mena private equity landscape (private equity international, july 2015)

7/24/2019 MENA Private Equity Landscape (Private Equity International, July 2015)

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Ready for moreManagers in MENA are optimistic about the industrysprospects in the region, thanks in no small part tothe continued consumer story and an improved exitenvironment, writes Siddharth Poddar

MIDDLE EAST AND NORTH AFRICA

The Middle East and North Africa (MENA)

region has been abuzz with private equityactivity over the last year. This is largely

because of two factors continued eco-

nomic growth and favourable demographics

in the GCC region, and a return to political

stability and returning business confidence

in key North African markets such as Egypt.

According to private equity managers,

the region is witnessing the natural evo-

lution of the private equity industry. This

is being reflected in various ways be it

through different kinds of deals, a greater

variety of exits, or an increased understand-

ing of the industry among business owners,

or even quite simply a greater understand-

ing of the private equity asset class among

business owners.

CATERING TO THE CONSUMER

The regions consumer sector has fundmanagers excited. There is a big focus on

services such as banking, healthcare and

education, and on products such as food.

The large levels of interest in these indus-

tries is reflective of the regions demograph-

ics, which are characterised by a growing

population and a fast-growing middle class,

coupled with an under-penetration of many

goods and services.

One example is what is happening with

peoples lifestyles with respect to food and

beverages, says Rick Philipps, partner and

head of North Africa at Actis, adding that

there are clear signs that people are moving

from staple to convenience food, unbranded

to branded foods and from loose to pack-

aged food. The market for snacks in Egypt,

for instance, grew 23 percent compounded

through the Arab Spring period, he says.

Another area of opportunity, according

to managers, is the oil and gas sector. While

the sector is facing challenges owing to sub-

dued oil prices, they are of the view that

this is a good time to invest in the sector

because of attractive valuations, particularly

because private equity funds can buy and

hold and invest through cycles.

Managers also have their eyes set on

healthcare services, for which there is rising

demand owing to an increase in per capita

healthcare spending and the increasing

incidence of lifestyle diseases in the region.

According to Huda Al Lawati, partner and

BRIEFING: MENA

CIO for the MENA region at The Abraaj

Group, which closed eight investments in

2014, governments in the region are not

going to be able to meet the healthcare

spending entirely on their own and that

is a big driver of investment in this space.

Another sector of opportunity in the

region is payments, according to Philipps.

Well over 90 percent of transactions in the

region are still cash-based, he says, so there

is a huge move to try and get people to use

cards and other forms of payments such

as through mobiles. The MENA region is

the fastest-growing globally in this sector,

he adds.

Actis invested in a company in this space

in Egypt in 2010, going on to rename it EMP,El Solh:listing on bourses outside MENA


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BRIEFING: MENA

are increasingly trying to expand across the

region. Companies often require capital to

do so, which private equity can provide.

Henry Gabay, co-founder and CEO of Duet

Group, says, for instance, that Egyptian

companies are looking for growth capital to

acquire similar companies in neighbouring

countries for possible expansion to North

Africa and sometimes sub-Saharan Africa.

Zug-based alternative investment man-

ager Partners Group has also adopted the

same model with one of its recent invest-

ments in the education sector. Robert

Lamb, senior vice-president, investment

solutions, at Partners Group, says the firm

has recently signed a joint venture with

one of the major sovereign wealth funds

in the region to take one of its portfolio

companies to the Middle East and then

invest along with the sovereign fund into

the company.

It is a schools business we own a

network of international schools and are

expanding that network through a buy-and-

build strategy. We are partnering with the

sovereign wealth fund to expand the portfo-

lio of schools in the Gulf this creates value

for our portfolio, develops our regional

investment understanding, provides an

attractive investment opportunity for our

partner and at the same time brings world

class schools to their doorstep, so it should

represent a win-win for both, he says.

In the future, the region could also

increasingly see private equity firms tap

into the expertise and networks that local

strategic partners can bring. For instance,

Lamb says: Certain markets such as Saudi

Arabia are interesting [in terms of the

opportunities they present], but there are

very high barriers to entry and it takes time

to develop the right relationships.

Another interesting theme that emerges

from conversations with managers is the

renewed interest in investing in North

Africa. While the Arab Spring created chal-

lenges for businesses across the region,

which according to Philipps is now prob-

ably the biggest regional player in the sector.

The firm adopted a buy-and-build approach,

growing the company through mergers and

acquisitions as well as organically.

REGIONAL, NOT NATIONAL

The buy-and-build model is now perva-

sive in the MENA region. This is partially

because, in isolation, domestic economies

are too small for businesses be it pay-

ments companies, healthcare chains, or

other service-oriented businesses to scale

and grow to their full potential.

Given that the size of individual econo-

mies can inhibit the growth of companies

beyond a point, MENA-based companies

Governments

in the regionare not going

to be able to meet the

healthcare spending

entirely on their own

and that is a big driver of

investment in this space


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BRIEFING: MENA

the fundamentals driving opportunities

were still in place in Egypt. Political stability

in Egypt and the region at large was one

key missing ingredient for investments in

the region, but its return over the last year

is drawing investors again.

Duet Group, for instance, launched the

Duet-CIC Egypt Opportunities Fund with

the Egyptian investment bank CI Capital in

2014, to target opportunities in the coun-

try. According to Gabay, the timing for thefund is interesting because of the change of

government and because reforms are start-

ing. He says a lot of companies suffered and

they now need funding.

We are very impressed with compa-

nies that survived the difficult times, he

said, adding that private equity can make

a difference by providing growth capital

to help these companies expand, perhaps

even beyond their borders, and by helping

these companies restructure, if required.

Al Lawati adds that although other

North African countries such as Algeria

face certain restrictions and challenges that

limit investment activity, those economies

have links to Europe (mainly France), and

that adds an interesting dimension in terms

of exits.

