Cross-border trade activity between UK and MENA to continue to surge in 2023

According to a new Cross-Border Insights report from Lumina Capital Advisers, 2023 is predicted to mark another record for cross-border transactions between Middle East and North Africa (MENA) and United Kingdom (UK) in light of a resilient regional-led global M&A environment and strong activity in traditional industries like manufacturing, oil & gas services and industrials.

Cross-border trade and deal activity between the two regions surged in 2022, driven by two-way capital flows as multinationals and funds sought access and investments in the region.

Andrew Nichol, Partner at Lumina Capital Advisers, said, “2023 will be a tale of two halves, with H1 seeing highly active Middle East corporates and funds continuing to invest into European companies, as domestic markets continue to face varying levels of economic turbulence. This will create a myriad of investment opportunities to diversify globally and gain access to best-in-class skills and talents. In H2, we anticipate improving sentiment across developed markets, which will drive global demand for natural resources, oil included. The region is extremely well positioned for yet another strong year ahead.”

Here are the top findings of the report for 2023.

1.    2023 deal-making to remain resilient despite global headwinds

Lumina saw a hugely resilient regional-led global M&A environment in 2022, with traditional sectors such as manufacturing, oil & gas services, and industrials showing strong levels of activity. With significant infrastructure spending announced regionally, consolidation in the construction and contracting sectors is gathering pace to build regional champions with the technology and specialist skills to service increasingly large-scale, complex projects. Family conglomerates and private equity continue to utilize the IPO boom in the regional public markets to facilitate exits and raise capital.

2.    Two-way investment will drive record FDI levels

Lumina expects to see a continuation of two-way capital flows between the Middle East and Europe and expects no let-up in the levels of regional infrastructure investment. As global corporates and funds increasingly set up roots in the region, with talent continuing to move in, 2023 is anticipated to be another record year for FDI in the Middle East.

3.    Ongoing JV and corporate restructurings

Lumina also believes there will be a significant shift in partnerships that already exist in the region with UK companies reassessing existing Middle East JVs, to view whether they are fit for purpose today given that many were set up decades ago. Dividend policies, governance structures, minority protection rights, and appropriate treatment of technical services costs (particularly in engineering firms) are all key focus areas. With increased activity between the regions, many international firms will want to ensure their existing contractual arrangements are fit for purpose in an era of growth amidst global challenges.

In 2022, UK-listed PLC revenue contribution from the MENA region was the largest ever, up to 15 percent compared to 12 percent four years ago. The Middle East promises a rare worldwide “bright spot” for UK firms seeking global growth. Furthermore, Lumina projects that UK PLC contributions to the Middle East would increase to 17 percent in 2023, contributing an additional GBP 1.6bn to UK PLC companies. While aerospace remains the largest sector, growth remained flat year-over-year.

This upward trend is also expected to be accelerated by the USD 900 billion opportunity in KSA alone, particularly in green energy and industrials, encouraging UK companies to expand regionally.

Nichols continued, “Countries in the MENA region continue to adopt a ‘post-oil’ mindset, creating opportunities for major global market players to expand their operations. This has been complemented with an emphasis on large-scale digital transformation aligned with national visions and goals. Several sectors, including fintech, automotive, infrastructure, and engineering, are pushing to develop innovative technologies to stay competitive.”

A USD 7.6 billion investment in regional venture capital over the past five years points in the direction of a resurgence in regional private equity investments, both direct and secondaries, being the fastest-growing alternative asset class in 2023. Lumina predicts deal-making will remain resilient despite global headwinds in 2023.