After the storm

Eighteen months ago, the notion that a a wave of regime change was about to sweep the Middle East and North Africa (MENA) region would have seemed fantastical. The uprisings that started in December 2010 in Tunisia, and subsequently spread to Egypt, Libya, Bahrain, Syria and beyond, took everyone by surprise. 2011 has been, in the words of Swicorp head of private equity Nabil Triki, “an exceptional year all round”.

This, clearly, has had an impact on investors’ views of the region. “What has happened in the region has shocked people,” says Julien Barnes-Dacey, senior Middle East analyst for Control Risks Group. “MENA was considered a relatively stable region; investors are now much more focused on the potential political risks.” 

Investors are now much more focused on the potential political risks

Julien Barnes-Dacey

Limited partners have become much more cautious about the region’s prospects. “We’ve seen a significant shift in LP attitudes,” says Triki. “They have been more conservative in any case because of the global economy, and have been allocating less to private equity. But here you have uncertainties about global issues added to regional ones. You would have been hard-pressed to find an LP looking to mobilise capital in the region until very recently. We are seeing some change, as transitions start happening. But fundraising will remain very difficult for MENA funds for the foreseeable future.”

GPs in the region have had a difficult few months. “Our view is that today, you have to be very cautious,” says Triki. “Until September, we spent our time focusing on portfolio companies to help them through a challenging period, help them manage cash flows and discussions with banks.” The uprisings have had a lasting impact, he adds. “In Q1, many companies stopped functioning as the revolutions took their course. In Q2 and Q3, there were strikes and social unrest – and even if these didn’t affect companies directly, it often had an impact on suppliers or customers. So it has been tough for them.”

Yet while question marks remain about the political future of many countries in the region – at the time of writing, elections were imminent in Egypt and Morocco and are due in 2012 for Jordan – those on the ground are once again turning their attention to investing. However, their strategies and risk-mitigation techniques have shifted. “There were fewer deals closed post-revolution until Ramadan in Egypt, as PE houses focused on their portfolio companies,” says Maged EzzEldeen, deals partner in PwC’s Egypt office. “Yet deal activity is coming back now. PE investors are looking for adjusted prices in more defensive sectors. They are also focusing much more on the due diligence process, so deals are taking much longer to execute.”

“Until September, we were in a holding pattern for new investments, waiting to see how the situation was unfolding,” says Triki. “But since then, we have started actively looking for new deals. We are focusing now on more defensive sectors, such as healthcare, food and beverages, pharmaceutical production and retail and education. This is not just because of what has happened here – the issues in Europe are affecting the MENA region as well. We used to back a lot of companies that had a heavy export base to Europe and that isn’t such an attractive proposition [now]. We want to focus on companies that will continue to do well because they serve people’s basic needs.”

It’s a shift that Yousef Bazian, PwC partner in Dubai, is seeing across the region. “Clients are still asking us for transactions, so interest in doing deals has not waned drastically,” he says. “However, their approach has changed. They are looking more at defensive sectors such as social infrastructure, food and oil & gas; they are taking much more time to evaluate each opportunity; and discussions around pricing have become more robust. M&A may slow down for a time, but I suspect it will pick back up again over the medium-term.”

The other issue is that pricing has fallen following the unrest – welcome news for private equity investors, who have long complained that valuations remained stubbornly high even after the financial crisis hit the region. 

This part of the world was plagued by high valuations that didn't reduce after 2009

Nabil Triki

“This part of the world was plagued by high valuations that didn’t reduce after 2009,” says Triki. “Now, finally, we are seeing good companies accept more reasonable valuations, and these are providing some good opportunities for investment.”

Part of the problem was the lack of assets for sale. The uncertainty caused by the social unrest is encouraging more sellers on to the market, looking for support as much as capital. New deal sources are emerging, too. “The market is starting to look more healthy now and that may be partly because investors are seeing new opportunities in Egypt,” says EzzEldeen. “Where previously there might have been businesses run by people associated with the old regime, and therefore not suitable for investment, now some of these assets that have never been available before are open to M&A.”

One of the more notable recent transations was the $90 million acquisition of Visa Jordan, which completed in August. Actis acquired the business through its payments processing platform business Emerging Markets Payments Holdings, as part of a strategy to develop the infrastructure for card payments in Africa. “This was completed after the uprisings started in a country positioned in the midst of the unrest,” says Hossam Abou Moussa, Actis director in Cairo. “It demonstrates our approach to the region – we believe that the fundamentals are highly attractive, led by demographic and social changes.”

And, while over the short-term there may be some pain as transitions continue, the medium-term should be much more positive as reforms start to take hold. “The Middle East has had a shake up. The result should be that the region becomes more transparent – [with] a greater focus from governments on making the environment more conducive to business,” says Bazian.