Take that exit

The art of getting out when it’s good

When investors look for an exit they don’t want to be shown the door. They want to see the cash consideration that rewards them for their risk – and they want to look good in the process; good for having created employment, good for respecting the environment, good for having contributed to economic growth, and good in terms of delivering corporate citizenship.

This attitudinal evolution is welcome news for one particular branch of the investor community: private equity professionals. Where 1980s-style incarnations of the private equity (PE) investment model were popularly depicted as slash-and-sell raiders, the PE funds of today can instead flash constructive partnerships and growth narratives of invested companies as their merit badges.

This is worth pondering when the latest reports on private equity in the Middle East and North Africa show glorious numbers about recent performances in fundraising, investments, and divestments – colloquially dubbed ‘exits’ – of PE funds in the Gulf Cooperation Council, Egypt, and other countries of the region.

Across MENA, 2014 was the best year for the region’s private equity players in terms of fundraising and investing since 2008, according to the Ninth Annual Report by the Middle East and North Africa Private Equity Association (MENAPEA) that was released at the end of July. The report disclosed investments worth $1.5 billion, representing a year-on-year increase of 118 percent, alongside an increase in deal numbers from 66 to 72, and a rise in average deal size to $32 million, which MENAPEA notes as a “post 2008 high”.

When compared with the previous year, fundraising revenue in 2014 leapt from $744 million to $1.23 billion, and exits increased in number from 16 to 20. The United Arab Emirates and Saudi Arabia had the greatest level of investments when viewed by value, respectively attracting 59 percent and 21 percent of the total $1.5 billion invested in the region (see comment page 82).

Getting the right backers for lebanon

By this measure, Lebanon appeared only in the margins, attracting a reported 1 percent of investment value. Curiously, however, the ratio was partially inversed when viewed by volume instead of value. In the number of PE investment transactions, Lebanon accounted for 13 percent of all deals in the region, compared to the 21 percent for the UAE, and 10 percent to Saudi Arabia.

Similarly, Lebanon captured 27 percent of all reported venture capital (VC) investment transactions in MENA last year, making it the regional leader in VC investment deals and continuing a trend observed in 2011-13. The MENAPEA report attributed Lebanon’s attractiveness to the regional VC industry to the fact that “the country is characterized by small and medium sized companies [SMEs],” without attempting to answer the question of how Lebanon might be differentiated from any other Arab country by the number of SMEs in the economy. The report made additional reference, however, to the Lebanese central bank support for investments in startups and SMEs.

As the MENAPEA report doesn’t drill down into country-level numbers on VC investment values or PE fundraising results and exits, it consequently upholds the image that Lebanon is a serious regional laggard when it comes to investment performances in venture capital and private equity capitalism. This impression is extended to and confirmed for the entire MENA region by the 2015 Global Private Equity Report from US-based consultancy Bain. While Bain’s global report occasionally agreed with MENAPEA that for MENA 2014 was a PE bumper year, PE exits today between Cairo and Kuwait City are still dwarfed by the worldwide growth rate and performance, specifically in divestments. According to Bain, exits from global buyouts shattered all previous records in 2014. “At better than 1,250 sales, last year’s exit count surpassed its previous peak of 1,219 transactions in 2007. And total exit value, at $456 billion, also blew past its previous record of $354 billion in 2007 and was 67% higher than it was in 2013,” the Bain report specified.

In the number of PE investment transactions, Lebanon accounted for 13 percent of all deals in the region 

However, statistical peaks and success stories are two entirely different things. Given the current surge in investor frustration with Lebanon, a single shiny PE divestment narrative may be equal in worth to an entire boom statistic elsewhere. Therefore, Executive made it a mission to learn more about a recent divestment under which the EuroMena 1 fund exited from Beirut-rooted Chedid Capital Holding (CCH), a rapidly growing financial services conglomerate specialized in reinsurance and insurance broking.

