Monday, 22 June 2020

Spotlight: Meet Abdalla ElEbiary, the new chief investment officer of the Egypt’s sovereign wealth fund

MOVES- Introducing the new Chief Investment Officer of the Sovereign Fund of Egypt, Abdalla ElEbiary: The covid-19 crisis has shifted the calculus for states and investors alike, with many having to shift gears on both long-term and short-term investments to survive. Egypt is no different. But while worrying about the short-term is essential, it is almost equally important to not lose sight of the long-term goals that will position us to better take advantage of the recovery. And that’s precisely what the Sovereign Fund of Egypt (SFE) hopes to do, and you can see that in the transactions announced. The SFE signed an MoU last month with New York based Concord International Investments to set up a joint venture to manage a USD 300 mn healthcare fund focused on Egypt and the Middle East, while also expressing interest in logistics and transportation projects. This is in turn balanced by long-term transactions in sectors that are underperforming during covid-19 today, such as tourism with the Bab El Azab revamp. As the SFE’s role in this balance becomes more crucial during the crisis, having the right CIO is there.

Enter our friend Abdalla ElEbiary, who you may remember from his time with Qalaa Holdings, once the continent’s biggest private equity firm. He’s no Nostrodamus (even though we are living in Nostrodamus times). But he is someone who knows private equity and balancing long-term risks and rewards. He was the managing director of the PE giant’s cement portfolio, where he led acquisitions of a number of key regional cement assets. He led the firm’swinding down of these assets just before the market turned with a supply glut, including the EGP 1 bn sale of ASEC Minya Cement and ASEC Ready Mix. Abdullah also led investments in Nile river transportation and logistics, and FMCG. He joined Qalaa following a stint at the investment banking division of Meryll Lynch. 

In his first exclusive interview since his appointment, ElEbiary discusses what the role of the SFE is during the crisis. He walks us through how best to navigate it, and how best to position Egypt for a recovery. He also updates us on the fund’s strategy, the status of key transactions, his ideal investment scenario, and what investors want to get out of Egypt in these times. 

Here are edited excerpts from the interview:

What’s the role of the SFE during the crisis? In general, the fund’s goal is to enhance investment in Egypt and maximize the value of public sector assets for future generations. In a perfect scenario, a consortium of local, regional and international investors would be assembled, some bringing operating experience and specific technical knowhow, to join forces with the SFE to refurbish or add value to a public sector asset. The partnership would result in a successful transaction, with generous, private-sector targeted returns for investors, sustainable development, and knowledge and management transfer to the Egyptian economy, says ElEbiary. “That scenario would hit all my high notes.”

Covid-19 has meant refocusing on healthcare, food and food security, logistics and infrastructure during the crisis period. The SFE already announced its intention to do this, says ElEbiary. “Globally, the pandemic has highlighted the need for more healthcare investments, and I think Egypt would benefit from this.” It’s also demonstrated the importance of food security, part of which comes from solid and uninterrupted supply chains. The SFE is emphasizing partnerships and investment projects that tackle these specific industries, launching a healthcare fund, considering setting up strategic medical warehouses, and planning other investments that will be announced in due course, he adds.  

But creating long-term value requires a long-term investment outlook, so hard-hit key areas like tourism won’t be overlooked either. Private equity as a vehicle has a 7-10 year investment horizon, but the SFE takes an even longer-term view, says ElEbiary. “We need to make the right fundamental investment decisions, not based on anomalies or where we are in the business cycle.” Tourism, specialized real estate projects and hospitality management are sectors where Egypt has a strategic advantage, so it’s important to continue investing in them, even if they’re temporarily hit by covid-19. So developments like the recently announced Bab El Azab revamp or developing the Mugamma El Tahrir are long-term projects that will take years rather than months, and ultimately add value to the Egyptian economy in a sustainable way.  

We’re also looking to monetize the fruits of previous long-term investments that are garnering investor interest. The government’s investment in infrastructure projects from 2016 onwards has built up Egypt’s economy so it continues to attract investors. Projects like the Siemens-built combined-cycle power plants, and the construction of desalination and wastewater treatment plants are large-scale, successful initiatives that are attracting interest from local, regional and international investors, says ElEbiary. Now it is time to monetize these projects, he adds. 

SFE transactions like the sale of the Siemens plants and the potential listing of Armed Forces companies are still on the table, but details are limited. All of these projects are moving forward, says ElEbiary, but they are ongoing processes, so there’s a limit to how much information can be disclosed. Investors have reiterated their interest in the Siemens plants, and discussions with investors about buying shares in army-owned companies are expected to take place “in the very near future.” The Bab El Azab project agreement was signed in early June, and now developing the plans and structure of the investment is the priority, before securing the right investors and setting the budget, he says.

The SFE’s partners should expect returns that are in line with the private sector, says El biary. Investors should also expect ROIs in line with market performance, especially as Egypt’s country risk keeps coming down over the long-term. A fund’s ROI needs to be measured against its lifecycle, which is typically 7-10 years, says ElEbiary. Thanks to the devaluation, IMF program, subsidy reduction and other measures, Egypt has taken important steps to improve the government balance sheet, and its risk-adjusted return keeps decreasing. All this helps to make Egypt’s investment climate more attractive.  

And the current SFE focus of capital and resources on specific sectors, as well as its ESG plan, align with global investor priorities. Sustainable development and having environmental, social and governance (ESG) criteria for projects doesn’t necessarily mean you should expect them to yield returns lower than private sector-targeted returns, ElEbiary emphasizes.

