To Amjad Ahmad, American investment firms Berkshire Hathaway and 3G Capital are the ideal comparisons for his own Precinct Partners in Dubai, a venture and growth capital firm with a patient capital model.
Ahmad is Palestinian and grew up in the US before moving to the region. He cofounded NBK Capital Partners, and says a natural affinity for the Middle East, and a desire to make an impact in an emerging market, led him here.
Precinct currently has six companies in its portfolio. Among them is Bayzat which closed a $3.6 million Series A round and Mr. Usta who has just announced a 2.75 million Emirati dirham (US$750,000) pre-Series A funding.
He says they use a model called 'patient capital', whereby investors are prepared to wait for a company to develop and sell out at the right time, rather than cyrstallizing their gains (or losses) at a specific time, which for most VCs is usually five to seven years after investing.
In a region like the Middle East where the entrepreneurship ecosystem is still comparatively new, this model might be the key to sustained growth.
You can take your sweet time. It is capital that is willing to have a long term spectrum to allow a company or a market to develop. You spend time improving these companies, injecting the right amount of capital and really developing them for the long term. So, you're forfeiting short term return to make a much larger return at a later stage.
It works well in illiquid markets. With the patient capital model, you do not need to make a certain number of investments per year, this means you can take the time to pick the right one and if you’re good at it you have an advantage over others. It also allows you to be patient during the exit. Unlike others that have to exit at a particular time, if you have patient capital you can really wait for that optimal exit and not to have to sell into a downmarket, or when valuations are bad, or when the company hasn’t developed.
There is no exit mandate. In a normal fund model you're pressured to deploy the cash. This can make you do silly things. Investments take a long time, especially when you're doing venture and growth capital investing the way Precinct is. With patient capital, if the companies continue to return double digit [returns to its investors] every year, why sell? We’re in it together - the more a company does well, the more we are willing to say “why sell?”
It’s about finding the right investors. There are investors in the market who are looking for a quick return and there are investors who are more patient. I try to attract investors who have patient capital themselves, who believe in this model and who care about long-term return and long term price appreciation.
Startups like it. If I don’t talk about exits they are delighted. I don’t need a structured exit in a document. I invest because I think there’s a real opportunity to make significant returns and I am willing to wait. I try to be a partner rather than an investor with a stake which is really beneficial to them. It makes a lot of sense to startups here because they take a lot time to become profitable.
Being patient is not easy. It’s a difficult model which is why the region has not adopted it yet. It’s much easier when you're raising money to do what everybody else is doing because they're used to seeing it. The mindset has to be there and people know the model hasn't been tried in a big way here. The data shows returns are generally higher with funds that have a longer life span, [for example] funds that have a longer lockup period on investor capital do better because they allow the manager to do what he/she needs to do to yield a higher return.
Illiquidity is the biggest challenge. The funny thing is that the illiquidity factor is what makes the return that much more attractive. My challenge is to try to fix the problem or reduce the pain of it for my investors and a way to do that is to create a market for company shares.
It is the perfect model for this region. I lived through the global economic crisis with a private equity investment portfolio. Then the Arab spring and then the oil downturn. Patient capital allows you the breathing space to fix the problem, especially in a part of the world often facing instability. When the global crisis happened, we figured out how it impacted on each company in our portfolio - some companies had balance sheet issues and some companies were hurt because their revenues came down. Because we didn’t need to exit and we were patient, we could live through the economic cycle. We actually used the downturn to improve the companies and harvest the portfolio in an environment that is less competitive. Downturns are actually very positive for patient capital models.
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