Investment flows: Private equity firms are playing a growing role locally and across the continent

The Egyptian economy has provided a wealth of opportunities to private equity (PE) firms, both domestic and foreign. The heady years leading up to the 2008 global economic crisis featured a number of significant deals that raised the profile of PE and helped to establish it as an alternative source of funding for Egypt’s corporations. Particularly notable among these were the investments in health care, education and agribusiness by Dubai’s Abraaj Capital and the $1bn equity investment by a consortium led by Egypt’s Citadel Capital in a second-stage petrochemicals refinery near Cairo. By 2007 six PE firms were operating in Cairo, some of which were stand-alone investment firms, such as Citadel Capital, while others were set up as units of investment banks, such as EFG-Hermes.

GROWTH: The emergence of the PE industry in Egypt’s capital spawned the development of a host of service providers and specialists, including business and legal consultancy firms, auditing firms and financial consultants. In 2010 this rapidly evolving group of businesses created established the Egyptian Private Equity Association, for which the founding partners were 24 individuals and six corporates: Abraaj, Beltone Financial, Concord International Investments, Carlyle Group, Citadel Capital, CI Capital, EFG-Hermes, Naeem Holding and Union Capital. The organisation has added a further 16 individual members as well as 10 corporate ones: ReAaya Holding, Actis, Paradise Capital, Misr Capital Investment, Multiples Group, Amwal El Khaleej, Euro MENA Funds-Capital Trust Group, Arab African Asset Management, Maatouk Basiouny Law Firm and Gulf Capital.

The reasons for the rapid growth of PE activity in Egypt are not hard to fathom. Before the global economic crisis began to show its effects on the domestic economy in 2009, the nation posted consecutive GDP growth rates around 7% per annum, was home to a diverse pool of undervalued firms and possessed a liquid capital market that represented a useful exit route for PEs wishing to float their investments.

MAINTAINING POTENTIAL: According to Kuwait Investment House, Egypt accounted for the largest single share of PE investments in the Middle East and North Africa (MENA) region between 2005 and 2009, attracting 20% of the total. However, deteriorating economic conditions since 2009, combined with unrest sparked by the popular uprising of 2011, have significantly altered the pattern of PE investment.

“Following the global financial crisis and then the Egypt revolution, the resources and financing for new projects has been limited. Private sector funding, particularly debt from international commercial banks, is now constrained for long-term projects. This had brought to the forefront the role of development finance institutions and export credit agencies,” Hisham El Khazindar, co-founder and managing director of Citadel Capital, told OBG. Although Egypt’s economy retains the potential that attracted PE investors in the first instance, while political uncertainty continues many international PE firms, as well as PE companies based in the country, are looking to direct their capital to other geographical locations. The region of sub-Saharan Africa has presented a useful alternative for many such firms, and Egypt’s proximity and business linkages to the region have ensured that a number of its domestic PE players are moving south as rapidly as their international counterparts.

INTERNATIONAL INTEREST: The high growth rates and capital demand exhibited across the African continent have attracted investment from markets across the globe. Initially dominated by development finance institutions, such as the World Bank’s International Finance Corporation (IFC), the UK’s Commonwealth Development Corporation (CDC), the US’s Overseas Private Investment Company, Norway’s Norfund and Germany’s DEG, private PE funds took notice when the IFC’s best-performing funds became those for Africa. PE investments in Africa grew from $151m in 2002 to $3bn in 2011, according to the Emerging Markets Private Equity Association, with South Africa and Nigeria accounting for the majority of these investments. The dominant forms of PE have been management buy-outs and restructuring via the financing of greenfield or expansion investments.

PLAYERS: The IFC led the way in the first PE deals early in the millennium and significantly scaled up its investments in the region over the course of the Nigerian banking crisis. However, it was not long before regional investors also began to deploy capital on a similar scale. South Africa’s PE firm Ethos Private Equity and its largest insurance company Old Mutual made an early move by purchasing a $130m stake, or 1.7%, in Oceanic Bank in October 2007, and a number of banks followed suit. Ethos’s investment commitments in Nigeria rose to $926m in fiscal year 2011, 34% higher than the previous year’s $690m, and focused on microfinance and financial institutions like First City Monument Bank and Diamond Bank.

Originally the CDC’s PE arm, which later broke off into an independent fund manager, Actis is a UKbased, emerging-market-focused firm with some $1.5bn invested in Africa and regional offices in Cairo, Johannesburg, Nairobi and Lagos. Leading several top deals, including Persianas, the operator of Nigeria’s largest shopping mall, and the industrial and property group UAC of Nigeria, the group has a proven record of successful exits. An early investor in the regional telecoms sector, Actis sold its stake in Starcomms in 2008 through an initial public offering.

The fund’s current investments include $151m in Vlisco Group, a well-established West African fashion fabric producer, and Diamond Bank, in which it invested $134m. In Egypt Actis is best known for its buy-in to Commercial International Bank, the nation’s largest private lender, of which it is the single largest shareholder. The firm has earmarked $500m for property projects in sub-Saharan Africa.

Aureos Capital is another key player. The PE firm was spun off by the CDC and Norfund in a management buy-out in 2008 and then sold to Dubai’s Abraaj Capital in February 2012. A sign of looming consolidation in the PE industry globally, the sale demonstrated the appeal of Africa-focused funds.

With some $1.3bn under management, Aureos’ key African investments include Nigeria’s Portland Paints & Products, Deli Foods Nigeria, chemicals company Nycil, Custodian and Allied Insurance, Computer Warehouse Group, and oil services firm AOS Orwell.

