Part two of our exclusive with EFG Hermes Group CEO Karim Awad continues this afternoon with a look at what’s next for EFG — and for the market in Egypt. If you missed Part 1 — where Awad dives deep into the Arab Investment Bank (AIB) acquisition and teaming up with the Sovereign Fund of Egypt — you can check it out here.

Among the key takeaways of part two:

• EFG Hermes is still in investment mode — merchant banking and direct investment are on the menu.
• The NBFS arm could grow outside Egypt, starting with valU in Saudi Arabia.
• The biggest obstacle to the return of international institutional investors? The absence of new, large-cap names.
• The debt market has been a shining star for companies looking to mobilize the capital they need to grow.

E: EFG went down this road before with Bank Audi. What’s different this time?

A: Primarily that there are huge chances for synergies between EFG Hermes today and AIB. It’s not a financial investment.

E: Will merchant banking still be on the menu for you going forward?

A: Absolutely. What we’re doing now is completing a pivot that started with our generating cash by exiting the Lebanese commercial bank at the right time. Some of that cash we returned to shareholders. Some of it we used to create the NBFI platform. Part of it is allowing us now to enter into our partnership with the SFE on the bank. And some of that cash has and will allow us to pursue merchant banking, private equity and other direct investments in the future. Look at EFG Hermes EV Fintech — it’s a partnership that acknowledges our industry is going to be shaken up by tech, and we want to be at the forefront of that conversation.

E: EFG Hermes is a global name outside Egypt — you’re the top-ranked broker in Kenya, you’re growing in KSA, you’re in Pakistan and Vietnam. But your NBFS platform is Egypt-only. Does the model scale outside of Egypt?

A: We wanted to make sure we had the business model right, and we’re now convinced we do. That’s why we’re seriously looking at which of our NBFI brands could work in which of our other markets — for example, we think valU could do really well in Saudi Arabia. ValU has been a great story for us in Egypt, and we think that as a fintech solution, it’s definitely exportable to Saudi Arabia, and we have three other markets that we could consider.

But you need to remember here that the market in Egypt is just huge, from NBFI to commercial banking, and it’s going to keep us very busy for the foreseeable future. On the other hand, the growth of the investment banking market has naturally been slower, and that’s why we started building our franchise outside with that end of the business. We’ve closed IPOs in Saudi Arabia, we’re working on transactions in the UAE, we’ve done cross-border M&A and we have a great brokerage market share.

E: What is next for EFG as an investment bank?

A: I think we’ve done a really good job building the franchise outside of Egypt, and I’m extremely happy with progress in important markets like Saudi Arabia and the UAE. As you said, we’re number one by market share in Kenya, which we entered just 2-3 years ago. We want to see more market share in KSA, and we want to grow our presence in frontier emerging markets, especially when it comes to the advisory side of the business.

E: Let’s turn back to the market here at home. When will foreign investors come back to Egypt? They’re the natural constituency to appreciate what you announced last week with AIB.

I think the issue with the stock market today is that the amount of investable paper is limited. The simple fact is that larger institutional investors demand large cap stocks in which to invest, and they want to see more diversity on the EGX in terms of names that represent the depth of the Egyptian economy.

E: So what’s going to bring them back?

A: A large IPO of a state-owned company. Or a large transaction like a [fintech player] Fawry or [education outfit] CIRA that has size and that puts on offer a sector to the economy without which they didn’t have access before. But more than anything else, they need more large caps. The simple fact is that a USD 100 mn IPO is going to attract a few foreign investors, but not all of the classes of foreign investors that you need.

Go back to when the market was doing USD 200-300 mn a day you had a lot of large caps with freefloats big enough that institutions could get in and get out on a daily basis. Today you have CIB, you have Fawry, you have Eastern and maybe Elsewedy. We have what, three constituents in the MSCI [Emerging Markets Index]? Back in 2010, the comparable figure was in the range of 10-11. We need to see good, fundamentally sound large caps that have significant growth potential.

E: What do your equity and IPO pipelines look like?

A: Healthy [smiles]. Look, we have good pipelines on both M&A and equity, but execution will always remain a function of markets.

But there is a disconnect right now: We think the economy is doing extremely well and the stock market does not reflect that at all. There is a huge disconnect that needs to be fixed sooner rather than later. It’s the opposite of the concern that some pundits have in looking at wesstern markets.

E: I think we probably want to close with a look at debt markets. If things have been slow on the equity front and picking up on M&A, they’ve been comparatively torrid on debt.

A: Developments in the debt market have frankly been extraordinary. Where the equity market has lagged, the debt market has been doing extremely well, in no small part thanks to the fact that the various regulators have really made it a priority to make debt more tradeable. We’ve seen a nice boom in issuances, from securitization and sukuk to corporate bonds. It’s a very healthy development, because debt is the backbone of any capital market globally.

E: But commercial paper and corporate bonds have been … slow. And securitization has really seemed to be the province of NBFS players and the real estate industry.

A: We want to see more commercial paper come to market, and we’ve put our money where our mouth is in that respect — we were among the first to issue commercial paper recently for our brokerage business. We see it super-interesting avenue for financing.

Look, the market — for commercial paper, for bonds, for securitization — it’s snowballing. It takes time, but we’re at the start of a really strong period of growth. And remember: The banks and investment banks usually go to the most obvious clients to start, right? That’s why you’re seeing a lot of real estate and a lot of NBFI players.

I think the changes now being discussed to allow landlords and schools and clubs and the like to securitize future cashflows is a really good development that will bring another class of clients to the market that weren’t there before. I’m optimistic.