Backing MENA’s entrepreneurs

Riyada Enterprise Development (RED) is Abraaj Capital’s new SME investment platform, a $500m initiative. Tom Speechley, who runs it, explains to PEO what RED is aiming to achieve.

What prompted Abraaj to set up Riyada Enterprise Development?

We’ve been growing our private equity business in the region for the past 10 years, and in the early stage of this process some of our best results came from backing growth companies and turning them from national into regional champions. Latterly our focus has been more on our buyout activities, but over the past two years we’ve also been reassessing the growth capital opportunity, and the conclusion we came to was that alongside our buyout operation, we should have a dedicated growth capital platform, with dedicated capital and a dedicated investment team.

Why such a platform?

Because the fundamentals are compelling. 90 percent of all businesses in MENA are SMEs. They provide about 70 percent of all jobs in the region, but only about 30 percent of total GPD. Compare that with the US, where SMEs contribute around 50 percent of output, and you can clearly see the challenge facing these businesses in MENA: they need to become more productive. For us, that’s a great opportunity to invest in.

Boosting SME productivity – is that going to put jobs at risk?

To the contrary! Improving SMEs may involve levering technology, but it has nothing to do with replacing people with machines. What we’re trying to do is significantly increase the earnings of a company with every growth investment we make, and you don’t do that by cutting jobs: you do it by growing the business and adding jobs. It’s what the growth capital model is about; if you are successful you will create new jobs.

So what does RED’s strategy look like? 

Our aim with the fund is to invest some $500 million of equity, of which we have raised well over half already, including a $150 million commitment from OPIC. We have taken some experienced people from the Abraaj private equity team and supplemented with new hires particularly in countries such as Palestine, Jordan and Lebanon. The idea is to be on the ground in every country in which we invest, with some exceptions in the GCC, and for that we can share infrastructure with eight existing Abraaj offices across the region. SME investing is all about grass roots presence and understanding, especially a detailed grasp of the entrepreneur; you can’t do it remotely. Which also explains why we have allocated dedicated pools of capital to several countries such as Egypt, Palestine, Jordan and Lebanon. It increases the focus of the team on the ground.  We will typically take influential minority positions, and then exit alongside the entrepreneur after say, five or six years.

Is private equity backing really what growth companies need?

I do think private equity offers the best solutions for SMEs. In recent times, people have been berating

Tom Speechley

the banks for not lending enough to SMEs, but I’m not sure that’s entirely fair on the banks. Many of these businesses aren’t bankable at the time we look at them. For starters, the high growth ones need their cash to keep growing not service bank loans. Equity is more patient. Plus private equity brings with it much more than capital. Many of these companies need help on many fronts; its about using your experiences learned with other companies to help organize their growth. I think another key thing is that the private equity model – done well – is sustainable by definition, because only successful managers will be able to come back to the market to raise fresh capital.  As investors, we’re about long-term sustainable success. We are repeat investors. And although we are absolutely for-profit, if we get it right, the developmental effect on the portfolio business will be significant. It’s the double-bottom line people often talk about. And don’t forget this region needs to generate 50 million jobs in the next ten years just to stand still on unemployment!

Abraaj is the creator of www.wamda.com, a new digital platform for MENA’s entrepreneurial community. What’s the thinking behind this part of the initiative?

Wamda means ‘spark’ in Arabic, and our aim here is to bring together all stakeholder in the MENA SME ecosystem and get them to talk to one another on the Wamda platform. Entrepreneurialism in the region is on the rise, but there is still a general lack of awareness of what is happening, a need for a better exchange of information, knowledge sharing, and we want everyone to engage in this exchange,  entrepreneurs, managers, investors, policy makers, advisers, trade associations, NGOs, and so forth. For example, through Wamda an entrepreneur can seek a mentor through an on-line matching service. And in due course you’ll be able to seek out angel investors through the platform too. Wamda is part of our CSR program.

When is RED going to make its first investment? 

Watch this space. We’re currently in execution mode with five companies, and we think the pipeline is extremely strong. We’ve looked at roughly 175 businesses in the past three to four months alone, and there is plenty more to come. But again, that really isn’t surprising if you consider that the SME sector accounts for such a large portion of the MENA economy.

On 8 & 9 November, Abraaj will be hosting “Celebration of Entrepreneurship”, a gathering aimed at entrepreneurship and the SME sector in MENA, which is expected to attract more than 1,500 participants. For more information, visit www.abraaj.com/celebration