The first-ever Egyptian sovereign buyout vehicle, Bedaya I, has reached a final close on EGP134 million (€14.96 million; $20.13 million).
Bedaya, which means “beginning” in Arabic, will target investments of between EGP5 million to EGP6 million in Egyptian small and medium businesses (from EGP10,000 to EGP50 million). It is managed by Cairo Financial Holdings Private Equity, the buyout arm of Egyptian investment bank Cairo Financial Holdings.
The vehicle is the first Egyptian fund wholly subscribed by government-backed entities. Its LP base comprise the Ministry of Investment, which provided EGP100 million worth in seed capital, as well as the Social Insurance Fund and the National Bank for Investment, each respectively contributing EGP20 million and EGP14 million to the fund.
The initiative aims to address a serious lack of financing for SMEs across the country, Omar El Maghawry, director of private equity at Cairo Financial Holdings, told Private Equity International. “For Egyptian banks, there is no separation between lending to medium to large-cap companies and lending to SMEs. Lenders typically ask them for the same historical financials and collaterals as they do to larger businesses. So it becomes more and more difficult for SMEs to access financing.”
The sector is crucial for Egypt’s economy: SMEs constitute 85 percent of all registered businesses in the country, and contribute around 70 percent to Egypt’s official GDP. But they currently receive less than 6 percent of overall lending in Egypt, according to El Maghawry.
We should be able to achieve good valuations when the exit time comes in five to six years.
Omar El Maghawry
Despite such a dearth in capital, the project has had to overcome strong structural issues inside the country, El Maghawry said. “Because the fund is fully subscribed by public entities, it has to be supervised by the Egyptian Financial Authority. But we discovered throughout the process the extreme inefficiency of the regulators when it came to private equity: this was the first buyout fund they had ever seen. They expected the same liquidity and redemptions as the ones you have in mutual or equity funds.”
The vehicle had an initial target of EGP500 million, but reached its final close on EGP134 million – because of the regulator’s opposition to holding several closings. Egypt still lacks the legislative framework that would entice other private equity firms to settle in the country, El Maghawry said.
Such hurdles add to the broader turbulences Egypt is currently going through. Since the beginning of the year the Egyptian pound has dropped sharply in value against the dollar, and forthcoming changes in the tax regime continue to create uncertainty for the country’s businesses.
The social climate also remains highly volatile: Egypt’s defence minister yesterday warned that continuing political tensions, now at a fresh high after six days of clashes between police and protesters in the country’s main cities, could lead to the “collapse of the state” if left untreated.
But El Maghawryn thinks there couldn’t be better timing for Bedaya to start investing. “It’s a buyer’s market at the moment: there are a lot of good companies around, but social and political instability mean that valuations are low. And we expect the economic cycle to be turning around 2017-2018, reaching seven percent GDP growth again – so we should be able to achieve good valuations when the exit time comes in five to six years.”
The fund is expected to hold its first formal investment committee meeting this week. This should lead to at least three investments being agreed on before the end of February, El Maghawry said.
The agri-business and manufacturing industries, along with TMT and services, were seen as the sectors likely to be given most priority.