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Technology Investments – The win4   - Situation

Without doubt the Gulf is a boom-region, having catapulted itself into the top league of global economies. The reasons are manifold. Obviously the increase in the price of crude oil and gas in 2008 has been a major factor. Also the growing repatriation of capital previously invested in the US, combined with a shifting investment behavior and increasing diversification of GCC economies have all played their part in the present growth dynamic. Nevertheless, the region has to deal with some serious challenges in the future – mainly inflation and rising unemployment. In 2008, five out of the six GCC countries had an inflation rate above 10% according to the International Monetary Fund (IMF). Approximately 50% of the population is under 20 years of age and in three of the six GCC countries the unemployment rate is around 15%. Both factors combined mean that within the next 20 years the region has to create approximately 4 million new jobs – of which only a small portion will come from the investments undertaken so far in the real estate and infrastructure sectors.

In contrast, let’s look at the expenses for R&D, technology and innovation in the GCC. The European Union set a goal to invest annually 3% of its GDP in R&D. Translated to the GDP of GCC in 2007, estimated by the World Bank to be USD 775 billion, this would add up to an annual expenditure of USD 23 billion. My rough guess is, however, that only a small proportion of this is actually being spent. The statement may support this assumption: „The ratio of research and development to GDP in the Middle East is among the lowest in the world. In 2006, 173,000 filing requests were made to the Patents Bureau in the US, or 465 patents a day. Between 1998 and 2006, a total of 298 patents requests were registered in the GCC”. (Gulf Research Centre, June 2008).

The key to success in economies with little natural resources and/or agriculture, is innovation measured in research and development, intellectual property rights and technology. One such success story is Singapore. Should this strategy, which was and continues to be successful for countries with no natural resources, not also prove successful in countries preparing for the post-oil period? The answer is clear: Yes, because technology is a driver of sustainable development, technology creates upscale jobs – and technology therefore contributes hugely to a diversified economy. Under this pretext another, slightly provocative, question is obvious: Can it be right for economies to reduce their dependency on oil and gas by diversifying almost exclusively into the real estate sector and thereby exchanging one dependency by another? In 1990 Harry M. Markowitz received the Nobel Prize in Economics for his theory on “Portfolio Selection” in which he comes to the conclusion that a diversified portfolio has a positive effect on the return-return parameters of the overall portfolio. The order of the day for GCC investors therefore is to diversify – and I would like to emphasize the importance of R&D, technology and innovation in this respect. Private equity and venture capital investments in technology have achieved excellent financial returns in the past and in addition they contribute to economic diversification, they protect from inflation and – last but not least – they are fundamentally Sharia’a compliant.

Thus the arena of private equity investments in technology companies is quickly becoming a highly attractive asset class, compared to conventional favorites such as real estate. My conclusion is that technology investments will be a key factor for a prosperous future of the region because with exceptional returns and their contribution to diversification, they serve the goals of both the professional investor and the GCC economy.

We have centered our business model on these thoughts. The chief attraction of our setup is our strategic focus: the core focus of our activities is on technology with a specific relevance to the Gulf region. This relevance is due to their characteristics (i.e. solar energy, desalination of seawater, wastewater treatment), due to their business sector (i.e. oil-, gas- and aluminum processing, aerospace, logistics, transportation, information and communication technology) or due to exceptional distribution conditions in the young and consumer oriented markets of the GCC countries (i.e. technical building equipment, mobility and communication solutions, media technology). In conclusion, the target companies proposed by A9C Capital do not just simply receive equity from investors and pay financial return, they are eager to use the opportunities to develop new markets, to establish new manufacturing bases and research centers. This in turn on the one hand undoubtedly supports the profitability of the target companies and increases the ROI, but on the other hand it helps the GCC economies to create new jobs and to build a diversified economy as the foundation of the next generation’s prosperity.

Summarizing the thoughts spelt out above, we find ourselves in a win4  – Situation (win-win-win-win): GCC investors win return on investment and portfolio diversification. The local economies win diversification, progress and jobs. Foreign target companies win equity funding and access to new fast growing markets. Foreign economies win as they gain access to new venture capital currently not available domestically and are therefore able to keep improving their technological capabilities.

In this complex environment, A9C Capital is a navigator and a catalyst for technology companies and investors, a promoter of development and a bridge between the economies of the GCC and Europe.

A9C Capital – Your gateway to smart technology investments!