The relationship between Chedid Capital Holding and EuroMena started more than seven years ago when the reinsurance brokers were told by their auditors about the fund, explains Farid Chedid, the chairman and chief executive of CCH. It was an opportune moment as the company was exploring whether it needed new capital for expansion. “At the time we were looking to institutionalize our shareholding and enhance our operations at the board level through corporate governance, and it was the start of expanding our operation outside of Lebanon,” Chedid tells Executive. “Once we had reached a strategic alignment over what both we and EuroMena wanted, we started evaluating the group as it stood at the time. Next, after we reached an agreement on the valuation of our group, the process of due diligence was launched and in 2008 we closed the deal that they would be shareholders in our company at 14.5 percent.”

According to Romen Mathieu, managing partner at the EuroMena fund, the fund’s involvement with CCH overshot the optimal period for accomplishing its targets by about two years, something which Mathieu attributes, in an interview with Executive, to the challenging regional and global economic conditions of the last eight years. However, he insists that the equity participation in CCH brought great results for all involved, beginning with the divested company and with its new strategic investor, the Saudi Arabian family conglomerate Al Rashed Group.

“It was a beautiful exit for Chedid; They have a great partner now, and it was also a beautiful exit for EuroMena in these hard times. We showed that we can exit our companies in any circumstances; and it is good for Al Rashed [investment subsidiary] Rimco because it is the goal of business families who invest with us [to find] potential long-term investments which EuroMena is going to bring to them,” Mathieu enthuses.

 It was a beautiful exit for Chedid; They have a great partner now, and it was also a beautiful exit for EuroMena in these hard times.

Chedid confirms that during its search for an investor when exit planning, EuroMena consulted with a Dubai-based investment banking unit of Lebanese banking group, BEMO, and also cooperated closely with CCH. “They had several offers from investors, from Lebanon, the Gulf, and also from outside the region. We reached an agreement that would optimize the valuation for EuroMena and find the best partner for us. Finally we agreed to have Al Rashed Group as an investor who would acquire the shares of EuroMena and be a shareholder with us. The whole five or six years were a very positive experience for us,” he says.

Securing the funds and expertise

Mathieu tells Executive that the fund’s announced return of “2.4 times the amount” equates to an internal rate of return of 18 to 19 percent achieved by EuroMena 1 on the investment in Chedid Capital, but he declines to disclose the divestment’s exact dollar value. He notes, however, with an expression of personal satisfaction that he has been asked to remain on the CCH board, switching from a position as shareholder representative to a function as non-executive director.

The enhancement of corporate governance structures at CCH was one important outcome of the collaboration with EuroMena and included work on board and management structures, expansion of corporate governance in all parts of the group, and the creation of non-executive director (NED) positions. From having a board of just four members, and not one NED in 2007, the group has advanced to seven board members, three of whom are NEDs. “The reason I asked Romen to stay on as an independent non-executive is because he has a lot of added value to contribute,” Chedid says.

He adds that Al Rashed Group brings strong business acumen into the partnership, as well as “a fantastic reputation and a very large network of relationships and companies,” while the insurance and reinsurance expertise in the partnership resides with CCH. The collaboration has already been tested in practice, since Al Rashed stepped in as the required Saudi partner in 2011, when CCH set up a new business unit in the kingdom. According to Chedid, CCH’s reinsurance broking activity in Saudi Arabia grew so fast that their Chedid Re Saudi unit has become the largest reinsurance broker in the country.

Joined with Al Rashed through compatible visions and high ambitions, Chedid says the near-term growth plans for CCH are the expansion of insurance and reinsurance broking activities under a paradigm of “always targeting 25 percent year on year”, in both turnover and profits. Referring to their recent registration as a Lloyd’s broker, he adds that the group is now establishing a presence in London, and working on its growth in African markets from a base in Mauritius. He emphasizes, however, that the group is “emotionally attached” to Lebanon and regards the bond with the Lebanese market as “very important regardless of turnover and market share in relation to our regional market share.” It would appear this is an enticing success story, on not one but two fronts; private equity and insurance.

Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years.

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