Although marked by the escalation of a global financial crisis, the close of 2008 is also showing the results of a healthy fund-raising season for a third generation of venture and private equity funds in the core Maghreb countries, with Morocco leading in domestic funds raised, followed by Tunisia.
Interest in Maghreb markets has followed a boom in global emerging markets’ private equity that began in 2005. As the model has proven itself, venture capital and private equity industry investment in the region have grown. Local Moroccan fund managers raised at least $1 billion in the 2006-2008 fund-raising season, an unprecedented sum that more than doubled funds under management, with a third generation of local fund managers gaining the confidence of core local and foreign fund investors for second or third funds.
In Tunisia, the Maghreb and Africa regional manager Tuninvest stood out, raising $161 million for its second Maghreb Private Equity Fund (MPEF II) covering the entire Maghreb region. This amount was more than double its first MPEF fund and Tuninvest also closed a second pan-African fund, a $25 million fund for investment in the African financial sector. The only Maghreb-based and Maghreb- focused PE fund, MPEF II is expected to emphasize Morocco and Tunisia, due to their greater attractiveness in terms of market depth and eventual exit opportunities. With reasonably successful private investment track records, attractive investment and business environments, and maturing and reforming financial markets, both countries are on the path to successfully leveraging their proximity to the wealthy Western European markets.
Venture or PE investors are drawn to the two countries’ domestic market growth and improving export capacity, as well as the emergence of a real exit market. These investors have achieved attractive trade sale valuations in deals with regional and European players, who are looking for the kind of quality firms that venture and private equity investors have nurtured. In the case of Morocco, the bourse has proven to be an attractive liquidity option for outstanding firms, and remains by far the leader of Maghreb region bourses in terms of liquidity.
Tunisia and Morocco now stand out as the leaders in venture and private equity investment in the southern Mediterranean basin and African continent. Other members of the Arab Maghreb Union (AMU) like Algeria, Libya and Mauritania, remained frontier markets for venture and private equity investors in 2008. And even though these countries are undertaking reforms to render private investment more attractive, they will remain frontier markets in a more cautious 2009. Challenging private investment climates with high uncertainty, cumbersome foreign investment and trade regimes, and limited exit possibilities will continue to limit classic venture or private equity investment. However, they will continue to attract discrete investments (versus dedicated funds), as market reforms take hold to enable better private investment and exit opportunities. As financial and investment infrastructure matures, the natural attractiveness of these markets will render classic private equity and venture investing more consistently profitable and secure, and thus attractive
The year ahead
Looking to 2009, the current global economic uncertainty and a global financial freeze that has touched most if not all major investors, suggest that 2008 marks the close of the current Maghreb fundraising boom. Nevertheless, the roughly 18 country or regional (Maghreb) funds, raised by Maghreb region fund managers in the 2006-2008 season, face an encouraging opportunity to invest well and counter- cyclically at attractive valuations in growth firms for an attractive exit in 3-5 years time. If local Maghreb firms can follow this investment cycle and intelligently overcome the near term market challenges, they will be well positioned to realize important returns after investing counter-cyclically. International funds, whether global or Middle Eastern, will likely continue to invest opportunistically but will be limited by investment focus and size.
The leading Maghreb region countries benefit from having launched small-and-medium-sized (SME) focused private equity and venture capital sector initiatives relatively early. Despite early disappointments, sustained public support as well as active investor interest driven by market liberalization helped overcome early disappointments and deliver real returns to patient investors.
The launch of first generation funds in 1991-1994 disappointed, returning more in terms of learning for local teams than financial returns to investors. The second generation of local Maghreb funds, mostly bank affiliates of 1999-2001 vintage, focused on later stage, largely growth and buyout investments of around $1-5 million in medium sized local or regional firms, as well as minority partnering in major investments by European firms in key growth areas like telecoms and tourism services. This strategy, in keeping with the investment teams’ more financially oriented profiles as well as market maturity and needs, seems to have paid off. While early stage venture investing has presented attractive opportunities for venture oriented funds with appropriate teams, a conservative business culture with a heavy orientation to founder and family control has limited opportunities. Similar challenges have limited the scope of later stage venture or ‘small’ private equity investments. Nevertheless, thanks to domestic market modernization and an emerging back flow of experienced Maghrebi managers from Europe and North America, venture and private equity firms have been increasingly successful in two arenas: one, investing in startups launched by ‘reverse brain drain’ managers with European or North American experience and two, attracting management talent to support buyouts or ‘transition financing’ as the post- colonial generation of managers near retirement and look to professionalizing their firms.
