Lucrative areas of focus for private equity investors

17 January 2016

Interview: Ahmed Badreldin, partner and head of the Middle East and North Africa region at Dubai investment firm Abraaj Group

Rather than a challenge, Dubai’s Abraaj Group views population growth across the region as an opportunity for private equity investors.

Founded in 2002, Abraaj was the pioneer of private equity in the Middle East and emerging markets across the globe.

It is the most important private equity player in Africa, Asia, Latin America and the Middle East, having built up a portfolio worth about $9bn across 30 countries. This includes $3.4bn in the Middle East and North Africa (Mena) region across 40 investments. Its successful strategy of investing in young, fast-growing markets has made Africa a prime target, and Abraaj raised $990m for a fund focused on sub-Saharan Africa, which closed in April 2015.

North Africa in particular is a major focus for investments in healthcare, education and fast-moving consumer goods for Abraaj, eclipsing the more wealthy Gulf region in terms of value and growth opportunities. Even before closing its $375m North Africa fund (ANAF II) in August 2015, Abraaj made six investments in the region, and the fund is now 70 per cent deployed.

North Africa

The combined population of Morocco, Algeria, Tunisia and Egypt is expected to reach 187 million by 2020, from 175 million in 2016, according to the Washington-based World Bank.

“In general the sectors that are attractive are those that benefit from demographic growth and a rising middle class,” says Ahmed Badreldin, partner and head of the Mena region at Abraaj.

“Healthcare is a big theme, and we have invested in hospitals and clinics, to create the largest healthcare platform in Egypt, Morocco and Tunisia.”

The resulting company, North Africa Hospital Holdings Group (NAHHG), supported by three European development banks, started with two hospitals in Cairo and two in Tunis, and intends to expand through acquisitions and new-build projects.

“There are very few new hospitals being built by the Egyptian government,” says Badreldin. “The hospital platform we have built across Cairo allows us to take advantage of the synergies to improve quality.”

Restrained spending

With governments attempting to reduce deficits and public sector debt, spending on healthcare and education is likely to be restrained despite rising needs.

In Egypt for example, healthcare spending in 2013 was just $151.3 a person, compared with the regional average of $403.4. The private sector made up 59.3 per cent of healthcare spending, according to the World Bank.

The shortfall in government spending creates an opportunity for the private sector to fill the gap in social infrastructure. Private equity can play a significant role in pushing investment and expansion.

With this is mind, Abraaj invested in the local Tiba Group, which runs a chain of schools, academies and Nahda University, with a total of 20,000 students.

“In the higher education sector in Egypt, the government stopped building universities more than 10 years ago,” says Badreldin. “But the student body is growing every year. The private sector is taking up the slack from the government not building, so it is an attractive sector.”

Egypt had 19.1 million school-aged children in 2014, a huge increase on the 13.8 million needing education in 2004. For tertiary education, 2.5 million students were enrolled in 2013 out of 7.5 million people officially of university age, compared with 2.1 million in 2003, according to the World Bank. But education expenditure was just 3.8 per cent of GDP between 2005 and 2012, according to the UN Development Programme (UNDP).

Food, healthcare and education are known as defensive sectors due to their resilience to slowdowns in the wider economy.

“Education and healthcare are the last spending items people cut back on,” says Badreldin.

This is especially the case when public services are underfunded and of poor quality.

GCC opportunities

This strategy extends to the GCC, but there are less private equity opportunities for various reasons.

“The GCC is very promising, but you have to look at whether transactions actually close, or if it is just hype,” says Badreldin.

“It is partly because of the smaller share of the economy made up by the private sector versus government and government-related entities, compared with North Africa. In the GCC, there are lots of state-related companies, while the large families transact between themselves to an extent.”

Nevertheless, Abraaj invested $25m in app-based UAE car service company Careem in 2015, as part of a $60m funding round.

It is also harder to push for the attractive valuations than in North Africa.

“The GCC is a net capital exporter,” says Badreldin. “Companies don’t need to raise equity as banks are flush with liquidity and sovereign wealth funds have a deep capital base.

“In North Africa, on the other hand, bank borrowing rates are high. They are ‘capital importing nations’, where private equity adds an element of very much needed capital.”

Private equity can also be the only way to get exposure to certain sectors in North Africa, where, for example, there are no healthcare groups listed on the Egyptian Exchange.

Focusing on perishables

Investing in consumer goods is also a good area of investment for growing populations whose consumption patterns are evolving rapidly.

“We are looking at FMCG [fast-moving consumer goods], especially food,” says Badreldin. “But strategic buyers are very aggressive, bidding up prices and paying double-digit multiples. There is a lot of competition in food and drink.”

Strategic buyers can afford higher prices for acquisitions that fit into their business model and long-term expansion strategies.

Abraaj lost out to US food giant Kellogg Company in a bidding war over Egyptian snacks producer Bisco Misr in January 2015. Abraaj made an offer of £E73.91 a share, but Kelloggs ended up paying £E89.86 a share, with the price driven up 21.6 per cent by the rivalry.

The private equity firm turned to a niche area instead; children’s diapers.

“We are partnering with two strong promoters and investing in the largest diaper manufacturing entities in North Africa,” says Badreldin.

“The appeal of diapers is obvious. These countries have a high birth rate and low diaper usage, and as the population grows and families convert from cloth to disposable, there will be a high growth rate for the sector.”

Abraaj’s first transaction of 2016 was the acquisition of a significant minority stake in Algeria’s Cellulose Processing (Cepro), which manufactures diapers and women’s sanitary products.

Birth rates

Egypt and Algeria continue to have comparatively high birth rates, at 3.3 and 2.9 births a woman respectively. The Algerian market has a diaper product penetration rate of just 29 per cent, compared with 35 per cent in North Africa and 61 per cent as the global average, according to Abraaj.

So even Algeria presents opportunities, despite its underperforming private sector and strict foreign investment rules.

“Every country is attractive, as long as you work with legal advisers who know the market,” says Badreldin.

For now, complex bureaucracy and macroeconomic risk are driving down valuations and allowing private equity to enter investments at low prices. The returns investors could make on exit in a few years’ time would be boosted by economic reforms across the Mena region to improve the business environment.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.