Egyptian SMEs on the rebound

Egypt's private equity market is showing signs of a rebound as funds home in on small and medium-sized businesses ripe for investment.

Egypt has struggled under the weight of political and economic uncertainty and a year after its uprising, its main indicators are flashing red. AP Photo

CAIRO // Egypt's private-equity market is showing signs of a rebound as funds home in on small and medium enterprises ripe for investment.

Large Middle East and North Africa-focused investors are tapping into the resilience shown by Egypt's small and medium enterprise (SME) sector, which accounts for about 80 per cent of the economy, particularly traditionally defensive companies such as in the consumer sector.

Abraaj Capital, the Middle East's biggest buyout firm, is among the investors looking at Egypt's consumer market, said Mustafa Abdel Wadood, the company's chief executive.

"SMEs is going to be an interesting space [and] the evolution that Egypt is going through will make a good playing field for work, then more people will take a per cent of it," he said. Abraaj will invest US$20 million (Dh73.4m) in Egypt's SME sector this year, said Mr Abdel Wadood, this despite the political and economic instability.

"Egypt lends itself to consumer stories ultimately, so we like sectors that benefit from the large and growing population," Mr Abdel Wadood said. "The reality is we continue to be active, but the trick for someone like us is to identity the right business to provide opportunity.

"We're seeing good deals; but it's always a challenge."

Egypt has struggled under the weight of political and economic uncertainty, and a year after its uprising, its main indicators are flashing red. Foreign reserves have shrunk by more than half to $16.4 billion, the country is in balance of payments deficit and there are no signs of the central bank devaluing the currency, which is falling steadily against the dollar. Despite this, private-equity activity is still going on in Egypt, even on a large scale.

Citadel Capital, an Egyptian private-equity firm, last month agreed to sell National Petroleum Company Egypt to the Canadian-listed company Sea Dragon Energy in a cash and stock deal valued at $147.5m.

This week, France Telecom said it would buy most of Naguib Sawiris's stake in Mobinil, an Egyptian wireless venture, at 202.5 Egyptian pounds a share. That is 8.7 per cent less than the price it would have paid under an earlier option agreement with Mr Sawiris, Bloomberg News reported.

And last year, in the midst of elections, Sweden's Electrolux acquired a 52 per cent controlling stake in Egypt's appliance maker Olympic Group. It was the first foreign direct investment of its size in Egypt after the revolution began on January 25, Saad Eldin Abdullah Sallam, the chairman of Paradise Capital, the parent company of Olympic Group said at the time.

"There will be opportunity selectively in some of the larger transactions," said Mr Abdel Wadood, adding that consumer-based transactions such as France Telecom's stake in Mobinil and Electrolux's acquisition of Olympic reflected a long-term view adopted by investors.

"Most people in the consumer business will take long-term views, and these are two testaments of the case. We are long-term investors and the value we get [now] is not about being at the best price possible every single time, it will be about helping this business grow," he said. Smaller private-equity outfits are also making moves. Marianne Ghali, the chief executive of Sphinx, a private-equity fund that is a subsidiary of Cairo-listed Citadel Capital, said her firm was "aggressively investing" in SMEs, the company's speciality.

Ms Ghali said the fund was working on three transactions in the waste-management sector, health care and packaging, all areas she classes as defensive amid a lack of clarity in the political situation. "We're looking at $10m transactions that will bring in significant return," she said.

But deal activity is still cautious in an environment in which the business community sees little assurance of a clear economic agenda in the coming months.

"Investors are realising that there are defensive companies, but the number of deals actually executed are not many. They can't decide whether they want to jump right now - or wait and see," Ms Ghali said. She said that until there was clarity on broad-based economic policies in Egypt, such as whether the government would adopt a stimulus or austerity package, and mechanisms to remove wasteful subsidies, investors would remain hesitant.

Private-equity activity has been lacklustre since the global financial crisis, as perceptions of companies' values among buyers and sellers differed dramatically, and widened even further after last year's uprisings. As a result, Middle Eastern merger and acquisition volumes slumped 43 per cent last year to $10.1bn, according to Thomson Reuters data. But the gap between the buyer and seller is starting to narrow as democratic elections in North Africa run smoothly and optimism over Gulf economies also grows, encouraging a revival in private-equity activity.

"There's a big warning sign, and until there's more focus on economic agenda, the investment environment will be tricky," said Mr Abdel Wadood. "That does not mean we won't invest. We're long-term investors, and we need to form a long-term view, but the economic agenda has taken a back seat to economy agenda."

Political parties are fumbling towards an economic policy to narrow a ballooning budget deficit, while the upcoming presidential election, expected to be held before June, will also offer a ray of hope for stability to investors waiting on the sidelines.

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