Arab Sping, Basket of Compelling Private Equity Opportunities

LPs and general partners alike need to closely follow developments in high-potential markets across MENA to tap into compelling opportunities arising from both macro fundamentals and economic dislocations. Outsized returns will come from structuring investments that offer solutions to the challenges if a changing region, leaders of the top Middle East and Africa private equity firm tell participants at PEI Capital Connect MENA 2012

Solid long-term macro fundamentals combined with short- and medium-term constraints on sovereign balance sheets will together create substantial opportunities for private equity investors across the Middle East and North Africa in the coming period, a top regional private equity leader told an industry gathering today.

“While the MENA region’s risk profile may seem higher today than it was before the Arab Spring, we remain convinced that the emergence of true participatory democracies will be net positives for the region,” said Citadel Capital Co-Founder and Managing Director Hisham El-Khazindar. “Indeed, we are cautiously optimistic that Egypt, our center of gravity, is largely on the right track in terms of a political transition to democracy, even though the nation will likely pass through substantial economic turbulence before all is said and done.”

El-Khazindar was speaking on a panel titled ‘The Arab Spring and investment opportunities,’ the first session at today’s PEI Capital Connect MENA 2012 in Dubai.

Economic challenges in markets in transition such as Egypt will likely include pressure on national currencies, restructuring of subsidy systems (particularly in Egypt) and resultant inflationary pressures. Given those challenges and the economic impact of the Revolution in 2011, El-Khazindar said, “Our key focus was and is on existing investments, where we have focused on a narrowing of execution risk as we shepherd our platform and portfolio companies through this transition period while positioning them to capture added value from still-unfolding change.

“Risk is part of any emerging or frontier market investor’s calculations,” El-Khazindar continued, “and they judge potential GPs not just on how they mitigate risk, but also on how they structure investment opportunities to capture the upside.”

Indeed, the sovereign balance-sheet constraints that today raise alarms for some investors are creating outstanding investment propositions for others.

“In Egypt, for example, the need to overhaul the previous regime’s system of energy subsidies is creating new opportunities for private investment in everything from petroleum refining and energy distribution to waste-to-energy. The challenge today is for private equity investors to structure deals that create value by helping countries emerging from the Arab Spring meet the aspirations of millions of citizens,” El-Khazindar said.

Since 2007-08, El-Khazindar explained, Citadel Capital has structured its portfolio in anticipation of risks such as devaluation while constructing platform companies around proven investment themes including deregulation / government pullback, infrastructure with PE returns, natural advantages and resources, and a fast-growing consumer population.

“A great many of our platforms are designed to benefit in the event of devaluation, for example, while offering solutions to pressing national challenges,” he said. “Our investments offer solutions to solid waste problems. They will substantially curb Egypt’s reliance on diesel imports while simultaneously preventing the release of nearly 180,000 tons of sulfur dioxide each year. They ease road congestion and reduce emissions by shifting transport off our highways and onto un-used waterways.”

While elevated risk profiles are “a fact of life in times of transition,” El-Khazindar noted, “thankfully there are still a few limited partners out there who are monitoring developments and who are simultaneously unafraid to make investment decisions based on fundamentals that will outlast any short-term disruptions. These include natural resource wealth, large, fast-growing populations and proximity to key export markets.”

Since October 2011 Citadel Capital has raised more than $325 million of equity and debt to strengthen its own balance sheet, while across its portfolio of platform investments it has secured a further $900 million in equity commitments over the past nine months.

Also speaking at today’s gathering in Dubai is Citadel Capital Managing Director Stephen Murphy, who headlined a panel discussion titled ‘Fundraising reality check: GPs and LPs ruminate on the trends shaping the capital-raising environment.’

“Do international investors still have appetite for the region? Absolutely — provided the opportunities are compelling and the general partner a proven local player,” said Murphy. “The simple fact that against a background of the Euro crisis and the aftermath of the Revolution in Egypt, we at Citadel Capital have managed to secure over US$ 1.0 billion in equity commitments is all the proof you need.”

Sophisticated international institutions investing with Citadel Capital in 2011 included the US Overseas Private Investment Corporation, the European Investment Bank, Germany’s DEG, the International Finance Corporation, the IFC Africa, Latin America and Caribbean Fund (ALAC), Dutch development bank FMO, FISEA (of France’s PROPARCO), the African Development Bank, KfW Entwicklungsbank, the ICF Debt Pool and the Belgian Investment Company for Developing Countries (BIO).

Asked whether blind pools or deal-by-deal fundraising are more appropriate to the region, Murphy noted, “The key is flexibility. That’s why, for example, we offer both blind pools in the form of our MENA and Africa Joint Investment Funds and deal-by-deal co-investment opportunities through our platform companies, each one of which builds an investment opportunity in a discrete sector. The reality is that there is a very small universe of investable GPs in the Middle East and Africa; if you’re one of them, you still need to give potential LPs a menu of options that suits their individual profiles.”