FinMin mulling new revenue strategy in bid to cut deficit

** The 2019 Enterprise CEO Week wraps up this morning. We don’t drink startup Kool-Aid and we don’t worship at the temple of PE. Even if you’re more militant about this than we are, Tarek and Sherif are must-read interviews: You’ll walk away feeling a hell of a lot more optimistic about where our community could go — and about what’s possible through the power of entrepreneurship. We can think of no better note on which to end the week.

Today’s participants are:

• Tarek Assaad, managing partner, Algebra Ventures
• Sherif El Kholy, partner and head of Middle East & North Africa, Actis

Already this week, we have heard from:

• Osama Bishai (CEO, Orascom Construction)
• Hend El Sherbini (CEO, IDH)
• Amr Allam (Co-CEO, Hassan Allam Holding)
• Mohamed El Kalla (CEO, CIRA)
• Riad Armanious (CEO, EvaPharma)
• Elwy Taymour (Chairman and CEO, Pharos)
• F. John Matouk (Founding partner, Matouk Bassiouny)
• Basel El Hini (Chairman and managing director, Misr Insurance Holding Company)

Our sincere thanks to the execs who took time out of very busy days to join us as well as all those of you who have written and called with kind words.

In the money: The Central Bank of Egypt has officially received the fifth USD 2 bn tranche of its IMF loan, Reuters cited MENA. The transfer comes a day after the IMF’s executive board finished the fourth review of Egypt’s reform program and signed off on the disbursement.

The Confederation of African Football is in town to inspect the country’s stadiums ahead of the 2019 African Cup of Nations,according to Goal.com.

The Egypt Building Materials Summit takes place today at the Nile Ritz Carlton. The event brings together construction industry investors, developers, policymakers, service providers and consultants, and over a dozen keynote speakers.

As Egypt gears up to assume its presidency of the African Union on Sunday, our role in the organization and ties with Africa were in the spotlight on last night’s talk shows.

There has been a sea-change in Egypt’s relationship with the rest of the continent since Egypt’s membership in the AU was suspended in 2013, Al Hayah Al Youm’s Khaled Abu Bakr said (watch, runtime: 03:03). Rep. Tarek Radwan chalked up the change to government-led efforts such as creating an African Affairs committee in the House (watch, runtime: 05:54). Masaa DMC’s Osama Kamal also touched on the topic (watch, runtime: 08:26).

State-owned companies delivered EGP 11 bn in profits during the last fiscal year, and that figure should double within a year and a half, Public Enterprises Minister Hisham Tawfik said on Al Hayah Al Youm. Tawfik recapped his ministry’s plans to salvage or liquidate companies currently in the red (watch, runtime: 16:26).

Cabinet Spokesman Nader Saad explained the new fuel pricing mechanism for 95 octane fuel, which will be implemented in April. Watch his conversation with Yahduth fi Masr’s Sherif Amer (watch, runtime: 09:05).

EXCLUSIVE- New revenue strategy to curb budget deficit could be on the way: The government is discussing a new revenue strategy with the goal of cutting the budget deficit to 5% over the next 3-4 years, a senior government official told Enterprise. The government expects tax revenues to surpass EGP 1 tn over the coming years under the new strategy, which relies on several pillars:

Improving the tax collection process: The in-the-works strategy could include measures improve the tax collection process with the aim of raising tax receipts to 18-20% of GDP, up from a current 14.6%, the source said. Amending tax legislation to fix loopholes and have it match international standards to attract investors would be on the agenda.

Convincing the informal economy to go legit will also be part of the government’s new revenue strategy, the source said. Incentives, including VAT discounts access to subsidized finance and insurance could be on offer to those who register their businesses and pay taxes. The government does not have an accurate figure of the size of the informal economy, but the source said unofficial data indicates it is at least as large as the official economy.

What about non-tax revenues? Increasing the prices of a number of services and commodities — that have stagnated for far too long — would also be on the agenda, the source said. The state’s privatization program would also fall under this category, as would efforts to amend the Mineral Resources Act to make the best use of the country’s natural resources. Increasing development fees and the state’s allocation in private funds would also be part of the strategy, which would also include efforts by the government to re-prioritize its spending plans to curb expenses and balance the budget.

