Market risk mitigation techniques to fortify portfolios – a closer look at Middle Eastern markets

Published on January 29, 2025 by Nikita Sushil

The private-equity landscape in the Middle East is positioned to witness an upswing in  deal-making activity, with prominent investment houses such as family offices and sovereign wealth funds in the region demonstrating a noticeable emphasis on diversifying from a sectoral and geographical perspective in recent years. The region’s focus on innovation and technology has increased substantially, with government-backed programmes such as Saudi Vision 2030, the UAE’s Technology Transformation Program (TTP) and Dubai’s Economic Agenda (D33) leading the way to transforming these economies by placing adoption of technological innovation, AI and green energy at the forefront of change. Together, these factors have led to growing investor interest in the private equity segment.

In terms of market risk in the context of Middle Eastern markets, the risks embedded in these investments are not confined to conventional systemic factors; they also carry an element of geopolitical risk, as witnessed in recent transnational shifts, making the case stronger for private equity players to effectively use techniques to mitigate market risks for investors.

An eye on geopolitical risks

Against the current backdrop of military conflicts involving Israel, Palestine, Syria and Iran, it becomes imperative for private equity firms to proactively manage geopolitical uncertainties.

Insurance products offer a useful means to adequately tackle this risk. Offerings such as political risk insurance (PRI) by entities such as the Multilateral Investment Guarantee Agency (MIGA), Arab Investment & Export Credit Guarantee Corporation (DHAMAN) and Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) enable protection against risks such as asset expropriation and currency inconvertibility, safeguarding firms against unforeseen financial consequences.

The growing case for derivatives

The launch of active futures offerings, such as ICE Futures Abu Dhabi’s Murban crude oil contracts and the Dubai Mercantile Exchange’s Oman crude oil futures contracts in recent years has made it possible to hedge exposure to volatility in commodity prices. Even so, regulatory authorities in the U.A.E., Saudi Arabia and Qatar are working towards launching more derivative products to safeguard against market volatility.

Shariah-compliant derivatives adhere to the principles of Islamic finance by eliminating elements such as maisir (gambling), riba (interest) and gharar (excessive uncertainty). These products rely on profit-sharing mechanisms and tangible asset-backed transactions, providing a useful alternative to navigate interest-rate volatility in markets where conventional interest-rate derivatives are not permissible.

Murabaha, which can be used to mitigate interest-rate exposure by allowing funds to structure financing arrangements with fixed profit margins rather than floating rates, can be a handy tool for firms in this context. Furthermore, while sukuk instruments are not used directly for hedging, certain structures, such as those that generate fixed returns (e.g., Ijarah Sukuk, which is backed by rental income from assets), can help funds stabilise cashflow, replicating that benefit of fixed-rate debt.

The impact of market decoupling

Safeguarding against global protectionism...

Global value chains seem poised for fundamental shifts amid the looming threat of tariffs  in 2025. Vulnerabilities in supply-chain networks, such as past instances of port congestions and shipping delays, have led to growing calls for regionalisation (near-shoring) and localisation (reshoring). More businesses have started to look inward and focus on their own territories.

...has driven a fundamental shift in logistics

Concerns over supply chain disruptions have accelerated the post-pandemic shift from “just-in-time” to “just-in-case” strategies. Companies want to limit their exposure to geopolitical risks and diversify and expand operations in low-cost manufacturing hubs.

Last but not the least

To further alleviate risks, private equity firms could

• Leverage strategic local partnerships. These partnerships can provide valuable insights, resources and capital amid challenging market conditions.

• Consider growth-stage diversification. This enables a balance between high-risk, high-reward early-stage investments and more stable returns from growth- and late-stage investments.

• Implement a staggered investment approach. This reduces the risk of needing to sell at a loss amid unfavourable market conditions.

Final thoughts

As the Middle East transitions away from oil, with a strong focus on sectors such as technology, healthcare, real estate and green energy, the combination of abundant capital and a burgeoning entrepreneurial ecosystem makes private equity investing a valuable proposition for potential long-term growth. Against this backdrop, effective risk management should not be viewed merely as a defensive strategy but as a proactive one that could unlock opportunities that others may overlook.

How Acuity Knowledge Partners can help

For over 20 years, Acuity Knowledge Partners has leveraged our experience to solve key challenges faced by our clients. With our SMEs offering technical expertise in investment operations and risk functions, our clients can choose from a wide array of services at different stages of their investment lifecycles. Our business has gained significant traction in the Middle East, enabling clients in the region to simplify their operating models and focus on what they do best, while we take care of the rest.

Source

• The State of Political Risk Insurance - ICIEC - The Islamic Corporation for the Insurance of Investment and Export Credit

• Risk and Reward: Early- and Late-Stage Investing

• Derivatives_in_IF.pdf

• https://www.arabnews.com/node/2574148/business-economy

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