December 13, 2012
Interviewed by: David Snow
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Private Equity in Egypt

Political turmoil does not change the fundamental economic attractiveness of private equity in Egypt, argues Karim Sadek, Managing Director of Cairo-based Citadel Capital. In an interview with Privcap, Sadek describes the investment climate in a post-revolution, “new Egypt.” He discusses the opportunities that a massively deregulated energy sector will bring to private equity investors in Egypt, the complexities of doing joint-ventures with the government and what development-finance institutions expect from local investors.

Political turmoil does not change the fundamental economic attractiveness of private equity in Egypt, argues Karim Sadek, Managing Director of Cairo-based Citadel Capital. In an interview with Privcap, Sadek describes the investment climate in a post-revolution, “new Egypt.” He discusses the opportunities that a massively deregulated energy sector will bring to private equity investors in Egypt, the complexities of doing joint-ventures with the government and what development-finance institutions expect from local investors.

Snow: We are joined today by Karim Sadek of Citadel Capital, based in Cairo. You invest across Egypt and also now are starting to invest into sub-Saharan Africa. So Karim, thank you for joining Privacy today.

I’d like to start by talking about private equity trends in Egypt. It’s a big country. It’s a country that perhaps a lot of people outside of Egypt want to know better, perhaps have some misperceptions about, given some of the dramatic changes that have taken place in Egypt recently. So why don’t we start there? How has the private equity, and the investment opportunity in general, changed since the change in power in Egypt?

 

Karim Sadek, Citadel Capital: It’s a very interesting question. I’d like to dissect it a little bit. Look, I don’t think… Whatever happened in terms of regime change or plans or directions of a new Egypt, we are still talking fundamentally as an economy and as a country, very little has changed. I mean, it’s still a relatively big market, 85 million people; still a very diversified economy; still a strategic location—special trade relationships with its main neighbor clusters like the EU, like Arab countries, like commerce in Africa.

So the fundamentals of the country as an investment destination haven’t changed. They’re still there and still very attractive. Obviously what is changing, and what is causing a lot of concern for investors, is the lack of a clear path on the political side. We’ve been seesawing a little bit. So we had a parliament. That parliament was abolished by the Constitutional Court. We end up having a president who is basically head of executive and temporary head of legislative, which is a very uncomfortable situation.

I think that lack of a clear path towards political stabilization—and by stabilization, I just mean that you have a process and it follows through—is, I think, the biggest deterrent.

Snow: Can you talk a bit about some of the really important sectors in the Egyptian economy that you’re focused on where you see a lot of opportunity?

 Sadek: Sure. I think energy is by far the foremost attractive, and one that we’ll witness a change in terms of its attraction. Traditionally, the energy sector in Egypt is highly state controlled, both, obviously, from a regulatory perspective and from asset ownership and from what you’re allowed and not allowed to do as a private sector. So there was a very limited scope.

If you take, obviously, the energy, if you start by the upstream sector, that’s always been private sector jointly with the state in cost-recovery schemes. The refining, the midstream, has been—traditionally, again—government owned and controlled, with all of the Egyptian refining capacity, with the exception of one built in 2002, really parastatals.

When you move one step down, at the utility level—so downstream energy, both oil and natural gas and power generation—you’ll find that there was some involvement by private sector in utilities. But, for example, the power sector generation and distribution still remain state owned. Now, the changing scenery is the fact that the Egyptian government has been subsidizing fuel in its direct form—gasoline, diesel, or through electricity—over the past 40, 50 years.

And this is coming to an end, because, simply, the Egyptian state budget and finance cannot maintain this anymore. And this will force a deregulation of that entire industry. And by deregulation, I mean just there will be an international press. Today we fuel our tanks at $0.30 U.S. a liter, which is a joke, given that Egypt is a net importer of energy.

So that is going to change. And with that happening, it will open up a lot of opportunities for investment opportunities within the energy sector—whether it’s refining, whether it’s power generation, it’s imports—which today is the sole right of the state. So there will be a lot of opening up in that area.

Snow: To that point, let’s talk a bit more about the deal flow of Citadel Capital. How has your firm traditionally sourced some of the private equity opportunities in which you invest, and how do you see that evolving going forward?

Sadek: We have had, traditionally, our strength in certain industries, energy one of them. I think we’ve been a partner of choice for many projects coming on board because of our ability to close projects and the reputation to do so. It’s been a little bit different when we were operating outside Egypt, where we’ve had people on the ground.

So, for example, our investment in the railway in Kenya and Uganda is a virtue of us having been there, having people investigating various opportunities and pursuing them. In Egypt, it’s been, as I said, mostly built on our reputation of ability to close transaction and delivering. This has helped us both when the project is a private-sector-led thing or, like the case of the refinery deal, where it’s more of a PPP.

So we have a reputation within Egypt to be a serious sponsor. You’ll note we have done no real estate deals in Egypt, which apparently, as it turns out, was the quickest way to make money in Egypt during the past 10, 15 years. So we tend to do difficult things, but we tend to deliver on them. So we have that credibility.

Snow: So in sourcing opportunities, you are working with, I would imagine, family groups who might want a private capital to move to the next step, in addition to sort of public-private situations.

Sadek: Correct. In addition to “greenfields,” which sometimes are either conceived by us or by third parties who have a good idea and come with it. But yeah, it’s very true.

 

Snow: What are some of the complexities of doing PPPs in Egypt? Is the government a willing partner in many of these projects?

Sadek: They might be willing politically, but there is a lot of hurdles on the regulatory side for that. Egypt is a tough place when it comes to regulatory and legal complexities of doing deals where you have the government in partnership—less so in PPPs, more so in JVs.

But Egypt has gone through a phase over the past 10, 15 years where it’s opened up. And that comes from what I was saying, that it’s quite a diversified economy and not single-industry-focused or limited. So a lot of Egyptian industries have private sector involvement. And so it’s not new.

But when you come to strategic areas such as I said, power and energy, you will find at, the higher level, political willingness to move ahead with it. But sometimes the regulations and everything that relates to state involvement complexes the deal substantially. What I’m saying is obviously pre the revolution.

Post-revolution, you’re also dealing with a complete set of other problems, such as state function is not very keen on signing anything, for obvious reasons. Because like most of the developing world, there is that general perception that private sector equals crook. And media has helped a lot on that. And that’s not something—that’s not, per se, Egypt. I’ve seen that all over, at least Africa. I don’t know about the rest of the emerging markets, but…

Snow: Final question. Does Citadel Capital get most of its investment capital from MENA region investors, or do you have a global investment base?

Sadek: Not anymore. It used to be primarily MENA, up to 2008. Post that, it’s been much, much more diversified, both geographically and identity-wise. I would probably say we’re one of the collective DFI, Development Finance Institutions—biggest partners in Africa, Egypt included. And that includes the wider scope of Western development-finance institutions: African Development Bank, Asian development-finance institutions, and ECAs.

So it is more of a diversified geographic footprint now on the funding side. And a lot of it with the development-finance institutions.

Snow: That says to me that there is a global interest in developments in Egypt. So it must be encouraging to bring in new partners from different regions.

Sadek: There is, especially post the revolution Egypt, there is a lot of development finance that is available for Egypt. Obviously there is no interest in financing Egypt budget, i.e., state budget. That’s not there.

There is a big interest in financing projects. There aren’t a lot of sponsors around in Egypt who have the network and sophistication, and the experience, of dealing with that pool of funding, because it has certain requirements in corporate governance, in KYC, in environmental and social impact assessments. So there is a lot of development funding that is interested in going into Egypt, subject to finding a corporate sponsor that they can rely on.

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