Israel has 3,602 private companies backed by private equity or venture capital, the highest number across the Middle East and Africa, according to S&P Global Market Intelligence data.
Israel's private equity penetration rate, which measures the percentage of total private companies in a market that have private equity investments, stood at 11.81%, among the highest in the region.
South Africa came in second with 1,639 companies, followed by the United Arab Emirates, which had 936 companies. The two countries' private equity penetration rates stand at 3.65% and 3.08%, respectively.
Israel and the UAE are private equity hotspots in the Middle East largely due to their business-friendly environment and policies that nurture innovation, said Ralf Wiegert, head of Middle East and Northern Africa economic forecasting at Market Intelligence.
"Investors can reliably find skilled personnel within a short time frame, which is often critical for realizing new ideas. Israel's and the UAE's markets are also sufficiently large and have promising growth perspectives," Wiegert said.
Rwanda had the highest private equity penetration rate in the Middle East and Africa, at 17.28% as of Nov. 3, followed by Madagascar with 15.71%, though both countries have comparatively small private sectors and few private equity-invested companies.
"While Madagascar may have one of the highest private equity penetrations in Africa, from a deal activity standpoint it certainly isn't moving the needle in terms of the overall industry. We would view South Africa, Morocco, Egypt, Kenya and Nigeria as much more active and influential markets for the private equity industry [in Africa]," said Tojo Rakotozafy, investment manager and head of Madagascar office at Africa-focused private equity firm Adenia Partners Ltd.
Nonetheless, Madagascar's private equity investment is expected to increase due to the country's diversified economy, limited access to debt financing for local corporates and little competition from other funding sources, Rakotozafy said.
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Overall, private equity penetration across the Middle East and Africa was at 4.83% as of Nov. 3. Penetration in the Middle East alone stood at 4.86%, slightly higher than Africa's 4.8% rate.
Most attractive investment sectors
Technology, media and telecom is private equity's most invested sector across the Middle East and Africa.
As of Nov. 3, there were 4,136 private TMT companies backed by private equity. The consumer sector came in next with 1,781 companies, Market Intelligence data shows.
Adenia Partners expects fundraising activity to be a leading indicator of private equity activity in Africa over the next 12 months. The firm said the overall fundraising environment has been hampered by the tightening of monetary policies, macroeconomic and geopolitical pressures, and constrained limited partner allocations.
In the Middle East, investors in Israel have moved into wait-and-see mode amid the ongoing Israel-Hamas war, Market Intelligence's Wiegert said.
"The impact of the war is severe in the short-term, and it will depend on the duration and the outcome of the war how long this will remain the case," Wiegert said.
The war is unlikely to significantly affect private equity activity across the Middle East unless it escalates to the wider region, he added.