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Thursday, 10 December 2020

DPI on its big Adwia investment + why it likes Egypt right now

Private equity house DPI made waves last month with the USD 126 mn acquisition of Egyptian pharmaceutical platform Adwia along with the UK’s CDC and the European Bank for Reconstruction and Development. The pan-African private equity firm manages over USD 1.7 bn in assets through 24 investments across 29 countries and made its first Egypt investment in 2016, acquiring a third of Egyptian electronics and home appliance business B-Tech for USD 35 mn through its USD 725 mn African Development Partners (ADP) II fund. The fund, which is now fully invested, saw two further acquisitions in Egypt: The purchase of a stake in water pipe manufacturer Egyptian German Industrial Corporate (EGIC) in 2017, and a more recent USD 45 mn purchase of a 33% stake in GB Auto’s MNT Investment BV, the parent company of asset based lender Mashroey and microfinance player Tasaheel. MNT in turn holds a stake in tuk-tuk ride sharing, delivery, and microfinance business Halan.

We had a chat with Ziad Abaza, the DPI Principal primarily responsible for the firm’s Egypt portfolio, on the firm’s new healthcare venture, what industries they’re keeping an eye on, and DPI’s plans and prospects for Egypt. Edited excerpts from our conversation:

Egypt is one of the countries in Africa that has been very strong performing over the last four to five years, let's say since the devaluation. We always say, think of somebody moving from the suburbs to the city — what's that person going to need? They're going to need a bank account, they're going to need to put their kids in school, they’ll need to get healthcare. So everything around urbanization that benefits from the growing young population is what we’re interested in.

DPI has so far made three equity-based investments in Egypt, and we like the growth story here very much. All our Egyptian assets have performed well for us, so we've been quite comfortable making pure equity investments in Egypt. The firm’s modus operandi involves acquiring significant minority stakes in fast growing businesses and working with the existing management team. We help businesses with strategic direction, acquisitions, international expansion and ESG, which is perhaps not in the DNA of every Egyptian.

With a population of 100 mn+, Egypt still has one of the lowest banking penetrations, and Egypt’s non-banking financial services sector still has a lot of space to grow. Part of what has helped the industry grow so far is the 2015 Microfinance Act, which helped regulate the industry. When we first looked at this in 2015, you maybe had two or three players in the microfinance space. Fast forward and there’s more than ten players five years later.

Similarly, we expect regulation through the Consumer Finance Act will have a positive effect on DPI’s businesses like BTech, which operates much of their sales through credit. We feel that regulation will help protect and grow that industry as the Microfinance Act did with the microfinance industry. The Consumer Finance Act will regulate an industry that is increasingly important in supporting small enterprises, since consumers don’t just take on credit to buy goods, but also as working capital for their businesses. Especially on the microfinance side you can see that there's a great impact story.

After years of eyeing an entry point, DPI made its first investment in the healthcare industry with last month’s USD 126 mn Adwia acquisition, which was also the first drawdown from the 2019 ADP III fund. It's an asset that we've been following for quite some time. The issue with healthcare industry tickets is that they’re often either too small for DPI’s mandate, or overvalued through auctions.

Now with our joint USD 250 mn pharma investment platform with the EBRD and CDC Group, a big part of the thesis is bringing more affordable meds, especially in critical care and oncology, to the population and the wider continent.

What we're trying to do is provide affordable medication and therapeutic areas, which are perhaps not as easily available or as affordable in the country and the continent as a whole.

The platform’s investment in India’s Celon labs, which specialize in critical oncology, will provide the know-how while Adwia’s manufacturing facilities and regional export networks will facilitate the distribution of medicines across the continent. The platform is at the due diligence stage with several other healthcare related potential acquisitions in countries such as Morocco, Tunisia, Algeria, Nigeria, Côte d’Ivoire, and Ethiopia, and we have plans to establish a local distribution presence in the core regions of Africa.

Beyond our investments in retail, healthcare, and the non-banking financial services industries, we see growth potential in education, FMCGs, and the food and beverage industries. With a country like Egypt, what we do is we look at the demographic fundamentals of this country and what drives growth in this country. When you have a country of 100 mn people that are underserved in quite a few areas, there's always really good chance to create value that come out

Industries like infrastructure, energy and real estate are not within DPI’s mandate, but they’re not entirely off the table if we see the right opportunity. I don't think we've yet invested in all the industries that we like in Egypt. I do think there's some other industries that will be interesting in years to come and we will turn our attention to those out of the third fund.

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