Emerging Capital Partners (ECP) has also focused its move towards pan-Africa funds, having established offices in Abidjan, Casablanca, Douala, Cameroon, Johannesburg, Lagos, Nairobi and Tunis. Raising some $613m for its third pan-Africa fund in 2010, ECP now has $1.8bn under management. Its key investments include fertiliser company Notore Chemical Industries, Starcomms and Intercontinental Bank, all of Nigeria. In Egypt, its largest investment to date was in the Sokhna Port Development Company, which it has since successfully exited. The firm says it invested more than $1bn in total on the continent in 2010 and hopes to grow its Nigeria book in particular.

LOCAL FIRMS LOOK SOUTH: Citadel Capital is a Cairo-based company that has turned its gaze southwards in search of investment opportunities, establishing itself as one of the foremost PE players in the region, where it is ranked the largest in Africa on the Private Equity International league table. As of 2012 the company controlled $9.5bn in investments, $4.4bn of which were assets under management (AUM), and recent years have seen its African interests account for an increasingly large share of this figure. According to its 2012 annual report, five of its seven primary-focus countries are in sub-Saharan Africa: Sudan, South Sudan, Ethiopia, Uganda and Kenya. To date, 10 of the company’s 19 opportunity specific funds – each of which controls a platform company in a specific industry – have significant presences in African economies other than Egypt.

Its most visible entry into the sub-Saharan arena is through its 51% stake in Rift Valley Railways (RVR), which holds a concession for a period of 25 years to operate more than 2000 km of track linking the Kenyan Port of Mombasa to the interior of the country, as well as the Ugandan capital, Kampala.

HARD RETURNS: Citadel Capital has arranged funding for a $387m, five-year turnaround programme for RVR, which has already resulted in a new Nairobi Commuter Service, connecting the Kenyan capital with the Athi River Industrial Area. Its investment plan for 2012 included $29.3m for infrastructure maintenance and $19.4m for locomotive maintenance. In 2013, RVR has delivered rehabilitated locomotives and container wagons to its fleet, launched an automated train warrant system based on GPS, and built 73 km of track between Mombasa and Nairobi. In October 2013 the company completed the first phase of the rehabilitation of 500 km of track that links Kenya with Tororo in Eastern Uganda and Gulu in the north.

Beltone Financial is a Cairo-based regional financial services group that operates in the fields of asset management, investment banking, securities brokerage, custody and research. Its PE division had LE2bn ($284.6m) in AUM as of November 2012. Traditionally, its focus has been on the domestic market, where it has received backing from the IFC and the Export Development Bank of Egypt to run an Egypt-dedicated sub-fund. However, Beltone’s recent strategic moves demonstrate its increasing interest in its southern neighbours as an investment destination. In 2012 it formed a joint venture with Altree Capital, a financial services group with offices throughout the continent and a predominantly African portfolio and knowledge base. The venture will serve as investment manager and advisor to the Altree Beltone Africa Opportunities Fund and Beltone Gems MENA Equity Fund.

Other Egyptian PE players are well positioned to pursue interests in Africa. EFG-Hermes is a leading bank in the region, with both investment and commercial banking operations. The Cairo-based player has built up a reputation in PE over the past decade, raising over $1.5bn in nine funds since 2000. The firm has a solid track record of domestic investment, launching the $54m Horus I fund as early as 1997 and entering a strategic alliance with Commercial International Investment Company in 2003 to manage its $321m fund, which was the largest PE investment vehicle in Egypt at the time. In 2007 the firm raised its largest fund to date – EFG Capital Partners III, which closed at $575m.

SECTOR SPECIFIC: In partnership with Dutch multinational Rabobank, EFG-Hermes established the first PE fund focused on food and agribusiness in Egypt in 2006. The Horus Food and Agribusiness Fund was set up with commitments of $46m and targets the agribusiness sector in Egypt and the wider MENA region, seeking capital appreciation through investments in equity or mezzanine securities of private, non-publicly traded companies with significant operations in Egypt. The fund has invested 57% of committed capital in four companies. Beyond Egypt, EFG-Hermes’s geographical focus has been directed eastwards to include interests in Lebanon, Syria, Kuwait, Bahrain, Qatar, the UAE, Saudi Arabia and Oman. Yet, despite being named “Investment Bank of the Year” at the annual African Banker Awards in 2011 and playing a pivotal role in African deals such as the $450m acquisition of Sudanese tobacco firm Haggar by Japan Tobacco, the firm has yet to direct its PE capital southward. The EFG-Hermes Middle East & Developing Africa fund contained no African assets as of late 2012.

CHALLENGES: Diverting capital from troubled North African markets towards rapidly expanding southern economies does not represent a panacea for Egypt’s PE players or their international counterparts. Greenfield start-ups – which have been encouraged in some parts of the MENA region through improved processes, reduced land costs and favourable taxation policies – remain a more daunting prospect in many bureaucracy-addled sub-Saharan states. Further, as is often the case with emerging markets, divestment from African interests can represent a significant challenge for PE firms entering these markets. “Exiting is one of the biggest questions we ask ourselves at the time we enter into a deal,” John van Wyk, partner and head of Africa at Actis, told a conference in April 2012.

EXIT ROUTES: While regional stock exchanges have been used as divestment channels in the past, the lacklustre performance of equities since 2008 has dampened their appeal. More popular have been trade sales to strategic investors and management buyouts, as in the case of Actis’s investment in Persianas. “We try and invest in businesses that will have strategic appeal to a trade buyer,” said Van Wyk. However, the longer-term potential inherent in the continent – most notably the expanding consumer base, stronger demand for consumer finance and a shift away from the traditional investment pattern of commodity exploitation to one of value addition – means that it is likely to remain an attractive proposition for PE managers. Moreover, with a new generation of African policymakers emphasising improved governance, the obstacles to investment grow smaller year by year.