Shalakany, Herbert Smith, White & Case tapped as local legal counsel on Abu Qir stake sale: Shalakany Law Office, alongside Herbert Smith Freehills, will jointly act as shareholders’ local legal counsel in the stake sale of Abu Qir Fertilizers as part of the government privatization program, a source close to the transaction told Enterprise. White & Case, meanwhile, will act as domestic counsel for the investment banks managing the transaction, which we had noted last month are CI Capital and Renaissance Capital.

Zaki Hashem tapped for ACCH stake sale: Zaki Hashem & Partners (ZH&P) will act as shareholders’ local counsel for the stake sale of Alexandria Container and Cargo Handling (ACCH) as part of the state program, according to Al Mal. White & Case, meanwhile, will take on a role as international counsel.

A senior official had told Enterprise that the privatization program could kick off as early as next month. Both companies were initially part of the first lineup, but the government committee tasked with managing the program is considering changes.

M&A WATCH- EK Holding makes bid for Emisal Salts: Investment firm EK Holding is making a play to acquire salt producer Emisal Salts, according to a report in the domestic press. The National Bank of Egypt, the largest shareholder in Emisal, will lead the sale process on behalf of other state-owned shareholders including National Investment Bank and the Chemical Industries Holding Company. The transaction is expected to close in 1H2019. No details were provided on the value of the bid or EKH’s post-acquisition plans.

CABINET WATCH- Cabinet greenlights Consumer Credit Act: The Madbouly Cabinet approved yesterday the draft Consumer Credit Act, which would govern retail financing and consumer credit, according to a Cabinet statement. The 30-article bill would set up a federation for non-banking consumer finance and require companies to obtain a license from the Financial Regulatory Authority to sell goods on installment. All consumer finance players will be subject to the legislation if it passes, but retailers and manufacturers are subject to it only if more than 25% of their annual sales are made on installment plans. The proposed law defines consumer finance as “any activity or operation aiming to fund purchases of consumer and durable goods and transportation vehicles.” It is expected to clear the House of Representatives before the end of the current legislative season, FRA head Mohamed Omran previously said.

Unemployment is down again: Prime Minister Moustafa Madbouly announced that unemployment came at 8.9% during 4Q2018, down from 10% in the previous quarter, while the full year figure was 9.9%, the cabinet said in a statement.

The Finance Ministry will make electronic payment of gov’t fees mandatory by early May for amounts exceeding EGP 500, according to a ministry statement. The ministry is planning to have installed by April some 22k ATMs and points-of-sale (PoS) across government service offices. We picked up a Cabinet statement last November saying all transactions would have to go electronic by January, but the date seems to have been pushed back. The move is part of the ministry’s new billing system, and of the government’s plan to gradually transition towards a cashless, paperless economy.

Uber sees Egypt as one of its “most promising markets” in the Middle East, where it is going after the region’s “exploding youth population,” Nicolas Parasie writes for the Wall Street Journal. The ride-hailing company has been expanding its presence in Egypt and elsewhere in the region as it looks to reach 1 bn users ahead of an IPO that could be value the company at c. USD 120 bn. Although some countries in the region, including Jordan and Qatar, are not major contributors to the company’s top line, the region’s allure lies in “its booming population of tech-savvy youth.”

AUC faculty deliver vote of no confidence in president after Pompeo’s ‘fiery’ speech: The American University in Cairo’s Senate voted on Tuesday in favor of declaring no confidence in the university’s president, Francis J. Ricciardone, and called on the university’s board of trustees to appoint a replacement, Declan Walsh writes for the New York Times. “In a letter to Mr. Ricciardone, faculty members cited low morale, complaints about his management style, grievances over contracts and accusations of illegal discrimination.”

The grumbles have been building up for a while: These grievances, the faculty members said, existed long before US Secretary of State Mike Pompeo delivered a “fiery” speech at the university last month, but “exploded into the open” when they were not included in or informed of the decision “to bring a former C.I.A director who has spoken in favor of torture to A.U.C.,” as the chairwoman of AUC’s history department, Pascale Ghazaleh, put it. Academics interviewed by Walsh indicated distrust for Ricciardone, largely due to his political background.

