The upcoming Euromoney Conference will, under the overall theme of investment competitiveness, focus on four areas of opportunity in Egypt: institutional investor development, infrastructure, renewable energy as well as small and medium enterprises (SMEs).
In this article, Richard Banks, director of the Euromoney Conference, looks at the prospects for investment in the SME sector.
When will it end? What SME owners in Egypt should know.
Life for the SME owner in Egypt has never been better. The government, international organizations, banks, advisors and the media have all accepted that the sector is key to the future of business. Your average SME owner — not that there is an average owner — can have her capacity built, costs funded, strategy advised upon, staff trained, genders empowered and much more. She could spend more time interfacing with supportive partners than selling product to customers. And, despite the plethora of good intentions, it is good that this sector is now receiving so much attention. Even those most derided of professionals — the investment bankers — are now moving into the market for SMEs.
As investment bankers truly accept that the credit-fueled days of mega-deals are behind them (until next time) they are beginning to look at the SME sector as a source of deal flow. Investment bankers make money from selling things (often to each other) and they are interested in building SMEs into businesses they can sell. Profitably.
In western markets there is an accepted cycle of corporate finance which includes angel investment, venture capital, early stage private equity, mid stage PE, late stage PE, IPO and beyond. But the point of the involvement of the investment bankers is to buy an asset cheaply and sell it for more at some later stage.
A whole market of savvy and experience corporate executives have grown up understanding how to create companies which provide the product the investment bankers want. As important (sometimes more important) as customers to a corporate start-up is making sure the company represents an unbeatable investment opportunity to financiers. The CEO is as focused on the investors, their returns and his exit strategy as he is the customers his company allegedly exists to serve. Whole industrial sectors have been created (briefly) to serve the investors demand for a particular type of company. The dot-com boom was the zenith of this type of company.
This model of investor-led company formation (as opposed to a more traditional opportunity or market demand-led model) does have advantages — and one of those is a rigorous focus on the exits. By starting with the end in mind a company has a much clearer mission and will focus on key performance targets within a defined time frame. This drives forward corporate growth at a much greater speed. Start-up companies exist which never intend to sell the product they are developing to customers. They build it, prove it works and then sell to a strategic investor.
It is not clear whether this focus on the exit is yet part of the culture of the SME market in Egypt. I do not have evidence one way or the other — but I would doubt it. It requires a different mindset to the business as an income generator for the owners. It is the business as an investment — compared with other investments. The return is crystallized at the exit. Without an exit the rationale for the business changes fundamentally.
In order for the SME investment market to institutionalize and develop more rapidly this mindset will need to become more accepted and more widespread in Egypt. It is part of what we will be discussing at the Euromoney Conference in September.
Richard Banks is Middle East Director for Euromoney Conferences. This commentary is published by Daily News Egypt in collaboration with Euromoney Conferences.
