Sectors Deep Dive Sectors to Watch in 2025

[Music] good afternoon everyone Thanks for everybody who stayed for the penultimate graveyard shift um thanks very much for the introduction um so our panel today we're going to be talking about sectors to watch for 2025 so that's that's pretty wide so we'll try and keep it somewhat focused um May what are your thoughts sector to watch from a TR perspective in 2025 um thanks Nicola uh estan on one of the previous panels said that the the trends of the future will be determined by what we see so let's let's try and answer that question um Dan in fact in his previous session on Slide Five had the full list of sectors which are facing working capital trouble um in the last year I think that that should have been the backdrop of our session would have been easier uh but I'm going to be conservative and a bit unoriginal in saying construction and Contracting um I think it's definitely a very interesting sector to watch out for in the next 12 to 24 months um let's look at what's what's Driven the market over the last a couple of years there's been a slew of projects announced in KSA driving the sector there's Global unrest and dislocation which has specifically benefited um the UAE in terms of demand generation uh and both the UAE KSA and generally the region have been on a growth path um due to a variety of reasons now that's that's changing slightly KSA has cut down on some of its Mega and Giga projects um there talks of overheating in the UA real estate development market and potentially the growth that they've seen so far may not continue and there's deficit budgets being announced combine that with the fact that um there's Legacy unresolved balance sheet issues uh for a lot of contractors um as as we can as we saw from the previous session there's working capital issues which are worsening um that's on the contractor side um on the lender side there's lower LTV ratios uh now onwards there's um lenders reaching their sector thresholds in terms of lending to the sector and combine that with potentially lower oil prices and we can see there's a few things happening uh in terms of the the sector and the macroeconomics which is going to make this a very interesting space uh in the next 12 to 24 months um what do you think yeah I think I think the point on um I mean my practice this is pretty sector agnostic um but probably a sector that I don't deal with so much is is the construction sector so actually I was chatting to our head of Middle East um construction Paula Bast she was over from Bahrain yesterday so we were chatting about you know what she's seen in the construction industry in Bahrain and she said they've seen an increase over the past three years of contractors filing for um bankruptcy in Bahrain so for a process but what they've Al and she said you know that that's been as a result of global and um Regional Supply Chain issues liquidity as you just mentioned Mah um so that has been more prominent in the last three years and in terms of of what the court how the courts are then dealing with that in barin um they are putting them generally into an Administration process which is not necessarily helpful because you then have an administrator appointed who is as I understand it in the small island that is Bahrain it doesn't have necessarily those on the ground skills to properly restructure and settle the positions um for contractors so I think there's just a bit of difficulty at the moment in in Bahrain for for example that's interesting I think it's it's a very similar Trend that I see in Saudi which releases its bankruptcy statistics and we track those as um Contracting and Retail are the two largest sectors which are seeing most restructuring and liquidation cases um I think you would be seeing something similar aren't you no no I agree so I think if I give you a Sal context if I may so I agree with the the both panelists in the sense that from a Saudi perspective it's not purely just the construction industry it's the supply chain to the construction industry which is also going through financial distress so I think it's a it's a it's a vene in the sense that people assume that it's really the construction companies themselves who are the subject of financial distress that's true that is the case yet there are also Supply chains to the construction industry or those construction companies which are also going through financial distress so to give you some context that's the ones that we do at the moment are the contractor themselves and provider of raw materials to the contractors so whether it be steel or other Metal Products Etc but in addition to that it even go extends so far are as um uh providers of leasing Vehicles so that the various raw materials can be shipped from one place to another those two entities are also being the subject of financial distress and to give you an extreme example um to go to mir's point in terms of the retail and consumer space even in the likes of the Kingdom where there's a significant um population um there are still financial distress which relate to the provider of dealerships for instance is one that I'm working on at the moment or a provider of white goods so similar to I suppose your your observation it's not sector Pacific that in the Kingdom uh the overarching sector would be construction but when you start to to Deep dive for want of a better word it there are other sectors in the Kingdom which are haven't been isolated or are ring Fen from these exposures they to are feeling the the the effects or the burdens of uh the impact at that level T yeah I think I think it's important to note from a private Equity standpoint we're seeing our assets face as you said cost pressures but I think the broader AI theme is you know on the consumer side is is great and when there's a big Trend we you know we always overestimate the shortterm impact and we underestimate the longer term impact and I think our assets in our portfolio are already starting to see a shift of where Industrial companies are benefiting from the tech Trend right so a lot of them are investing in the tech centers the data centers you know you're you know um you know we've seen a very sharp uh increase in durable goods cost efficient Goods you know that use the AI technology to improve efficiency to lower costs so I think that's where we've seen a big push um but all in all it's important to note like even though there's a big