Automotive sales rebounded in 2018 as total vehicle sales jumped 42.9% y-o-y, approaching pre-floatation levels with 193,800 units sold, according to figures from the Automotive Information Council (AMIC). Passenger car sales saw the greatest growth, rising 47% y-o-y reaching 145,800 units compared to 99,500 in 2017. Sales of imported cars (the segment worst-hit by the float of the EGP) surged 59.4%, while sales of locally assembled cars grew 29.1%. Truck sales grew 36% with a total of almost 32k units driving off showroom lots.

Topping coverage of Egypt in the foreign press this morning is news that a coalition has been formed by Egypt’s opposition parties against proposed constitutional amendments that could potentially extend the rule of President Abdel Fattah El-Sisi until 2034. The self-styled “union for the defense of the constitution” includes members of the Karama and Dostour parties, as well as other left-leaning groups and lawmakers. While parliament has given preliminary approval to the proposed changes, it will take a final vote on February 17, which will then be followed by a national referendum. The Associated Press reports that opposition figures plan to challenge the amendments before Egypt’s Supreme Constitutional Court.

Other notable headlines include:

• Egypt’s clampdown on tuk-tuks has had a significant impact on companies — such as Bajaj Auto in India — that manufacture the three wheelers we import, reports Indian publication Money Control.
• The Vatican and Al-Azhar mosque and university have signed an agreement to fight extremism, Al Arabiya TV reported. Reuters notes that the document was signed on Monday in Abu Dhabi, during the Pope’s visit.
• A campaign to dissuade Egyptian parents from having their daughters undergo FGM has taken off,Voice of America reports.

Tarek Assaad wears Algebra Capital’s investment thesis on his sleeve — and on his face. “No, I prefer to smile, if you don’t mind,” Assaad (LinkedIn) told us when agreeing to pose for the shot you see above. Assaad, partners Karim Hussein and Ziad Mokhtar and the team at Algebra embody a sunny optimism about what’s possible in Egypt, the region and emerging markets at large when the entrepreneurs (both the tech-focused and the tech-enabled) get the financial and organizational backing they need. The company has become synonymous with VC and tech culture here in Egypt, having led or joined funding rounds for companies that are budding household names, among them Eventtus, Elmenus, FilKhedma and La Reina. He’s also opened our eyes to the immense potential of core tech in Egypt, embodied by scrappy startups such as the ridiculously cool Si-Ware. Tarek is an engineer and veteran of America’s West Coast tech scene, but he’s not one to fetish-ize the Valley. On the eve of a recent trip to California for a high-profile industry event, we asked Assaad whether he was looking forward to rubbing shoulders with America’s tech elite. “Naw. You know, I go because I get to meet VCs from other emerging markets. We have so much more in common with people in Argentina or Southeast Asia — it’s a totally different game here.”

A few years ago, friends would ask me, “When are you going to get a real job?” The momentum that exists now at the mass market level just wasn’t there even a couple of years ago — people thought the whole ecosystem was something that happens in the US, but would never be successful here. But then Uber, Careem, Facebook, and the likes entered the market. Now, people are asking me how they can become angel investors. The number of introductions I make between people from brick and mortar industries who are interested in getting their feet wet with this type of investment has increased significantly compared to a few years ago.

Look, the industry is nascent — you can count the players on one hand at the moment. But there is more than enough activity to keep us busy, and we are seeing regional investments coming in and signing agreements — like Swvl — that are increasingly becoming larger.

There is a lot more capital coming into the industry. Sawari Ventures just closed the USD 35 mn North African fund, for example. There are a couple of others who are raising capital, and there is a lot more interest from regional funds looking Egypt. There’s different stages of venture investment and I think there is more money coming in.

A few years back, the typical round for an Egyptian tech startup would raise USD 1-2 mn; today, you’re seeing rounds of USD 5-10 mn and, more recently, rounds raising USD 15-20 mn. We’re seeing more money coming in as companies are maturing, and the sources of funding are also changing — a lot of the money has been coming in from the region or internationally, but we’re starting to see more involvement from local players.

