Attractive investment opportunities remain a major challenge in the Gulf, particularly with family-owned businesses. Private equity's expansion into fast-growing emerging markets has reshaped the business landscape and the MENA region has ridden this new wave of investor interest.

Annual private equity investments in the region soared to $3.8 billion in 2007 from just US$148 million (Dh543.6m) in 2004 before the global financial crisis.

Now, with economic growth reviving, conditions look promising for private equity to pick up where it left off. But bucking the global trend, the industry's momentum in the MENA region appears to have stalled. Last year the total deal value was just $521m, its lowest level in five years.

Signs of inertia elsewhere in the deals pipeline suggest new investment activity could remain subdued.

Last year private equity companies arranged only six exits - a steep decline from the 17 exits valued at $2.9bn in 2008.

A slump in new fund-raising is another indicator that momentum has ebbed. New capital commitments to the Middle East dropped from 10 per cent of the total allocated to emerging markets in 2008 to just 5 per cent, or $1.1bn, last year.

In a sample of 10 regional funds, Bain & Company found that, on average, it was able to close at only 55 per cent of its original target.

Bain's interviews with more than 25 limited partners found they were becoming more selective about the regional funds they will work with.

For Middle East-focused funds unable to show a consistent track record of success, it is becoming increasingly difficult to attract investors who have many appealing options in other high-growth markets from which to choose.

In a recent ranking of 10 emerging markets, limited partners ranked the Middle East only ninth, just ahead of Russia and the former Soviet republics.

Private equity companies active across MENA also have their hands full putting to work the money they have already raised. Less than half of the $20bn committed between 2001 and the end of last year had been invested.

Much of remaining "dry powder" has been idle for so long that many funds are now beyond their planned investment windows. Thus, because they cannot count on using capital gains from successful liquidations of earlier private equity investments, investors may be unable - or unwilling - to meet future capital calls.

A scarcity of attractive investment opportunities will continue to be a major challenge. Local economies are dominated by family businesses and government-owned enterprises that have long spurned private equity acquirers - and in some cases, have become competitors to private equity companies.

Private equity investors have struggled to gain traction with owners of family-owned companies, who have been reluctant to sell significant stakes or cede management control. That barrier is unlikely to fall soon. The global economic downturn has left many families dubious about financial assets and preferring to hold on to businesses that generate cash flow.

Meanwhile, deep-pocketed government investment companies and sovereign wealth funds, including Mubadala Development - a strategic investment company owned by the Abu Dhabi Government - Emirates Investment Authority and Invest AD, are beginning to target the same investment opportunities that have traditionally been the domain of private equity companies.

Their privileged access to deals and longer time horizons make them tough adversaries.

This new challenge, on top of the other liabilities weighing on the industry, could compromise many companies' prospects for survival. Bain estimates about one third of private equity companies will not bounce back from the downturn or successfully raise follow-on funds.

They can elevate their games and differentiate themselves strategically from their competitors by concentrating on four key areas:

Sharpening sector focus. Specialisation in growth sectors such as health care, education, logistics and oil and gas will be an increasing source of competitive advantage for strong deal flow.

These industries boast increasing consumer demand and attractive profit margins and they have proven to be resilient through the downturn. Private equity companies will need to build deal teams with industry specialisation to demonstrate convincingly how they can add value to portfolio companies.

Some companies are already beginning to organise investments based on sector themes. Homing in on specific sectors will inevitably limit the number of investment opportunities in any given market. To achieve sustainable operating scale, firms may need to broaden their geographic scope to capture opportunities across MENA.

Broadening the investment landscape. Companies can significantly expand their deal flow by looking beyond conventional buyouts and growth-capital investments to consider a wider range of opportunities, including infrastructure, property, mezzanine lending and other debt financing.

Bain & Company estimates the value of infrastructure deals open to private equity investors will reach between $6bn and $10bn annually - more than double its estimated value of private equity investments in growth capital and buyouts.

But penetrating the relatively few infrastructure deals open to those investors will require distinctive competencies for arranging deals and expertise in financing and managing large projects.

Some funds are widening their deal options by targeting companies earlier in the development cycle. To the extent that their involvement complements economic development initiatives in the region, they may find willing partners in the public sector.

Abraaj Capital recently acquired Riyada Ventures, a Jordanian venture capital companies, to create Riyada Enterprise Development, a new investment platform focused on small and medium-sized enterprises that has already attracted government co-investors.

Enhancing due diligence and smarter ownership.Private equity companies need to hone their due diligence processes - disciplines that are especially important in the MENA region, where a high proportion of target companies are private and lacking transparency.

Once they close a deal, private equity companies need to work actively with management at their portfolio companies to identify two or three high-priority initiatives that create value.

Laying the path for exits. Private equity leaders begin weighing how they will exit each investment well before the time comes to sell by continuously evaluating market conditions for initial public offerings (IPO) and identifying potential strategic acquirers.

Developing a sound exit strategy is particularly important for foreign private equity companies operating in markets such as Saudi Arabia, where IPOs are restricted to local investors, the secondary market is thin and taxes on capital gains can be onerous.

Despite recent headwinds, the region's vast wealth and solid growth offer much that should continue to attract private equity interest.

But it will take greater focus and resourcefulness on the part of companies to convert those appealing attributes into winning returns.

Jochen Duelli is a partner with Bain & Company and a leader of its Middle East private equity practice. Alexander DeMol is a Bain manager, affiliated with its private equity practice.