A growing feeling of stability has moved Egypt back on to the radar screens of private equity investors, says Youssef Haidar of TVM Capital Healthcare Partners. Before the 2008-09 global economic crisis, Egypt was typically part of a triumvirate of Middle East countries targeted by private equity investors, alongside Saudi Arabia and the UAE. Its emerging market dynamics – with a large and youthful population and rapidly expanding middle class – was the perfect complement to the higher-income but less populated Gulf states.  Of the three, Egypt’s equity market was in many ways one of the more advanced, with progressive listing rules. It had the depth, liquidity and foreign participation needed to provide funds with a viable exit option.  However, the global crisis, and then political and economic instability in Egypt intervened. This contributed to investor reticence, and most of the $10 billion of ‘dry powder’ capital available to MENA funds in 2008 was never deployed.  While Egypt accounted for around a fifth of MENA private equity investment in 2006, the country had only a 6% share in 2014, compared to 55% for the UAE and 21% for Saudi Arabia. However, investor perception is now turning, and the Egyptian economy is likely to benefit more from a private equity industry that is again on the rise. MENA funds raised $2 billion of capital in 2014, more than double the previous year’s total. They should attract more capital in the coming years by pointing to Egypt as an exciting market that adds to a fund’s diversification, in terms of geography and investment theme. POSITIVE SIGNS
There are encouraging signs in the proliferation of conferences drawing foreign investors to Cairo, and capital is starting to be deployed. We at TVM Capital Healthcare Partners acquired Egyptian manufacturer Ameco Medical Industries (Ameco) in late 2014, and we are looking for more investment opportunities in Egypt in the next couple of years. Having emerged from a significant slowdown, Egypt is expected to record healthy GDP growth of 4.5% this year. Lower energy prices and increased capital inflows have helped the country by reducing pressure on the current account and moderating inflation. Greater political stability is persuading many investors to look again at Egypt’s economic potential.  A couple of new developments this year have brightened the macroeconomic picture further. Firstly, the country’s largest ever gas discovery, in the Mediterranean Sea, could combine with new production of liquefied natural gas on the Red Sea coast to make Egypt a net energy exporter in the coming years. Secondly, the opening of the ‘New Suez Canal’, a parallel waterway designed to increase capacity, is expected to boost revenues of this strategically important asset by 9% next year. Meanwhile, the government has been keen to improve the investment climate by reducing corporate tax, continuing to provide tax exemptions for firms in free trade areas, and suspending capital gains tax for two years on publicly traded equities.  Investors are also heartened by the structural changes in the Egyptian economy. The country is shedding its ‘rentier economy’ tag and becoming less dependent on Suez Canal revenues and government spending. The private sector’s share of total investment has increased to over 60%, from around 50% a decade ago, and this is likely to increase as a relatively underleveraged corporate sector steps up capital expenditure.  Importantly, for anyone investing in manufacturing, logistics or the consumer sector, the country’s 82 million population is driving demand, with household consumption now accounting for over 80% of GDP, up from around 70% in 2006. ‘ROLL UP YOUR SLEEVES’
This does not mean everything is suddenly rosy for investors. From 30,000 feet, the opportunity in Egypt is obvious for many, but challenges arise when you are on the ground.  Capital restrictions are a frustration, and remitting returns to investors outside the country requires complex structures. Because the current account deficit remains a concern, legislation in this area is hardly predictable. There can also be challenges when investing in family-owned firms that are hungry for growth capital but are either hesitant to make the adjustments necessary to institutionalise, or do not have the capacity to implement change.  The key to lasting investment success, as in every region, is a deep knowledge of local business culture, strong business relationships, and a lot of detailed work on aligning interests between company founders, management and private equity investors.  In the MENA region in particular, private equity firms often need to take a ‘roll up your sleeves’ attitude, and offer practical support to their portfolio companies.  Private equity firms may benefit from setting up an operations group to provide services to the companies they invest in, including in the areas of finance, legal, human resources, information technology and executive support.  Such teams can help drive operational change and promote transparency and an open exchange of views that contributes to the value creation process. It is important for the region’s private equity industry – and indeed for much-needed job creation in the Egyptian economy – that investors are prepared to invest this kind of time and effort. If they do, capital will become increasingly available for a country with such strong economic potential. Youssef Haidar is partner and managing director at TVM Capital Healthcare Partners ©2016 funds global mena