A rebound in private equity activity in the Middle East is providing a ray of hope to the region's mergers and acquisitions business, which is struggling with weak asset values and skittish investors.

Middle East M&A volumes slumped 43 per cent in 2011 to $10.1 billion, according to Thomson Reuters data. Fee income from advising clients on deals fell 37 per cent to $221 million.

The only major private equity transaction which featured in the region's top ten M&A deals last year was the $336 million sale of Dubai's Maritime Industrial Services by Abu Dhabi-based Gulf Capital and Saudi Arabia's Amwal AlKhaleej to London-listed Lamprell.

Credit Suisse was the financial advisor to Gulf Capital in that deal.

But there are signs that the region's private equity sector, which has seen minimal activity since the global financial crisis erupted in 2008, is in for a revival. If the rebound extends to North Africa, it could be good news for economies struggling to recover from the impact of the Arab Spring uprisings.

'Private equity houses are actively reviewing their portfolio investments to see where they can create value through acquisition or disposal,' said Jon Breach, chief executive of BDO Corporate Finance Middle East.

'We anticipate more secondary buy-outs in the region, following the pattern of the more established private equity markets in the US and Europe.'

Among major deals recently, Abu Dhabi-based Centurion Investment announced in January it had bought a 40 percent stake in UAE Exchange, a regional foreign exchange firm, in a deal which a source involved in the sale said was worth $2 billion.

Egyptian private equity firm Citadel Capital last month agreed to sell National Petroleum Co Egypt to Canadian-listed company Sea Dragon Energy Inc in a cash and stock deal valued at $147.5 million.

And Carlyle Group said in December it had acquired a 42 percent stake in Saudi Arabia's Alamar Foods, the master franchise operator for Domino's Pizza and Wendy's restaurants in the Middle East and North Africa.

Bankers are encouraged by both buy- and sell-side activity in the sector, with private equity firms scouting for deals to deploy cash raised from investors and also looking to exit investments with a view to returning money to shareholders.

Several factors are behind the recent surge in activity. Perceptions of companies' values among buyers and sellers diverged dramatically during the global financial crisis, and widened further after last year's Arab Spring uprisings introduced political uncertainty into the equation.

The gap is now closing, partly because of growing optimism about Gulf economies' ability to weather the global crisis and partly because North African countries hit by the Arab Spring have held democratic elections smoothly, even though full political stability has not yet been achieved, industry executives say. That is encouraging deal flow.

Also, private equity funds have been sitting on cash for a long time and are under growing pressure to deploy it in investments. There is pressure from shareholders to monetise some of their existing investments.

'On the one hand, we have pools of capital which are willing to deploy funds for investments and on the other side, there are deals available because you now have an adjustment in buyers' and sellers' expectations to a middle meeting point,' said Matteo Stefanel, senior partner at Dubai-based Abraaj Capital.

'We have never had such a strong pipeline of deals. I have no doubt that for credible players in the industry, it's a similar case.'

Globally, initial public offers of shares in a stock market are a preferred route for private equity firms to exit their investments. This route has been all but closed in the Gulf after slumping property sectors dried up liquidity; Dubai, for example, has not seen an IPO in over three years.

So seeking strategic buyers for assets is evolving as a preferred choice for many private equity firms in region.

'Today, I think M&A is a preferred exit route for private equity firms because capital markets are challenging. But that doesn't mean the trend cannot change pretty fast, and that we won't see a return to IPOs,' Stefanel said.

Abraaj sold its stake in Turkish hospital group Acibadem late last year to Malaysia's state-linked investor fund Khazanah Nasional.

Some 218 investments were made by regional private equity funds between 2004 and 2009, of which the funds have only exited 14, according to a 2011 report by the Wharton School of the University of Pennsylvania and Amwal AlKhaleej. This is a sign of the large volume of investments in search of exit routes.

'Looking at the investment cycle of PE players, several of them are coming into the divestment round of their investment cycle, and hence we are seeing some sell-side processes being launched by these sponsors to exit their investments in the absence of public market listings,' a senior Dubai-based banker with an international bank said, declining to be identified as he was not authorised to speak to media.

One closely watched deal is Gulf Capital's planned sale of its Gulf Marine Services unit, which could fetch around $500 million. The sale, which is expected to be a litmus test for other private equity exits in the region, has attracted nearly a dozen initial bids, two sources familiar with the matter said.-Reuters