It’s fine to start small. There’s a significant opportunity in alignment for future rounds once the first introduction is made. Once someone gets an investment of USD 50k in the first round from a connection I made, they’ll come to me in the next round when they need a USD 1 mn investment.

2018? Well, it was the year of ramp up for us, for the fund. We closed in late 2016, we had a few transactions in 2017, but the investment pace really picked up in 2018. We close the year having committed almost twice the capital to just about twice as many transactions as the year before.

For Algebra, 2019 will be the year of follow-on investments, from us and from other people / investors. The investments we made in 2017 and 2018 are maturing enough that these companies are going out and looking for subsequent funding. We’re going to continue backing these companies, but we’re also going to invite other investors to participate in subsequent funding rounds. This could mean bringing in other limited partners from outside our fund structure.

Bringing the right talent to portfolio companies is going to be the biggest challenge for us this year. We’ve been focusing over the past few years on just making sure we have an engine that works and can then bring in senior and technical talent. We have senior talent, but a lot of companies are struggling to retain technical talent because so many developers are going abroad, especially to places like Germany.

How can we keep people here? Give them exciting opportunities and give them ownership within the opportunities. We’ve seen companies that have very strong cultures (which can be hard to build) thrive when they can clearly describe the value of the stock options that they offer. This is a shift from the mentality, particularly among younger developers, that compensation is only calculated with salaries and bonuses, and with zero value placed on stock options because they’re illiquid. Some companies are doing a better job now at explaining the value there and showing that adding stock options to the equation makes the outcome more attractive than leaving. Lifestyles abroad may be different, but there’s no question that the upside potential here is different.

Fintech is clearly one of the biggest opportunities in 2019, but we haven’t seen the pipeline that we would have hoped for. A lot of that is because starting a successful fintech company requires having earned some exposure to it in a previous life, as opposed to e-commerce, for example, where all you need is to be a consumer who identifies an inefficiency and tries to solve it.

The chance to move the needle here in Egypt is significantly greater than in more developed markets, because there’s so much potential here in everything that hasn’t been done yet. Technology can play a big role in that. Fintech is a buzzword everywhere, but Egypt’s credit card penetration rate is 3% — fundamentals like that scream for more things to be done.

How do I see the wider economy faring in 2019? The real answer is I don’t really care, because we went through three constitutions and just as many presidents, a huge slump in the economy — and people are still looking at tech startups. That’s how it always is, unless there’s a catastrophe or a huge shock. If the economy is growing at 3% or 6%, our companies are still growing 100%.

Approach to compensation in 2019 budget: We’re a very small team. We select people based on their skills and the impression they make, and we want to make sure they are well-rewarded, so the compensation will reflect that. We work hard to bring in the right people, and once they’re in, we’ll compensate them well. We are planning on giving raises for 2018 performance.

Inflation in general slows everything down and we feel that sometimes, but it’s interest rates that matter to our portfolio companies. There are a few things that come into play here: We’re a USD-denominated fund, so after the devaluation, we expected inflation to keep picking up and we’ve seen that happening for a while. We’re keeping an eye on inflation and FX rates and how these will affect our returns. FX rates shifting within the 10% range won’t really hurt us too badly, but a sharp drop like the EGP float eats out all the gains you’ve made, so that’s something that worries us. None of our companies will go take a bank loan, but high interest rates correlate with high inflation. With high inflation, people will spend less on fewer things, and companies will be hindered.

There could be a few exits by venture capital in our industry this year, but it won’t be the year of exits. Companies are still maturing, so we’re probably still two or three years away from seeing that happening in Egypt. Maybe in the rest of the region, things will start happening a bit earlier just because funds entered earlier. Systematic exits will happen when the companies that we’ve been funding, as an industry, for the past few years achieve either significant traction on the user level or significant financial performance.

Who will buy at exit? If you have financial performance, you can attract the PE guys, who are looking for interesting tech plays. If you have enough of a market presence, even if you don’t have the financials, you’ll attract strategic players. Both these scenarios can happen but I don’t see many companies ready to get to that phase this year.