What also helps? The SFE is designed to be as agile as a private sector entity: The SFE has been set up to work and undertake transactions like a private sector outfit, meaning it is flexible to move as rapidly as possible, says ElEbiary. The people who work there are dynamic and responsive, and all are aligned in wanting the best for Egypt and wanting to act quickly. The first item on the agenda when he settles into the role and checks on safety protocols is some organizational housekeeping, he tells us. It’s about making sure the right people are sitting round the table and they have the right hiring policy in place to continue attracting top talent. 

Whatever shape the recovery will take, the SFE has to lay the groundwork for it: Whether we’re set to see a V-shaped, U-shaped or W-shaped recovery is very difficult to judge and will depend on global trends and how the pandemic changes, says ElEbiary. The IMF has said that for the first time since the Great Depression, both advanced and emerging market economies will be in recession in 2020, so it really becomes a question of who can best weather the storm and rebound the fastest. “The post-2014 economic reform, the pipeline of transactions we are developing in multiple industries, are all testament to how solid the Egyptian economy is today,” he adds. Though they have a long list of prospective investments and partners, it’s relatively easy to prioritize some investments — which could be quick wins — and put others on the back burner, in response to the ups and downs of the market. “This is not a one or two-year race, or even a ten-year race. This is a much longer race than that,” he says.  

Can specific indicators show us when we’re past the worst? Rising demand for hydrocarbons and oil products is one indicator to look at. That said, there’s no one single indicator that can do this, says ElEbiary. Finding a vaccine, reducing the mortality rate, increased mobility, and resumption of supply chain fluidity — these are all milestones. Every time we pass a milestone we get closer to normal, and moving in the right direction is what’s most important at this point, he adds.

IPOs unlikely before 1Q2021, but M&As may hold interesting developments: It’s difficult to know when the IPO market might rebound, ElEbiary says, but it’s unlikely to be before 1Q2021. M&A activity is also likely to remain slow until 2021, but ElEbiary sees potential for interesting developments, with financially prudent companies well positioned to take advantage of the downturn. “It’s difficult to predict which sectors will see the most consolidation, but healthcare, education, food and food security or infrastructure — whether utilities or data centers — tend to be resilient industries. Sectors like tourism, airlines, hospitality management are more likely to come under tremendous pressure,” he says. 

We should get a clearer picture by 4Q2020: Both the IPO and M&A markets will be impacted by the seasonal nature of covid-19, he adds. And the recovery of both could be impacted by a second wave of infections, whereas if the pandemic subsides a faster comeback might be possible. “But I wouldn’t expect financial markets to come back to anything resembling where we started 2020 before at least the end of 4Q2020, or early next year.” It’s also difficult to judge when and how quickly to come out of lockdown, without the data or tools to know how to achieve the delicate balance the situation requires, he adds. 

Just what makes Egypt interesting as an investment destination these days? We offer interesting investment prospects in areas like electricity and water, with attractive yields at the right risk-adjusted return. This is difficult to find at the moment, globally, says ElEbiary. And it didn’t happen by chance, but rather because the cabinet chose to invest in Egypt’s infrastructure years ago so we now have these projects to monetize, he adds.

And sectors like energy and water offer investors multiple projects, with both existing and greenfield assets, making them especially attractive. Investors want to come into a market that’s wide and broad enough to accommodate a number of investments in the same field, according to ElEbiary. So for energy, the SFE is considering investments that provide additional capacity, as well as monetizing existing capacity. This includes conventional electricity, like the Siemens plants, and investments in the renewable sector. 

On the impact of interest rates on the equity investment climate: Essentially, the higher the interest rates, the more challenging their return on equities, says ElEbiary. So long-term the interest rate needs to reach an equilibrium, so people are able to cover the cost of inflation and banks get a return on their capital. They’re looking for a sustainable level of inflation, which then dictates interest rates, which then dictates return on equity. “As we continue to invest in industries, healthcare, education, infrastructure, and some import substitutes, and to close the budget deficit, I think inflation numbers will continue to come down. But I’m most interested in direction. Are we getting to the right interest rate and inflation environments directionally? I think the answer is yes.” 

A possible return to the debt markets also indicates how well Egypt’s economic reforms and restructuring have worked, ElEbiary argues. “As you shore up the economy, debt markets — like international investors — welcome you to come to them, even in difficult times, like this pandemic,” he says. 

With Egypt still drawing international and EM investors, now’s the time for the SFE to get its ducks in a row. Despite the general climate of risk-aversion, the SFE has been pleasantly surprised that no prospective investors have withdrawn interest, says ElEbiary. Even if they have reshuffled their priorities to focus on healthcare or food, their interest in the Egyptian economy remained. “We want to use this difficult time to do the important work, so we’re ready to deploy when the crisis passes. If you structure, study, and do your technical and operational due diligence, this is the best use of the time,” he says. 

The key message ElEbiary wants to convey: The SFE is open for business, but not trying to crowd anyone out. “We are here to cooperate with both private investors and public sector entities, to create value for the economy and for future generations,” he says. But he favors fair and effective competition, as a way of bringing the best products to the market at the best prices, to benefit both investors and consumers. 

Meanwhile, we may expect to hear a new big announcement from the fund soon: “These things are difficult to estimate, but multiple projects lead to multiple successes. And I think we’re working on that.”

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