The Middle East and North Africa (MENA) region has been abuzz with private equity activity over the last year. This is largely because of two factors – continued economic growth and favourable demographics in the GCC region, and a return to political stability and returning business confidence in key North African markets such as Egypt.
According to private equity managers, the region is witnessing the natural evolution of the private equity industry. This is being reflected in various ways – be it through different kinds of deals, a greater variety of exits, or an increased understanding of the industry among business owners, or even quite simply a greater understanding of the private equity asset class among business owners.
CATERING TO THE CONSUMER
The region’s consumer sector has fund managers excited. There is a big focus on services such as banking, healthcare and education, and on products such as food. The large levels of interest in these industries is reflective of the region’s demographics, which are characterised by a growing population and a fast-growing middle class, coupled with an under-penetration of many goods and services.
“One example is what is happening with people’s lifestyles with respect to food and beverages,” says Rick Philipps, partner and head of North Africa at Actis, adding that there are clear signs that people are moving from staple to convenience food, unbranded to branded foods and from loose to packaged food. The market for snacks in Egypt, for instance, grew 23 percent compounded through the Arab Spring period, he says.
Another area of opportunity, according to managers, is the oil and gas sector. While the sector is facing challenges owing to subdued oil prices, they are of the view that this is a good time to invest in the sector because of attractive valuations, particularly because private equity funds can buy and hold and invest through cycles.
Managers also have their eyes set on healthcare services, for which there is rising demand owing to an increase in per capita healthcare spending and the increasing incidence of lifestyle diseases in the region. According to Huda Al Lawati, partner and CIO for the MENA region at The Abraaj Group, which closed eight investments in 2014, “governments in the region are not going to be able to meet the healthcare spending entirely on their own and that is a big driver of investment in this space”.
Another sector of opportunity in the region is payments, according to Philipps. Well over 90 percent of transactions in the region are still cash-based, he says, “so there is a huge move to try and get people to use cards and other forms of payments such as through mobiles”. The MENA region is the fastest-growing globally in this sector, he adds.
Actis invested in a company in this space in Egypt in 2010, going on to rename it EMP, which according to Philipps is now “probably the biggest regional player in the sector”. The firm adopted a buy-and-build approach, growing the company through mergers and acquisitions as well as organically.