um focus on AI and Tech but half the Apex from the hyperscalers is going towards industrial use right it's going towards buying land it's going towards uh you know improving efficiency of capital goods I think that's where we've seen a lot of opportunity um but yeah I mean just on that Tech point I think probably if I was asked what's from a a contentious insolvency lawyer's perspective what are you going to be looking out for in 2025 I think maybe maybe 10 Tech maybe Tech startups you know I think that the the global rate of tech startups sorry of of failures of tech startups is pretty high I think it's like 90% and within the first year as well um I don't I think that's probably slightly more prominent in the region yeah I think I think it's not only Tech it's it goes towards like you know if we look back 3 years all the transactions that were done meaning private equity deals or other m&as that were done postco you know pre sort of Russia Ukraine were done at very elevated multiples when interest costs were very low now that Dynamic has shifted because interest costs have gone up multiples have come down across sectors and companies are facing a hard time to beat up or match up to those expectations on iida that's where we're seeing a crunch so the tech failures for sure on the startup land is there but even even slightly mature companies are starting to find it tough to meet these expectations and that's why you're seeing a longer time for corporates or private Equity Funds to exit some of these deals because they don't want to Mark uh a loss or a reduction on their round but they're open to your but I think if I may it's it's very interesting you say this because from a soui perspective it's um the tech startup space or the startup space in general is a space which I think in terms of its evolution hasn't met those failures because we're at a slightly different evolution in our in our growth cycle and so what you are seeing in that space is and this was uh mentioned in one of the earlier panels in terms of private credit the emergence of private credit like you mentioned alternative credit however you want to frame it but it's it's it's interesting in the sense that we are seeing the startup space having exposure to private or alternative credit but then if I bring it back into the context of this discuss question in terms of turnaround you aren't seeing that private credit tap into the turnaround space and so you know one of the things that we look to in terms of opportunities if I may is um you know there is a significant working capital demand or requirement that working capital demand or requirement is not understandably being met by the Banks themselves because you know they already have had their funding lines suspended um and they don't want to understand to increase their exposures Etc but we aren't seeing that space yet being filled by by private credit so I think it's interesting when you mention startups and and you know uh uh those things in the sense that fine in terms of data technology there is a real emergence or desire in the Kingdom to to build data centers um as you appreciate the kingdom is very um uh concerned about the outflow of data from the country and so there's various restrictions but we aren't yet at a stage in our cycle as a country where we're starting to see those entities fall into theault where uh there are there are opportunities the opportunities for us are more uh a request to move away from funding those from private credit and potentially moving that Capital towards disten entities who who really need those working capital requirements yeah no I I think I think it's interesting because I think it will you know you start as you say it will it will start coming through here maybe followed by Saudi at some point I think what is you know real adantage in the region and particularly in the adgm and the DFC is the regulatory framework around um you know digital assets Etc you know the adgm have had their regulations since 2018 the difc is recently issued its digital asset law do you think I think maybe that will increase confidence maybe in the private capital investment I had a question for you here if you may um from an investor perspective are there any sectors that you've previously seen growth in or invested which you'll probably try and stay away from in the next 12 24 months um I think sectors that are um you know we tend to stay away from commodity linked sectors because that's very difficult to to sort of map you know there's various factors that influence prices of commodity right now one could argue that given the need in the world for energy right copper lithium and the storage angle of that is a big sector nuclear is now becoming a very big sector but how do you store one is Generation how do you store that energy that space we you know we we tend to play in that space um but but we generally tend to stay away from direct commodity exposure because that's you know it's it's extremely hard to hedge that uh given external factors um but but to answer which are the sectors we are putting more effort towards um one is security right so this is not food security because that's been a theme for a while but we're seeing a lot of interest and a lot of unique Assets in things like Fire Security uh building security um Railway security so so you know so that's a theme that on in the industrial line while there's a lot of data centers being built but there's a lot of security element on that as well like how do you secure the data but even the facility um so that's one thing that we're trying to uh focus in the value Shain okay interesting I think on the general sort of landscape of are we going to see increased filings for bankruptcy for example in the UAE in 2025 I I think that has to be a no um because of the new law and the new exact regulations which up the debt threshold for creditor filing five-fold um it's now million durhams so I think we will see less creditor Le filings in onshore UAE which is very interesting when you compare it to to the kingdom in the sense that in the Kingdom it's we've gone through an evolution in the sense that um a new bankruptcy law was introduced a couple of years ago fine um when it first came out there was a real uptake particularly from debtors to to jump towards a filing um so much so that it was sort of bypassing the consent process to go straight into a filing and then what we've learned is is that