What made you target North Africa and the Levant for your fund?
Our strategy with regard to emerging markets private equity is to target markets where we have a clear competitive advantage and can leverage off the Société Générale network. We are a specialist mid-market player in emerging markets, with a sister fund in Eastern Europe and have seen an opportunity to deploy the same style of activist mid-market investing in North Africa that has worked well for our previous funds in Eastern Europe. A lot of large funds have been raised in the Gulf and are targeting the bigger deals. By limiting our fund size, we can target a market segment that is comparatively underserved and, in this way, the large Gulf funds become a potential source of exits for us.
How active is the North African mid-market?
We haven't closed any deals yet but we've got the first few under way, which will hopefully close in the next month or two. Deal flow is strong, particularly in Morocco and Egypt, but the gestation period for transactions is very long. You're dealing with companies and owners that are not used to dealing with external investors. We have to spend a lot of time with shareholders and management teams to coach them through the transaction process. It's private equity as it was done in Europe at the start, before it became as institutionalised as it is today. The price we pay is time, but we can generally find proprietary transactions and avoid auction processes. So far we've only participated in one or two competitive auctions.
Is leverage available?
To be honest there's more leverage than we need. It's the opposite problem from the rest of the world. You have large local banks like CIB in Egypt as well as international banks like Soc Gen, Credit Agricole, Barclays and HSBC. There is significant liquidity across the region and banks have become much more aggressive and keen to provide acquisition debt. On the deals we have reviewed so far, we are tending to ask for a bit less than the banks would be prepared to offer. We're looking for a balanced investment thesis and do not have to overuse leverage to drive returns. We're not looking at any businesses that have flat earnings as they're all growth companies. We're tending not to go beyond three times EBITDA on the debt, but it can vary substantially depending on the cash flows of the target company.
What are valuations like in North Africa?
There is a segment of the market where valuations have been driven up by the liquidity within the region and coming from the Gulf – average price to earnings on the stock exchanges are comfortably above 20. For those companies able to tap into the liquidity there's quite significant upward pressure on valuations. However, we're often dealing with companies that know they can't access the stock market and are not able to market themselves to foreign funds, so there's less pressure on the valuations in our segment size of the market. Most of the transactions we are looking at are at multiples of between three and six times EBITDA as opposed to double digit EBITDA multiples at the top end of the market. We aim to take businesses through an institutionalisation process and improve the corporate governance so that we can access the higher valuation multiples on exit.
Do you think North Africa's economic development will be affected by a worldwide downturn?
There are some companies which will be affected. The region's strength is that a lot of the growth is being driven by massive investment from the Gulf in real estate, construction and infrastructure, which should continue to flow so long as the oil price stays high. That is a key driver that will help to insulate the region from what's going on in Europe and the US. The businesses which may be vulnerable are the pure export businesses that treat Europe and the US as their core markets.