Ongoing political instability in the Arab world’s most populated country has not scared off at least one private equity (PE) fund from making major investments. Beirut-based Euromena recently deployed $20 million in an Egyptian oil and gas company, Sakson Petroleum Services, after having invested $13.5 million in an optometry hospital, Al Oyoun Al Dawli, earlier this year.
“It’s a country that had already a lot of potential and revolution gives it more potential,” says Romen Mathieu, managing director of the Euromena funds. “There are 80 million people looking to live, get medication, wear clothes and if you select well, you can make a lot of money.”
Since the launch of Euromena’s first fund in 2006, a total of approximately $100 million has been invested by the two Euromena funds in 14 companies in four countries in the region [see chart]. With an average ticket size of $8 million per company, these funds also offer co-investment opportunities in specific names, bringing the total amount invested to $175 million.
Seeds of the idea
Armed with PE experience from investment bank Lazard and accounting firms Arthur Anderson and Ernst & Young, Mathieu saw an opportunity in 2004 to invest in medium-sized companies in the Middle East. While certainly aware of the lack of transparency, stability and infrastructure in the region, Mathieu saw this as outweighed by the opportunity and decided to launch a PE fund dedicated to the Middle East. His strategy was to start off by attracting European public institutions to provide credibility to the fund and eventually attract private Gulf investors reassured that it would abide by the book. His goal was to create a Euro-Arab partnership. As he needed a platform and a solid partner to launch his fund, he went to United Kingdom-based private equity firm Capital Trust, which had previously tried but failed to venture into this region and was keen to give it another go. With Capital Trust on board, the European Investment Bank (EIB), the first European institution to deploy capital into Mathieu’s venture, soon followed.
“By creating opportunities for work, Arabs can educate their children and instead of holding the Bible and the Koran and running with it, they can think of a better life,” says Mathieu. “If the Gulf and Europe understand this, they will face the enemy of fundamentalism and illiteracy.” That’s how he says he succeeded in gathering interest from three European public institutions — the EIB, Proparco, a Paris-based development institution and Averroes Finance, a fund of funds — accounting for 30 percent of the committed capital. Equipped with European public money, he raised the remaining capital from 45 private investors in the Middle East.
There are also bigger plans for 2013, despite the European sovereign debt crisis and the uncertainty in several countries in the Arab world. Mathieu’s next aim is to raise a minimum of $200 million starting next year for Euromena’s third fund, and he is keen on adding companies in Libya, Iraq and Sudan to the Euromena portfolio. The final composition of the investments, however, depends on the final makeup of investors of the funds — with major targets including the International Finance Corporation, the private sector lending arm of the World Bank, and Germany’s DEG, one of Europe’s largest development finance institutions — as they may put restrictions on where their money goes.
For this third fund, he will also be seeking to tap private European wealth from families such as the Rothschilds and institutions such as Paris-based PE Quilvest, in addition to Arab public investors such as sovereign wealth funds (SWFs). Mathieu seems more confident on attracting European private investors, given the previous funds’ track record. The first fund’s three exits generated an average return of 2.5 times the investments, and one of the exits was completed through the sale to French building materials leader Saint Gobain and another one to London-based international pharmaceutical company Hikma.
“We are getting appetite from European private investors,” adds Mathieu. As for Arab public investors, he is less confident and laments that “one can never understand why they would or would not give you a penny; it’s not a transparent process.” Despite this, he has not given up and will pitch to Arab SWFs again next year.
For now, the focus is on investing in two additional companies already on Mathieu’s radar — one in Morocco, still untapped by Euromena, and another in Egypt — which would complete the investments of the second fund, as well as exiting two additional companies by year-end, which Mathieu is confident will be completed despite the challenges in the region. He says the exits will be done through sales to professional investors and high net-worth individuals in the region, as strategic international investors are less willing to deploy money due to the given uncertainty in the region and the European economic crisis. With lack of visibility on prospects in the Arab world, Euromena exits its investments when it has the chance to make at least two times the investment.
“Especially in times like today; if I wait one more year, I might make three times [the investment] if the ‘Arab Spring’ turns into an ‘Arab Summer’ but I would definitely sell today because there is a big question mark on tomorrow” says Mathieu.