the law in my humble opinion is is very clear in terms of how it operates and you know what you you can and can't do however the issue and this is one of the what was mentioned on the other panels is that there's an issue in terms of the interpretation of the application of the law in the sense that the same legal principle is interpreted in different parts of the country in different manners and that has an implication on the debt restructuring and then I think what we've all learned as advisor is is that um it probably for want of a better word is a nuclear option right in the sense that I think people still have it as a contingency um in terms of filing but when we we do advise debtors and creditors it's something that we say if things don't come together on a consensual basis then let's then adopt the the the filing but what we do as advises is that we have them in parallel so as in when um if we don't reach a consensual debt restructuring then we are left with no other option right what are we are seeing though is very interesting is um creditors are actually taking the initiative to to file um banks in particular in the Kingdom some banks are taking the initiative to file um that was seen as a taboo uh Once Upon a Time in the sense that a bank didn't want to be perceived as someone who would be taking their customer to court um the banks have seemed to reconcile that and now uh they reach a certain stage where they actually think you know filing is probably the best rout of action for that so it's quite interesting it's quite a unique instance I think andir you know this a lot better than I because you you guys run the statistics but there's literally you know over 300 plus cases in the Kingdom where people have filed um through the court and they're all different types of procedures it's not a procedure Pacific um but again you know this a lot better than I in terms of the satistics that you on yeah if if you're want the quote statistics I think that's been more than 700 cases uh filed 750 majority we been liquidations and admin liquidations and and very few restructurings but I think I think again it's driven by a lot of smaller Shops going in for admin liquidations and so yeah and have you seen a trend or a pickup maybe not yet when as the market matures for credit to equity or credit for control um transactions because we you know as as private Equity sometimes we find great businesses but the the wrong cap structure yeah and overly levered you know maybe you know in that postco pre uh war zone where deals were done that now the businesses are great but they're overly levered they can't pay what we've started to do is we started to go into the debt um but with a view of getting control of the equity because we know there's a restructuring coming I think that is an opportunity in the Middle East in the Kingdom where in some companies that don't want to go down the liquidation route you could go for a debt for equity swap you could do some you know um interesting structur I think the answer to that is yes we are seeing that in the sense that they've only there's I've seen it and I've advised on on two in the the listed entity space so our equivalent of our t for instance which is our Stock Exchange I have done one which has been done and I'm in the process of advising one at the moment who is actually doing a debt for Equity swap for a listed entity um and that the entity who's doing the swap that C party is interesting enough a bank um and in both of those instances we have a there's a central bank requirement that we need to satisfy in relation to our ability to acquire those shares what is interesting though is is that away from the listed entity space you are seeing debt for recity swaps but they're more strategic in the sense that to give you some flavor uh if a bank does a debt for Equity swap coincidentally that bank also has a construction business right and the entity in question who's doing the is in distress is is a construction business or um where you do see from a non-banks it's more a strategic investor who is a peer or competitor who does a debt for Equity swap so debt for Equity swaps yes um maybe perhaps if I may the leading question is um uh debt for asset swaps and the answer to that is no at the moment in the sense that we aren't seeing uh I suppose where you're from you you'll see more debt for asset swaps we haven't seen those Deb for assets FS at the moment and if you don't mind maybe if you if you speak to that because from someone from the kingdom that's quite fascinating for me it is it is harder because there's always a question on valuation yeah right I think the debt for Equity swaps at least are are easier because you have maybe in your listed example you have a listed price um but the you know for debt for asset swap is slightly harder it's easier if it's unlisted we haven't seen or those are you know trickier transactions to do it's only more so if there is a strategic fit with one asset of ours in the portfolio then we can go into the debt acquire some assets and then merge it with another asset um but apart from that I think it's more on the credit to equity which is which is easier to get control of an asset through that route good so I think for 2025 my sector to watch or 2025 2026 maybe let's give it a bit more time but maybe Tech I don't know if you had to choose one sector to watch in in the TR space for 2025 or 2026 what would you say where' you go that's a construction Contracting real estate I agree it's construction um and similar to sort of the the analysis that I gave at the outset it's the supply chains to the construction sector which also suffer the residual consequences of that and so I think for me someone who's based in the Kingdom it's fascinating with all the uh the Giga and the mega projects that are being referenced to um you there is a a flip side to it in the sense that there is a a construction consequence in terms of those same Industries one would assume that those same companies would be able to service and meet those demands and as a result of which there shouldn't be such impact but the reality on the ground is different great here you're not allowed to say real estate and construct no no no I think look I'm I'm more of the optimistic so I I I think the uh you know overall chemicals industry the speciality chemicals has a lot of opportunity so so hopefully that that's not a sector that's going to face [Music]