IN CONTROL

One other interesting dimension seen in

the MENA region is that of vendors becom-

ing more amenable to giving up controlling

stakes in their businesses. More recently,

we have seen a lot of mandates being given

to advisors for control deals, says Al Lawati.

A trend that helps explain this is succes-

sion planning. According to Karim El Solh,

the CEO of Gulf Capital, there are a lot of

succession planning issues coming up in the

Gulf and a lot of the founders are reaching

retirement age and they need to tackle the

succession planning issues eventually.

He says that often these founders may

not have children who are able or willing

to run the family business and their com-

panies many not have the size or the criti-

cal mass required to go public, so selling

to a private equity firm becomes a more

viable option. This is particularly true

for expat entrepreneurs who come to this

region and set up businesses, run them for

several decades and now want to go home

and retire, he says.There are also several families with

large businesses that are now much more

amenable to selling off peripheral, non-core

businesses at this time of limited liquidity.

Sometimes they even just want to bring

in a professional partner to help chart the

course of their business.

Not only are sellers more amenable to

parting with controlling stakes, but banks

are more willing than before to provide

financing for acquisitions too. Banks, par-

ticularly those based locally, are opening up

and are willing to fund transactions.

El Solh says banks becoming more

sophisticated is also part of the reason

why financing is easier to secure now. Local

banks are becoming more competitive and

aggressive in this area and El Solh says that

about half of Gulf Capitals acquisition

financing comes from local banks at the

moment.

EXIT MARKETS OPEN

Deal flow and investments, though, only

form one part of the story. The evolution of

the exit environment in the MENA region

is also encouraging, managers say. Over the

past few months, there have been a few

MENA-based companies that have gone

public on international stock exchanges

such as the London Stock Exchange.

El Solh says that taking a local business

and creating a regional champion out of

Al Lawati: larger businesses attract interest

Certain markets

such as Saudi

Arabia are

interesting [in terms of

the opportunities they

present], but there are

very high barriers to

entry and it takes time

to develop the rightrelationships


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BRIEFING: MENA

it allows companies to be listed outside the

region. He cites Gulf Marine Services, an

assembler and operator of jack-up barges

and offshore support vessels, which was a

pure Abu Dhabi player when Gulf Capital

acquired it. With our funding and back-

ing, GMS became the number two player

globally over time and 40 percent of its

revenues came from the UK and Europe.

The firm looked at listings in several mar-

kets overseas and then settled on the LSE,determining that it was the ideal exchange

for GMS owing to the high concentration

of the companys business in the UK.

Al Lawati explains further, saying that

the scale of business is important, as is the

investment theme. MENA healthcare, for

instance, she says, is a broadly and globally

understood phenomenon, so finding inves-

tors in overseas markets such as London is

possible as it has strong access to investors.

Sometimes companies are too small and

too local and they may not garner enough

interest internationally, she says.

However, a new companies law in the

UAE may help change that, according to El

Solh. According to the new law, companies

can sell as little as 30 percent in a second-

ary sale, while historically only a primary

sale of shares was permitted at the time

of listing. This opens up an exciting local

exit route for private equity funds, he says.

What is more, the new law will also encour-

age listings in the UAE as it brings down

the minimum float for companies from 55

percent to 30 percent.

There is also increased interest from

foreign multinationals in the region. This

provides an avenue for trade sales to pri-

vate equity managers. Kellogg, for instance,

acquired an 86 percent stake in BiscoMisr,

Egypts number one packaged biscuits com-

pany for $125 million in January. Similarly,

last July, Mitsubishi Corp. and Mitsubishi

the key differentiating factor between the

kinds of deals the two firms [will] make.

The reality is that when you take a look

at the number of businesses in the region,

some 85 percent of them are SMEs, she

says. She adds that while these businesses

do not present investment opportunities

for Abraaj because of their size as Abraaj

operates in the mid cap space, it makes

sense for these businesses to be supported

by funds such as Auvest.

There is an increasing level of sophistica-

tion in the regional private equity industry

in the region and Abraajs commitment to

the Auvest fund is a demonstration of the

phenomenon.

Ultimately, the success of these regional

funds is important because the region is

home to some very large institutional inves-

tors sitting on stockpiles of cash. Some of

these investors first launched their private

equity activities investing with a handful

of local names, some of whom arent even

in existence any more, and that resulted in

a less than ideal experience with private

equity, one manager says. As such, many of

them are choosing to first invest overseas in

the asset class. The success of local private

equity managers could soon change that. n

Philipps:appetite for convenience food

Heavy Industries acquired a 38.4 percent

stake in Metito Holdings, a water solutions

company from Gulf Capital in a trade sale.

These are hardly isolated instances of

foreign companies investing in compa-

nies based in the region. Managers expect

the regions larger companies to continue

attracting foreign multinationals as well

as the large global buyout firms. The key,

it seems, is for indigenous companies to

develop a regional footprint.

CONTINUED EVOLUTION

The Auvest MENASA Opportunities Fund

I, a new fund launched by the Auvest Group,

is testament to the continuing evolution of

the private equity market in the region. The

group is in the market to raise $250-$300

million to invest in the SME sector across

the Middle East, North Africa and South

Asia region, and surprisingly, counts Abraaj

as a limited partner in the fund.

Abraaj has committed $30 million to the

fund. Considering that Abraaj itself is a GP

committed to investing in this region, its

commitment to another fund manager is

interesting, and perhaps unexpected. How-

ever, according to Al Lawati, the deal size is

There are a lot

of successionplanning issues

coming up in the Gulf and

a lot of the founders are

researching retirement

age and they need to

tackle the succession

planning issues

eventually

mena private equity landscape (private equity international, july 2015)

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