Telecom Company (STC).
“The window of opportunity for creating large tech companies in the Middle East is there," he added. "We want to see moon shots.”
STV is one of the biggest and most active venture capital funds in the Middle East and North Africa (Mena), investing close to $100 million of its $500m fund in 2018 in six separate ventures. And Mr Abdulrahman, from the helm of STV and before that, as an investment committee member at Saudi Telecom Company Ventures, has been a long-standing champion of Careem.
He led the campaign for STC to invest $100m in Careem in 2016 – pushing the then three-year-old start-up past the $1bn valuation mark. Two years later, after STC’s independent venture capital fund STV was set up, he co-led a further investment into Careem’s $200m seventh round of fundraising.
“Careem realised ride-hailing is a hyper-local game. You need to invest locally, you need to be very well tuned to local needs, and you need to build features that are customised to how people behave,” he said.
While Mena “punches above its weight” in terms of the number of mobile phone users, the share of dollars spent on digital services and internet users, the region is not being served by “high-quality local companies that meet that demand” across a wide variety of industries, according to STV’s research.
Entrepreneurs that want to build a “hyper-local” business to meet that pent-up demand could find Careem-level success, Mr Tarabzouni said.
Global giants such as Facebook, Spotify and Netflix have the technical know-how and resources to build universal products and invest quickly in new geographies to capture large market share, but there are numerous sectors where unique hurdles make it challenging for global companies to come into Mena and find quick success.
“You don’t want to invest where barriers to entry are so low that global players can come in and crush local competition,” he said.
Now Mr Tarabzouni is looking to other sectors in Mena that are ready to "grow in orders of magnitude" as Careem did for ride-hailing, and Souq did for e-commerce when it was bought by Amazon for $580m in 2017.
For another Middle East company to create a realised value of $3.1bn again, STV is “bullish” on business models for original Arabic content creators, e-commerce affiliated ventures in logistics and payment processing, and cloud-based communications.
Mr Tarabzouni also foresees a "virtuous cycle" occurring in the coming years as Careem alumnae and those inspired by Careem co-founders Mudassir Sheikha and Magnus Olsson, who left jobs at McKinsey to pursue their start-up, decide to take the leap.
"The best thing that can happen out of Careem is another Careem," Mr Tarabzouni said. "Not in four years but in two."
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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A little about CVRL
Founded in 1985 by Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, the Central Veterinary Research Laboratory (CVRL) is a government diagnostic centre that provides testing and research facilities to the UAE and neighbouring countries.
One of its main goals is to provide permanent treatment solutions for veterinary related diseases.
The taxidermy centre was established 12 years ago and is headed by Dr Ulrich Wernery.
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