High-quality, objective benchmarking data is unfortunately not yet available, although reliable anecdotal data indicate that best second performers (with an unsurprising overrepresentation of independent fund managers) matched or beat their investors’ benchmark return expectations. Although a majority of exits realized from this generation were private trade sales (i.e. acquisition by another firm), some notable IPOs have been possible in Morocco, most notably High Tech Payment Systems (HPS).
Looking forward, investment focus for the third generation of funds remains relatively stable, with Maghreb region funds looking at growth and management buyout opportunities in a range of sectors. There is an accent foremost on opportunities in industrial investment in off-shoring, particularly the outsourcing of parts and components to lower-value finished products in the electronics and automotive areas. This is followed by interest in the telecom and IT sector, including investment in off-shoring oriented IT services like call centers. Other areas that are attracting investment include agribusiness and transport, both areas in which emerging modernization trends are expected to create real growth and innovation opportunities.
In the Middle East, mega private equity funds are the trend, at the upper end of hundreds of millions of dollars, with minimum to average investments in the upper
double-digit millions. In the Maghreb, locally-managed funds still remain modest in size, with most in the $15-50 million range, focusing on SMEs (mostly medium sized firms in industry and services). Initial investments fall largely in a $1-5 million range, with a few deals reaching $15 million. In contrast with the Middle East, core Maghreb region business expansion and growth seems to be driven by north-south opportunities, with Maghrebi firms and financers looking north to Europe and south to sub- Saharan African neighbors for export opportunities. Current linguistic affinities and ancient commercial connections help drive this orientation, assisted by an advantageous competitiveness and market familiarities.
The leading local venture capital and private equity firms have followed leading Maghrebi industrial and service sector firms in taking a north-south orientation, as evidenced by the only Maghreb regional fund manager, Tuninvest Group, managing both Maghreb and sub-Saharan venture and private equity funds. At the same time, for a variety of practical reasons, Maghreb-Mashreq investment has lagged. Anemic cross investment is an ongoing challenge. While Middle Eastern private equity and venture capital funds do often include the Maghreb in their prospectuses, actual investment has not followed. Subtle intraregional differences have impeded a comprehensive MENA strategy for private equity and venture capital.
The bottom line
Historical venture and private equity investment experience in the Maghreb has confirmed the classic observation, that all good venture investment is local. Regional differences in business style, a lack of Maghrebi integration and the relatively small size of PE investments continue to limit regional corporate strategies, in spite of a real potential for complementarities. These factors hinder a more dynamic Mashreq-Maghreb investment business and investment connections.
But overall, Maghreb region funds are well positioned to invest during this difficult economic cycle. An expanding investor base, with significant private local capital in partnership with international investors (increasingly private and European), should support the development of a well-institutionalized sector. The emergence of a pool of experienced local venture or private equity firms with clear local mandates matching market needs is encouraging for future growth.
Overall, 2009’s key opportunities in the core Maghreb countries (excluding the oil sector), will continue to be in industrial and services off-shoring, with a focus on leveraging the region’s proximity to Western Europe. Opportunities will emerge in the domain of modernizing lower value added agricultural products to export high- value added processed products to Europe. In the tourism sector, investment in the management and services sector of underdeveloped areas is also anticipated. The energy sector, outside of Algeria’s hydrocarbons, has attracted a potential interest, particularly in renewable energy. Algeria remains a country with high potential but considerable complexity on the frontier of private equity and venture capital investors. Although Algeria is attractive to PE investors, especially those looking for “chunky” investments, the absence of near-term exit strategies and ongoing delays in structural reforms are still deterring investment.
Maghreb-based funds will remain the most effective vehicles for investment in Maghrebi markets, where successful equity investment windows remain small in terms of initial equity sizes and ill-fitted to global or MENA fund investment needs. But in spite of logistic hurdles, the Maghreb region remains well positioned to capitalize on its connections with Western Europe.
WILLIAM C. FELLOWS is country director – Maghreb, Financial Sector Reform Program with FSVC