North Africa started in 2008 as the least-noticed market in the region, but it has emerged to become a new investment destination for private equity firms. While most region specific funds use some form of the monicker ‘Middle East and North Africa’, the later half was almost forgotten until this year, when North Africa came to mean more than just Egypt and more than occasionally big buyout deals. The growing popularity is derived from the diverse industries and opportunities waiting to be tapped in the Maghreb and Libya, as they emerge from their economic infancy in 2009 with potential for growth as destinations for regional and international private equity.
Private equity firms did not have dedicated operations in the Maghreb until the late 1990s. Capital Invest, based and doing deals in Morocco, launched their operations in 2000 after significant regulatory changes induced the firm to structure a fund for investors looking to work with businesses in the kingdom. Capital Invest’s local status enabled it to navigate Moroccan legal and regulatory challenges that prove daunting for foreigners. However, most Morocco-dedicated funds fail to look to the rest of the Maghreb and are myopic in their vision for expanding companies within smaller domestic markets. Only some have recognized that big business lies in financing regional expansion plans for businesses, increasing the potential consumer base and building rapport with host governments in the remainder of the region.
The asset class can supply the demands of North Africa, where a chronic lack of financial intermediaries stymies growth, hinders entrepreneurship, and cripples the ability and desire to innovate. While private equity is not the only fund type — Julius Baer launched a Northern Africa Fund for listed equities in 2008 — it offers a distinct advantage for the numerous small-and medium-sized enterprises often managed by entrepreneurs and other firms, where the business model is attractive but cannot succeed without financing. Another plus, although pitched to a lesser extent in the region’s trade circles, is the ability of private equity fund managers who go into a deal, spot flaws in corporate governance, and revamp firms and encourage them to become more transparent. Local fund managers and their counterparts in Europe and the Middle East will look to two markets in particular: Tunisia, which holds title to the most developed business environment for private equity investing, and Libya, where Qaddafi’s socialist model had first led to an obliteration of the private sector but where the revolutionary-cum- leader is now seemingly coming to terms with economic reality and advocates the need to (re)develop a veritable private sector, encouraging legislation to emphasize the point.
Within North Africa, Tunisia has the longest history of private equity firms. In the 1990s, Tuninvest began to serve Tunisian businesses but then grew with backing from the International Finance Corporation, which supported the firm’s expansion to the rest of the Maghreb — Algeria and Morocco — that share many similarities with the Tunisian market, including similar legal systems and traditions. The timing was perfect and excess liquidity from the Gulf seemed to strengthen Tuninvest’s fundraising climate at a time when exit opportunities were coming into sync. With the region’s bulwark bourses in Casablanca and Tunisia performing exceptionally well, opportunities for strategic sales to numerous European and Gulf firms were beginning to expand into the Maghreb’s markets.
In 2008, Tuninvest’s Maghreb Private Equity Fund II closed at $193 million, 25-50% higher than its initial targets, displaying a trend to find qualified general partners and fund managers as well as the increased attractiveness for the asset class in North Africa. The close was lengthy, which Tuninvest attributed to legal constraints affecting investors in the fund, including the International Finance Corporation, the European Investment Bank, the African Development Bank, and the UK government’s CDC Group.
Tuninvest’s fund is already 50% invested and the remaining capital will be used to finance businesses throughout North Africa, including the region’s more frontier markets in Algeria and Libya. Egypt-based Citadel Capital is taking similar steps and in 2008 opened an Algerian office, with others set to open in both Libya and Syria soon. In these new markets, Tuninvest will balance the larger market risks with higher potential rewards through lucrative deals, which are financed from Citadel Capital raising its capital on a deal-by-deal basis.
Just west of Egypt lies a market with amazing potential and ameliorating regulatory climate, which has encouraged private equity shops to scout for deals. This is a result of Libya having the largest proven oil reserves in Africa, egged on by the introduction of Law 443 in 2006, which has encouraged the development of Libya’s private sector. Colony Capital, a global investor in private equity with an emphasis on real estate deals, received the green light from Libyan regulators to move forward with a deal to buy out a government-owned oil refining and distribution business. This agreement amazed investors at the end of 2007 because the size of the investment, at $5.9 billion, would have made buyout target Tamoil the largest in Africa to date, beating hefty deals in both Egypt and South Africa. Secondly, Colony Capital won the bid over The Carlyle Group, the ubiquitous buyout shop.
Although the specifics surrounding the deal are not clear, some have speculated that Colony Capital was to usher in other interested limited partners who were investing in the deal to get a taste for the Libya market. One limited partner, Equity International, planned to use the transaction as a base off which to spot homebuilding opportunities and other potential partnerships with the Libyan government, which plans to build 530,000 new houses by 2012. Other co-investors might have been courting the government with further potential opportunities through partnerships with the Libyan Investment Authority, which invests $40 billion in assets from oil revenues through Libya’s own sovereign wealth fund. In 2008, however, the momentum of the deal lost traction. The reason cited by a number of businessmen is the political risk in dealing with a still overly-controlling Colonel Qaddafi and a regime type that is still impervious to standard business methods and best practices. Some attributed the 2008 failure of the deal to a continued reluctance and non- cooperation on the part of the Libyan government in handing over Tamoil’s financial records.
Colony Capital’s problems do not plague all of the country’s private equity deals and others demonstrated that it is very possible to work with a local partner who, by law, must own a 35% stake of the business. In 2006, Venture Capital Bank BSC and Global Emerging Markets successfully completed a buyout of Challenger ltd. for a 40% stake. In early 2008, Libya piqued the interest of private equity firm Klesch to invest in an $8 billion project for oil refining and an aluminum smelter.
Egged on, Libu Capital, set up by Phoenicia Group Libya, raised $95 million from Libyan investors, including the Libyan Arab African Investment Group, and planned to raise the remaining $205 million for a $300 million close in 2008 from foreign investors. The fund is aiming to deal with projects in the country’s lucrative oil services and construction outfits to supply the demand for homemade cement and other downstream building materials. The move to seek additional funding came from “investor enthusiasm,” according to a press statement. Ryad Sunusi, president and CEO of Phoenicia Group, warned investors not to partner with funds lacking the backing of the Libyan government or with no practical experience in the country. Citing Lion’s Pride, Tuareg Capital, and Marj Ventures, he noted that they have “a very limited understanding of the Libyan legal and business environment and no strategic game plan or long-term planning and relationships for managing a successful investment portfolio.”
The movements in the Libyan market in 2008 reflect a slowly-growing optimism. Fund managers and investors will continue to watch Libya from the sidelines as the government moves forward with private sector development plans. Further moves to increase the country’s exit possibilities will encourage investors in a similar fashion that occurred in early 2007, when Libya inaugurated its first stock market, which Libyan Minister of Economy and Trade Tayeb Essafi explained as a gesture to reinforce investor confidence and to, most likely, offer a forum in which traders can buy and sell assets without the tight control of the government.
Navigating the regulatory thresholds in North Africa demands from private equity funds a focus on strategy, particularly recruiting a due diligence team with extensive local contacts and relationships with each country’s institutions and the people behind them. The need to understand reputations and size up markets with the most accurate information is the only way to sharpen business acumen during fund lives of five to seven years. Competition from firms with broader regional mandates, including those funded with capital from the GCC, have expressed willingness to do deals on a case-by-case basis in North Africa, but the deals with the most hidden underlying value are not only with large, headline- grabbing buyouts. Small-and-medium-sized enterprises, which North Africa has in abundance, are often undervalued and need some private equity as well as the savoir-faire of the funds’ operations teams to bring in attractive prices at the exit.