European Firms React to MENA Unrest

For private equity investors throughout Europe, as well as in the United States, the political situation in Middle East and North Africa (MENA) presents a series of challenges, interspersed with opportunities.

For some, the risk of association with Libyan leader Muammar Gaddafi is a serious threat. The London School of Economics accepted money from the Libyan regime. As a result, Sir Howard Davies, director of the research university, resigned in early March.

Meanwhile, the Libya Investment Authority, a sovereign wealth fund, has used its billions of dollars to invest in assets around the world, including a minority stake in Pearson, publisher of The Financial Times. For a company determined to maintain editorial impartiality and integrity, this is a troublesome issue.

High-profile politicians had formed warmer diplomatic relations with Gaddafi in recent years, forgiving his former sponsorship of terrorism. What should they and the investment community do now? What if he survives and the Western world has once more to do business with him?

Such calculations also plague relations throughout MENA, including Egypt, where former President Hosni Mubarak and his family had a hand in many investments, including one of the country’s principle private equity firms owned by EFG Hermes, where Mubarak’s son Gamal previously held an 18% stake.

U.K.-based private equity investor Actis, spun out of the government investment body CDC, has active investments in Egypt and Tunisia, which it monitors closely. Once the protests began, there was an immediate impact on some of the companies involved, according to Alasdair Maclay, director of fundraising at Actis.

“There was a major impact on the workforce in both Egypt and Tunisia, not being able to get to their place of operation. But things are now back to normal,” he says.

Maclay takes a long view of emerging markets. Actis operates in Africa, Asia and Latin America. “I don’t think the current situation has changed our long-term view of emerging markets, even though there is evidence of anti-Western sentiment,” he says.

In 2009, Actis invested $244 million in leading Egyptian bank CIB, an institution that is not owned by the Mubarak family, Maclay says.

“We have seen the business respond robustly in the light of a difficult situation,” he says. A marble quarrying company in which Actis invests suffered disruption from its staff being unable to reach work, for example.

In Tunisia, two companies in the oil and gas industry were similarly disrupted during the country’s protests, but these are temporary distractions compared to the broader threat from political uncertainty and economic volatility. If an incoming regime should decide to nationalize a country’s assets (as Egypt did under the leadership of President Gamal Abdel Nasser), then investors could be left penniless.

“The situation is making us think hard about country allocation,” Maclay says.

At the heart of the Egyptian protests, according to such commentators as James Surowiecki writing in The New Yorker, is a youthful population with low job prospects. About one-fourth of young Egyptians are unemployed. While private enterprise is encouraged and lauded in the Western world, the stranglehold of governments and big business in MENA countries makes it virtually impossible for small businesses to grow.

“Political favoritism is rampant and Byzantine regulations are difficult for outsiders to navigate,” Surowiecki wrote.

A form of “patrimonial capitalism” has emerged, concentrating power and wealth in the hands of a few families and making it difficult for such governments to effect meaningful reforms. In Jordan, Saudi Arabia, Yemen and even in Libya, current rulers have promised extravagant pay rises to public servants, hoping to buy off discontent. But the reforms that are needed to stimulate private enterprise, encourage free trade between nations and to root out corruption, remain distant mirages for most MENA countries.

The situation is making us think hard about country allocation.

Alasdair MaclayDirector of FundraisingActis

Egypt had made some progress towards joining the international group of nations welcoming foreign investment from private equity. In the years between 2006 and 2008 there was foreign direct investment of $38 billion and yearly growth rates of 7 percent. This fell away following the credit crisis of 2008, but had started to revive just as the popular uprising took hold at the beginning of 2011.

Before trouble broke out, Egypt ranked 94th on the World Bank’s 2011 “Ease of Doing Business” report, up from 90th in the previous year, although the rankings noted the country was still thwarted by such issues as construction permits, property registration and contract enforcement. These are all areas that concern private equity investors looking for reliable and robust commercial partners.

“We have come a long way but we want to do a lot more,” says Rachid Mohamed Rachid, an Egyptian politician who has served as minister of investment, trade and industry. “While the BRIC countries [Brazil, Russia, India and China] have received a lot of attention, we want Egypt to be at the top of the second tier of major emerging markets.”

Such an optimistic forecast may have to wait some years, now that things have been tipped over in the MENA region. For the moment, the main concern of many Egyptians is repatriating the billions of dollars that they suspect Mubarak stole from the country and smuggled overseas.

Swiss authorities have frozen assets belonging to the Mubarak family, while the new Egyptian government has requested other European countries to do the same, both for assets belonging to Mubarak and other high-ranking politicians.

Until there is a good deal more clarity on which assets are to be claimed back by the Egyptian government and which may remain in private hands, the prospect of a new host of private equity firms investing in the country will remain remote.

There are many other reasons to hold off investing in MENA countries. During the period of intense unrest in Egypt, as elsewhere, the government shut down the stock market and cut off Internet access, hampering the country ability to trade and conduct commerce.

This could, of course, be a golden opportunity for braver investors, faced with less competition and a potential wave of liberated youth with disposable income and a hunger for Western products and services. As an example of how consumerism is taking advantage of the situation, holiday packages to Egypt are now on sale at bargain prices, with the promise of uncrowded beaches.

As of early 2011, there were 11 private equity firms based in Egypt, another six with secondary offices and 18 more that make investments in Egypt. This group may shrink in the coming months, unless there is a resolution to the question over who owns the billions of dollars or assets that left the country under Mubarak’s rule.

The number of investors may also dip as the threat remains for continuing instability in the region. Egypt shares a border of more than 600 miles with Libya, which saw many refugees try to cross into Egypt.

Citadel, the most prominent Egyptian private equity firm, suffered a 20% fall in its share price in the wake of the protests. More broadly, investment fund trackers noted a $3.5 billion weekly outflow from emerging market funds in January 2011, as the first signs of trouble appeared in the media.

The Middle East has in recent years experienced the same pattern as North Africa: high investment volumes between 2006 and 2008, followed by a drop and then a revival, which is then followed by a collapse as political protest took hold in 2011. In 2007, private equity investment in the region topped $3.8 billion, falling to just $521 million in 2009, as the planned exits failed to transpire and many companies became financially distressed.

Concrete signs of renewed activity include Dubai-based Abraaj Capital’s December 2010 acquisition of a 49% stake in Network International, a provider of credit card processing services, for $544 million. But strong growth in private equity in the region is hampered by the domination of family-run companies and the gap between seller expectations and buyer motivations.

With civil unrest still bubbling away in Bahrain and elsewhere in the Middle East, a civil war taking hold in Libya and popular dissent growing in Saudi Arabia and Iran, the entire MENA region is likely to be a tough location for private equity investors of a nervous disposition in the months and years to come.