You’re not going to see tech IPOs in Egypt anytime soon. A lot of businesses that have been built in the past few decades have grown and become attractive, but almost none of them are tech businesses. It’s almost the exact opposite in developed markets: Many of the companies that have been built in the past 20 years are in tech. International asset managers will be ready to come into Egypt, but they’ll ask their local counterparts about their tech allocation, and the answer is, “We don’t have any because there are no publicly traded tech companies.” IPOs will eventually happen, but right now it’s less risky and less of a headache for the entrepreneur to let PE or strategic investors come in and make the business more attractive, rather than go to market. I’m not sure who will go the distance, but there’s a hump to overcome, after which you’re in a really good position where there’s a lot of money chasing fewer opportunities.

There will be a lot more capital coming to the market in 2019, whether in the form of LPs supporting funds or direct investments or some organizations playing both roles. I see the IFC and EBRD both supporting funds. The EBRD is an LP currently supporting Algebra, and the IFC didn’t make a direct investment in this space last year but put USD 6 mn in Nigerian logistics startup Kobo360. As the ecosystem develops and companies make more money and attract more capital, it will stop being a dual bottom-line game: The purely for-profit guys are becoming a lot more interested and are coming here because they see opportunity.

Any sector driven by technology will outperform this year. Software will eat the world.

Industries that are being disrupted by technology and can’t adapt fast enough will probably underperform.

Regulation counts a lot, but it’s more of an issue for the portfolio companies. Transport companies will be regulated by the Ride-Hailing Apps Act, for example. Regulation for others, like fintech companies, is unclear. Regulation isn’t quite breaking investments, but it’s certainly an area of concern and a risk consideration. I don’t care about the economy’s growth rate, but I do care about regulation, and so far regulation is structured in a way that favors larger companies or stifles innovation, or requires a lot of hoop-jumping that startups aren’t capable of. These are the kind of things that can scale back a lot of the momentum that’s already been building up. Regulation for VCs is different, because all VC funds, including Algebra, are domiciled elsewhere because of difficult local regulations. But the bottom line is that the money is still coming into Egypt, so it’s not the end of the world.

Egypt stands out among its regional peers for the size of its economy and the quality of talent that makes a tech play doable. In other countries, you’ll see large markets but not enough depth of technical or commercial talent, or strong talent but a small market. If you start in one of these countries, like Jordan, you have to start locally and then try to think of how to expand to another country, like Saudi. But Saudi and Jordan are two different countries and typical consumers are dealing with different issues in each of them, so it’s difficult to scale outwards. But in Egypt, the market is big enough with a strong enough talent pool to build a strong tech startup and scale inwards to the domestic market and reach a decent enough scale. That makes Egypt attractive and make the most sense for our business.

Outside parties frequently ask us about the holding period and follow-on capital. Nobody really knows how long it will take to exit tech startups in this part of the world and how much more capital you will need to deploy. You could look at other structurally similar markets like South America and South East Asia and try to guess, but we’re cautious about follow-on capital and we’re dedicating a very significant part of the fund for that. There’s a lot of capital coming in, which is great, but we know that we will need to shoulder these investments for quite some time until someone new comes in and wants to invest in the company.

It’s exciting to see the quality of talent that is willing to leave or forgo very attractive opportunities and come to the world of startups. We’re seeing people leaving fast-track corporate careers that could have them in a VP position at a large multinational and instead decide to become the VP of marketing or operations at a tech startup, and that’s exciting for us. Once you have USD 1 mn in funding and a strong CEO — someone who can articulate the vision and tell someone who’s qualified come build this with us it works. Algebra tries to play a role in that — connecting someone who may have comfort and security but is bored and wants to be part of something different to ventures that we see potential in. The level of energy and engagement there is phenomenal, and that’s something we want to double down on this year.

