The Private Equity Elephant

By Wael Khattab
September 17, 2015
Published by Business Today; August, 2013

Small successes in the Egyptian private equity industry have not brought the nation up to speed with international industry standards. It’s time to talk about the elephant in the room.


As Egypt's private equity industry begins to resurge from its recent dip, it is necessary to assess transparently what has happened in the last 10 years and grasp the lessons learned to set the stage for the next 10 years. As we reflect on the evolution of the Egyptian private equity industry, the image of Mohamed Sobhy's 1990s character, Ali bey Mazhar, comes to mind. Ali bey, with his limited skills, weak financial power and volatile basic ambition viewed almost every business opportunity as a lever for unprecedented success and wealth creation. Needless to say, he ended up broke and had to find himself a job to make a living.

On the flip side, the ironic paradox stems from the confirmed growth potential of Egypt's economic fundamentals and the dynamic role private equity has tried to and can play in the coming years in Egypt.

In the five years prior to the January 25 Revolution, approximately 75 private equity transactions were closed in Egypt with an average transaction value of $200 million (LE 1.4 billion). These 75 transactions were executed by 36 private equity funds focused on Egypt and, needless to say, the private equity scene welcomed three to four new Egyptfocused funds every year. With such growth, the common concern was where the industry was sourcing relevant talent from to execute private equity transactions in such a short period. Egypt's private equity experienced four years of stagnation that came on the heels of almost a decade of consistent growth. The financial crisis and the consequences of the Egyptian revolution which have hampered the nation's economic performance led Egypt's private equity industry to shrink to an annual figure of approximately $300 million (LE 2.1 billion) compared to almost $1.4 billion (LE 9.8 billion) recorded between 2005 and 2008. The real test during this time was to the robustness and business fundamentals of transactions executed.

This is as much a time for reflection for the nation as it is for the private equity industry. As someone who has worked in the private equity industry in the Middle East for close to a decade now, and currently heading a prominent regional Saudibased private equity fund with close to LE 500 million to invest, I believe it is time to talk about the elephant in the room.

Identity crisis

The private equity industry in Egypt doesn't really know what it is: Is it only a provider of cash to operating companies, or does it provide operational growth to its partners? Is it a partner who rolls up its sleeves to make actual operational change, or is it merely a strategic advisor?

Egypt's PE identity crisis; is it only a provider of cash to operating businesses, or does it provide operational growth and management guidance to its partners?

As a practitioner in the industry, I can clearly trace how the industry players and stakeholders have difficulties defining the value added of private equity to its partners and investors. To me, this is the most painful of the industry's problems: If the industry cannot come up with a clear mission other than making money for investors, then industry players need to spend some time identifying a more comprehensive raison d'être. One senior member of a prominent third-generation family business in the Middle East told me, “I've invested in private equity funds globally and in the Middle East. I am always amazed how you guys manage to convince people to sell you their companies when you have no knowledge of their businesses and they can get access to capital from other less demanding sources.” This highlights my point exactly: Investors struggle to demonstrate the value added and yet we tend to shy away from this truth and most turn a blind eye.

Lack of experience

The second of the industry's problems is that the majority of Egypt's private equity leaders are from banking or advisory backgrounds and have limited equity investment experience. No doubt they have smartly created platforms that, one way or another, raised significant capital commitments to “continue the show” of financial and private equity investing in Egypt. However, almost all of them are currently struggling to keep the show intact and continue running their private equity programs.

Talent management

The third — and most serious of the industry's woes — relates to how it handles young talent. Private equity is a people-driven service industry. Hence, focusing on talent management and knowledge transfer is of prime importance. We currently face a state of mind where young professionals are confused by the fluid state of the industry. They tend to talk mostly of highlevel strategy visions of potential targets and focus on press releases and communications on closed deals as means of painting a picture of successful investors. In fact, this unfortunately exemplifies the figure of a businessman “wannabe” that overlooks commercial and operational common sense. Our young professionals need to have at the center of attention the importance of rolling up one's sleeves and growing the business through more time and attention to the portfolio companies as opposed to strategy setting and deck writing.

Above all, every fund manager in the industry has to start treating the capital raised from investors exactly as if it is their money.

Truth, hype or illusion

Before reaching a conclusion, those who care about the industry and believe in it should face the reality of where the industry stands. Not only in terms of credibility in the eyes of its key stakeholders (be it family business owners or investors), but also as an asset class that is sustainable for its investors, professionals and potential partners. We need to think about how long we are going to continue to worry about highlighting key metrics of the added value of private equity. When are we going to be able to clearly say that involvement with PE platforms and fund managers are sustainable and credible ways of wealth creation, and that fund managers are not Ali bey Mazhars of the economy? It could be said that I am of the opinion that the private equity industry in Egypt is an illusion. In fact, my inclination is to admit that private equity practices followed in more developed markets have not taken off in Egypt yet and that the fundamentals of the industry — in terms of building on solid demographics and sustainable demand of operating family businesses — is definitely clear and unique and a true opportunity going forward.

However, I would add that the few successful cases in Egyptian private equity history have resulted in a grand illusion of prosperity. It created a hype that was inflated and eventually burst in times of financial crisis and the Egyptian revolution.

Once we come to terms with that, many people should start thinking of ways to develop their teams in a more sustainable and longterm manner and encourage continuous learning. I would also embark on a long route of education for family businesses, young professionals and investors that the industry is currently going through a correction and we all must work toward focusing on clear value creation and building credibility with our partners and investors.
Above all, every fund manager in the industry has to start treating the capital raised from investors exactly as if it is our money. We have to protect it, work very hard to grow it, and keep it safe. It takes only one irresponsible experience to bring the credibility meter back to where it started, and that is “very low” in my view. To conclude my thoughts I wish to point out that without acknowledging the elephant in the room and communicating to investors, partner and private equity professionals how the industry should improve, the image of the opportunistic and limited value creation will always continue to chase Egyptian private equity as we go forward.