How can Egypt’s private equity funds walk the talk?

When a business owner is in need of funds, they can raise capital through a number of diverse channels, including, but not limited to, becoming publicly listed and issuing bonds; borrowing from banks; or seeking out investors. Most businesses in Egypt would expect needing to raise capital at some point in their business cycles, whether to expand, scale, or adopt new technologies. However, a 2021 Alternative Policy Solutions paper found that, in Egypt, “access to finance remains a “major constraint” for small and medium-sized manufacturers even as a plethora of Central Bank of Egypt (CBE) programs have tried to channel liquidity to the sector,” reported Enterprise.

That’s where private equity and venture capital comes in. Simply defined, private equity are non-banking investment funds that pour capital into SMEs and startups with successful trajectories, potentially filling in the financing gap for SMEs which are crucial to the health of any economy. The third quarter of 2021 saw the global private equity industry reaching a record $787 billion, reported Forbes, a testament to its significant role in the global economy.

In Egypt, the private equity market still has a long way to go to fulfill its full potential. The market faces a myriad of institutional and structural challenges. But the foremost challenge remains a lack of adequate caliber and personnel to lead the market, whether as business leaders, venture capitalists, investors, or regulators. This gap led the American University in Cairo (AUC) School of Business to launch an Executive Education Private Equity Diploma, collaborating to that end with The Sovereign Investment Fund of Egypt (TSFE), and the Egyptian Private Equity Association (EPEA).

“We’ve seen a lack of talent in the market and it is one of the biggest challenges we face,” said Ayman Soliman, the CEO of TSFE at an event marking the two-year anniversary of launching the Private Equity Diploma, held at AUC Tahrir in June.

The event, which can be watched here, saw a slew of similarly important figures in academia, policy-making, and private equity stakeholders; descend to AUC Tahrir to pool their expertise in an attempt to address pressing issues facing the private equity market in Egypt. Aside from the pronounced talent shortage, what else is keeping the market from getting where it can?

Regulatory mayhem

Investors are known to be wary of unstable countries, whether by means of political instability or legislative instability, with the latter being a major repellent of venture capitalists who don’t often appreciate an environment with quickly-changing laws pertaining to their investments.

The laws themselves, said Arig Ali, partner at Zaki Hashem Law Firm and instructor at the AUC School of Business Executive Education, aren’t the problem. “Whenever we start discussing legislative issues that hinder private equity or venture capital, the go-to initiative is always to change the entire law or create a new authority to start from scratch. I’m firmly against this approach because Egypt already has a lot of good laws that can enable the private equity market.”
The problem, she elaborated, is with the enforceability of these laws. As much as the lack of talent in the market represents a major hurdle, ”but also the regulators and service providers need to go through training to be able to strike a balance between upgrading the law to promote investment, and, on the other hand, attain market stability.”

“When foreign investors come into the market and find that we take decisions and change laws rapidly, they get wary,” she argued. “They want a stable environment where laws in the market don’t change for at least five years at a time.”

Her argument was backed up by Haytham Wagih, managing partner at Growth partners and instructor at the AUC School of Business Executive Education. “I want to focus on the education of regulators and service providers. If we only focus on training practitioners, it won’t work; we need to focus on educating and training regulators and service providers,” asserted Wagih. “Regulators are responsive to a great extent, but the problem is that when one is not fully aware of how the [private equity] business is run, then what happens is that they fix one part based on our recommendation but they lack clarity on the big picture.”

Banks can’t do it all

But it’s not that grim for SMEs, according to Wagih who explained that the CBE has been pushing the banking sector to support SMEs, launching investment funds that particularly target them. “The CBE stepping in, lowering the risk of funds being channeled into SMEs investment tools, effectively made the risk [of investing in SMEs by way of private equity] lower than when banks invest in bigger companies, which gavebanks a great incentive to invest in SMEs. However, this is yet to fully blossom due to the lack of [private equity] market knowledge on part of banks.

“Corporate banks need to raise awareness because even their investment teams, like risk analysts, aren’t really aware how to study or assess investing in a [Private Equity] fund,” he concluded.

“I want to add that the banking sector does have a lot of good initiatives. But the real needs of SMEs aren’t going to be covered by banks,” added Ghada El Gohary, CEO at the Egyptian Venture Capital Company (EVCC).

“We’ll continue to have a problem because venture capitalists are rare and there’s no way that the venture capitalists that are already in the market could manage to cover the financing needs of the [SMEs] market.”

The banking sector, she explained, invests mostly in working capital, while SMEs need equity, expansion, and other financial tools not offered by the banking sector.

“No matter how many initiatives are launched by banks, we’ll continue to have this problem as long as the private equity and venture capitalists sector isn’t being developed.

Adapt or perish

Potentially a big step forward for private equity funds won’t come from the ecosystem, but from within; Private Equity funds don’t just provide capital, but also, to varying degrees, should have the expertise to get involved in setting business goals for the SMEs they invest in. They can also work on restructuring such businesses to maximize future earnings.

In Egypt, private equity funds often fall short in meeting their end of this stick.

“Our biggest challenge is that we work on restructuring, which is not usually even a department that exists in Private Equity [funds] in Egypt so there’s a big lack in technical assistance,” said El Gohary. “Other major challenges are the issues of discipline and adaptation. Business owners that obtain private equity funds; do they have the discipline to stick to the business plan? As a result of wars and other global challenges, business owners have no time for such adaptation.”

“This should be the role of those in private equity; to be outsiders that have an overview vision and can advise on how to manage crises like the one we’re going through now.”

Egypt’s Private Equity ecosystem is far from fully developed, but a collective, sustained and innovative effort to enable the ecosystem to flourish could prove transformational for the economy and its growth trajectory.

“When we have persistent problems, we have to accept new solutions,” concluded El Gohary.

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