2018 was not an easy year for private equity — not globally, and certainly not in our neck of the woods, where the collapse of onetime regional and EM champion Abraaj shook both the industry and those who invest in it. Sherif El Kholy, partner and head of Middle East & North Africa at Actis, the premier emerging market PE firm, knows a thing or two about navigating challenging circumstances. A veteran of the finance industry, El Kholy got his start at EFG Hermes and then moved to HSBC doing structured finance. Since joining Actis in 2004, he has been focused on North Africa, taking the lead on key transactions, executions and exits. Actis’ regional portfolio spans from Honoris United University (Africa’s largest private higher education network, which reaches from Morocco to South Africa) to Egypt’s Integrated Diagnostics Holdings (led by Dr. Hend El Sherbini, who appeared in our 2019 CEO Poll on Sunday). Actis has invested some USD 1 bn in Egypt across sectors including food and beverage, healthcare, and power and has completed landmark investments in market-leading businesses including CIB, Edita Food Industries and El-Rashidi El-Mizan.

2018 was the year of uncertainty for the private equity industry, not just in Egypt, but globally, for a variety of different reasons — not least of which is the emerging markets volatility and how the trade war between China and US had an impact on the attractiveness of emerging markets.

For PE, I think 2019 will be a year of stabilization and momentum buildup. And for Actis it is a year of growth across our markets. We are augmenting our presence and activities in Egypt and in Africa, as well as building on our global financial services sector expertise by launching a global fund dedicated to that sector, with a dedicated global sector team. Our aim is to reaffirm our position as the leading emerging markets private equity firm.

The biggest challenge in 2019 will be ensuring the reform program Egypt continues at pace — and that the side effects can be absorbed by people, especially the middle class, and that social costs of the reform program can be manageable. I think the reform program is absolutely essential and there’s been a lot of very tangible improvements achieved in the past 24 months. It is important to press forth in earnest. I think it’s important not to take any U-turns, but to keep an eye on the social costs of that program and ensure that there is sufficient attention and funding given to welfare programs such as Takaful and Karama.

The biggest opportunity of 2019 is to capitalize on Egypt’s increasing focus on Africa and to use Egyptian businesses to build bridges across the continent. We are strong believers in the importance of building sizeable, scalable businesses that are pan-African and that’s why we’ve previously created Africa’s largest payments platform — Emerging Markets Payments — which was ‘born’ in Egypt and then diversified through acquisitions and organic growth all over Africa. We’re now doing the same thing in higher education through our education business Honoris United Universities, which is spread out across all of Africa and is in the process of entering the Egyptian market. With Egypt heading up the African Union in 2019, there’s an opportunity to create more business ties between Egyptian and African businesses and capitalizing on the investment opportunities that arise as a result of that.

Over the past two years, there has been a much bigger focus by the government given to Egypt’s relations with Africa and I’m very pleased to see that. It’s very healthy and encouraging to see Egypt focusing on occupying a much bigger space in the African investment ecosystem.

I feel positive about the prospects of the Egyptian economy in 2019. From a growth standpoint, from a stability, and health standpoint, I feel more positive about it in 2019. I think a lot of the improvements will depend on what happens with foreign direct investment (FDI), which is certainly improving and accelerating. It’ll be important to see an acceleration in the pace of equity flows into the country and new private sector projects getting funded by foreign investors.

The health of the economy will also depend on the continued recovery of tourism. I think there will be a recovery in tourism in 2019 and that the positive trajectory the sector is taking will continue. The third thing is the continued recovery of consumption, which was hard hit after the EGP float and saw volumes fall across many sub-sectors. Those volumes are starting to come back from the second half of 2018 and I would expect them to continue recovering in 2019 as the markets rebalance and consumers start to absorb the inflationary shocks that have happened over the last couple of years.

Why hasn’t FDI grown as fast as the gov’t was projecting? I think there are two reasons. The first one is related to global markets: Emerging markets have been on a turbulent path for the last couple of years. It’s not just Egypt — most emerging markets and capital flows into emerging markets, particularly on the equity side, have been impacted by that and there’s been multiple reasons for that. These include Brexit and the trade war between China and the US. We’re seeing a lot of international investors channeling their investments into developed markets, particularly the US. The second reason is the higher interest rate environment which has made the carry trade in Egypt more attractive and a safer route for deploying international capital into the Egyptian market, and more attractive than long-term FDI into equities and projects. Investors have had the opportunity to make low risk returns by channeling their investments into debt instruments.

That said, the investment regulations are there and investment promotion and support to investors from the Investment Ministry is there. What I hope will happen is that as interest rates go down and growth accelerates, we will see a pick-up in equity flows and setting up new businesses, and setting up new hubs for multinationals in Egypt to capitalize on Egypt’s relationships with a variety of other markets in the region. That’s why I’m hopeful that investment activity this year is going to pick up, both on the portfolio flows front and the projects front.

Our approach to compensation in 2019 will be very much consistent with our approach in prior years. Actis has a well-designed performance management system, and a fixed salary and a variable performance bonus system. Salaries are benchmarked according to market rates of pay. And then there’s a merit based performance bonus to reward high performers. And, yes, I expect that there will be raises in 2019.

Our business is all about investing in well managed, high growth, privately owned businesses. And what’s been happening over the past two years is that the environment of high interest rates has constrained the appetite and capability of a lot of Egypt’s private business to implement capital expenditure programs via the use of bank funding. So I feel that overall growth in the private sector has been impacted by the environment of high interest rates which obviously has an indirect impact on the private equity industry.

I certainly hope interest rates come down in 2019. I think it makes sense that they start to come down this year, hopefully sooner rather than later, especially with inflation starting to come under control.

We continue to have investment appetite even when interest rates are high. But I think what will happen when interest rates come down is that by definition, businesses will be able to borrow more at more competitive rates which will catalyze capital expenditure programs which will translate into growth. And growth is one of the most important ingredients that private equity looks for, so it’ll have a positive impact on our investment appetite within our focus sectors, which are energy (particularly renewable power), the consumer sector, education, healthcare, and financial services.

Education is a high priority sector for Actis. We had invested in it before in China and Brazil and we’ve decided to enter that sector across Africa in 2014. That is why we created Honoris United Universities which today has over 30k students spread across 30 cities in nine African countries. And we met with the Higher Education Minister and there was support for Honoris to enter Egypt. We’re working on two different approaches into the Egyptian market. The first one is an organic route by setting up an international branch campus for one of our universities, Regent’s business school. The second route is investing in existing private universities and we are looking at a number of those.

We believe Egypt has good K-12 prospects and we’re interested in replicating our successful example of Honoris by starting a similar platform for it. Egypt is one of the very attractive markets in that space so it would be the same Africa “string of pearls” strategy that we used in higher education. We are actively looking at the K-12 sector in Egypt.

Inflation has been a very big issue in 2018, because inflation manifested itself in a variety of different ways. The most notable of which was its negative impact on the consumer sector and, as I mentioned earlier, volume drops within the consumer sector. I think high inflation has meant that interest rates needed to remain high, and that in turn has depressed private sector borrowing. It’s all interconnected and that’s why getting inflation under control is a very important aspect. The CBE’s policy of inflation targeting is absolutely the right policy to make sure that inflation gets under control to enable interest rates to come down. This will then enable capital expenditure programs to accelerate which will in turn have a positive impact on the private sector investment at large.

I think the IPO outlook this year will be more subdued than 2018. 2019 is the year we will see more M&A activity than IPO activity. There is been a healthy flow on the IPO side over the last 18 months or so. But there are a variety of reasons why I would expect IPO activity to be lower than in 2018. Part of that is investor appetite. There will always be investor appetite for IPOs in defensive sectors. But now there has been a pause in IPO activity since 4Q2018, because of mostly emerging market sentiment, and because of all the noise with the state privatization program. I think the program has to be timed well to be successful to make sure these assets are priced optimally. But another relevant factor to take note of is how the regulations are governing IPOs going to evolve, especially in the aftermath of the Sarwa IPO.

I think M&A activity will improve in 2019. With inflation coming under control, that has positive impacts on a variety of different sectors and on the investment sentiment. The acceleration of growth in GDP is going to give investors more confidence. Continued pace of reforms and support from the IMF will continue to provide a positive impetus. A lot of private businesses will look for replacement capital and expansion capital transactions — these are transactions that happen on the private level, like sales of significant minority stakes or buyouts. We’ll also see an increase in what’s called pre-IPO investment — where a private equity investor comes in with a stake in the business and then helps the business get ready for an IPO. That’s very similar to what we did in our investment in Edita Food Industries, which was very much a pre-IPO investment ahead of the company’s very successful IPO on the EGX and the London Stock Exchange.

From a private equity sector mapping standpoint, I would expect the payments sector and fintech to be outperformers. I expect the education sector to enjoy growth. Medical diagnostics and medical services, as well. And small ticket non-discretionary spend consumer goods, particularly within the food and beverage space.

Real estate is expected to underperform along with discretionary spending sectors, and any sector that rely in a big way on imported raw materials for their inputs. Banks are also expected to underperform as a result of the new tax treatment and yields on treasuries coming down.

Where am I investing? I very much like the food sector. Particularly businesses that are small ticket, geared towards the consumption of the middle class. I also see investment opportunities within the education space.

Is Egypt at risk of over-regulation? I think Egypt has a prudently-regulated market with very good levels of governance as it concerns the corporate world. The issuance of the Investment Act and the Bankruptcy Act, from a regulatory standpoint, are very welcome steps. But I think the biggest risk in Egypt at the moment is a risk of over-regulation. A good example of effective regulation lies in the electricity sector, where private sector participation has been enabled in a big way and as a result, there has been an explosion of growth in that sector with a very positive outcome for the country. The same needs to happen from a regulatory standpoint in other similarly strategic sectors.

I want to point out education and healthcare as two such sectors, where there are still barriers to entry, particularly for foreign ownership. Until today, a foreign investor cannot own 50% or more of a private university unless they open an international branch campus. Buying and selling shares in companies in the healthcare space requires approval from the Health Ministry. More liberalization is required on this front to enable the transfer of know-how and to enable private sector and foreign participation in those sectors. So I think the over-regulation risk is sector-specific. But overall, Egypt is prudently-governed, investor protections are there, the ability to litigate and get what’s due to you is there and it’s robust, especially when compared to other comparable economies.

Egypt’s fundamentals put it at an advantage over other economies: Egypt is a high priority market for Actis. We’ve been on the ground for over 16 years. We’ve invested and committed close to USD 1 bn across a variety of different sectors including energy, financial services, food, and healthcare. We’ve invested consistently throughout periods of challenges to the economy. And that’s because we believe in the long-term prospects of Egypt from a demographic standpoint and from a growth standpoint and a diversification standpoint. But at this point, the number one priority for me in Egypt is making sure that private sector participation is as deep and as enabled as it should be and that there isn’t any crowding out of the private sector by the government or quasi-governmental players. Egypt’s long term growth can only be guaranteed and sustained by a healthy and flourishing private sector with both local and foreign investor participation.

…And Egypt is in competition with other emerging markets for international capital. International investors have choice and they choose to channel their money into the most attractive markets. Accordingly, to ensure growth in private sector participation and equity flows and FDI, the Egyptian market needs to continue providing a healthy investment landscape as well as actively encouraging and enabling the private sector to occupy a bigger space.

If I were to start a new business today, it would be an education business. I would get into setting up my own private university, which I think is a good business, with very good social returns. It’s a fascinating sector with a lot of latent demand.

The biggest issue in private equity in emerging markets today is perception. There have been unfortunate events that have happened in the emerging markets private equity space which have colored the views of investors of that industry. The dark cloud that has loomed over emerging markets private equity in 2018 because of the bad coverage is probably the biggest challenge we see today. And one of the challenges for emerging markets private equity firms today is to deliver positive outcomes that counter the negative perceptions.

What can PE firms do to change that perception? I think it is a good opportunity for strong private equity firms to distinguish themselves and show investors how they run themselves and approach investment management and corporate governance. I think it’s an opportunity for the well-governed, professional players to distinguish themselves from the pack. I expect there to be a “flight to quality” within the industry. Investors are now more discerning than ever and are carefully picking who they put their money with. Track record thus becomes very important.

The most common question we get from LPs on Egypt is will the EGP devalue this year. We will see. I think if the EGP slides a bit, it will be healthy. It would certainly help exports. So I won’t be surprised if there was a little devaluation over the course of 2019, but not of a big magnitude.

What have you not asked me? How about this: Why am I still an Arsenal fan?