“The whole world is talking about emerging markets and how they are the linchpin for the world’s recovery,” Karim Helal, group CEO of CI Capital Holding, the investment banking arm of Commercial International Bank, said.
As to whether these burgeoning economies will fulfill that promise, Helal said, “Emerging markets will play a major role, but we need to manage expectations.”
“I don’t think it is right for the OECD [Organization for Economic Cooperation and Development] to hang their hopes of survival on emerging markets; they need to fix their own house. They caused this disaster, and we are back to the old habits of poor banking practices,” he added.
Asked whether the obsession with emerging markets will wane once advanced countries get their economic houses in order, Helal indicated that herein lies the problem: “We have seen that Western investors blow hot and cold.”
Egypt needs solid investors with a long-term view, he affirmed. “This is part of the reason that CI Capital took the initiative of looking Eastward and reaching out to promote Egyptian opportunities to Asian investors,” he noted.
Owing to their culture, their mindset is different: “They aren’t hit-and-run investors nor are they looking for ridiculous returns, but instead reasonable, sustainable ones,” he said. Working in Asia for many years allowed him to have a firm grasp of the culture.
As investors, he described Asians as “information addicts, they want to understand everything about the market in which they are planning to invest, and once they do, the floodgates open.”
Thanks to general market dynamics as well as his firm’s Asian strategy, Egypt and CI Capital “are seeing a lot of traction from Asian private and institutional investors, sovereign wealth funds and companies.”
CI Capital is discussing specific investment opportunities with Asian investors, Helal said without providing further detail.
Two main issues stand out in the Egyptian market as the largest obstacles, he said, but simultaneously represent the most significant economic growth and investor opportunities: small and medium enterprises (SMEs) and the country’s dynamic demographics.
SMEs helped carry Egypt through the financial crisis thanks to local production and consumption, and despite the major bottlenecks in the sector, they were able to contribute 80 percent of GDP.
“What if there were no roadblocks, and SMEs had access to finance, investments, banks lending?”
The result would be tremendous, he underscored.
He explained that the recent tax reforms were instrumental in removing one of the main hurdles to opening up the sector for economic exploitation. The large, informal SME sector viewed the old tax system as “unfair, and thus pushed many firms to have two sets of books.”
“This came at a price,” he said, which came in the form of SMEs having no access to finance. “Now, thanks to the 20 percent flat tax rate, companies are willing to open their books,” Helal said.
The change led to a domino effect in the SME sector: The government began focusing on SMEs more closely, the central bank began providing incentives on reserves to banks to drive lending, which allowed CI Capital and others to launch funds for SMEs, and gave impetus to the Nilex as a source of funding capital.
Investment banks, however, still need to live up to their responsibility of supporting SMEs, which is currently not happening. “Most banks are looking for the big ticket,” he said, “but CI Capital is different.”
“Our whole approach is based on relationship investment banking: We want to grow with the company,” he explained. The firm set up a midcap unit, which provides SMEs with the same corporate finance advice and services offered to major corporations.
Today’s market giants grew from being small companies, he said, citing Juhayna Food Industries, one of the largest food companies in the Middle East, which started with around LE 500,000 and is now a multibillion-dollar public company.
“Imagine how many Juhaynas there would be if the right support system existed,” he mused.
The second major area for economic expansion is the exceptional demographic changes that Egypt is experiencing, he explained. With the country’s unemployment rates where they are and the government’s desire to achieve double-digit growth, jobs must be created, Helal said, but this cannot be achieved with Egypt’s current infrastructure.
He noted that this is the driving factor behind the billions of dollars being poured into infrastructure projects, the stimulus packages being rolled out by the government, as well as the speed at which the public-private partnership law was passed this year.
Infrastructure projects cannot be developed by government, foreign donors and the banking sector alone, he said, and foreign investors must get involved. CI Capital is “very active in this space” because it is alluring to many Asian corporations and financial institutions.
SuperReturn Africa
Against this backdrop, Helal’s firm, amongst others, is sponsoring the upcoming SuperReturn Africa conference, a private equity and venture capital focused event, from Nov. 29 to Dec. 1 in Cairo.
The organizers, Helal said, wanted an Africa-focused conference because the continent is considered the “last consumer frontier.”
Seeking to capitalize on an opportunity, Helal helped lure the conference to Egypt rather than Johannesburg, South Africa as was initially intended, noting that via his connections to the event’s organizers, he was able to persuade them of Egypt’s key significance to the rest of the continent’s economy.
Helal noted the importance of highlighting Egypt as a “hub for private equity” and as an economic gateway to the rest of the continent through the conference.
Dating back to the Nasser era, Egypt had an “iconic status” in Africa, Helal said, which was somehow eroded during and after the 1980s, but that role is now being “rediscovered.”
And hosting the conference, he asserted, “cements” that view.
Private equity as a driver of developing emerging markets’ economies will be a main overriding theme of the conference.
Helal explained that given the extent of capital requirements for emerging markets that are “far beyond” the government’s and banking sector’s ability to shore up, private equity “is poised” to fill the gap left by its counterparts.
For his part, one of the key reasons to hold the conference is to “deepen the level of knowledge and awareness” about the continent, which is all too often lumped under one label, much in the same way one cannot not equate France or England with Europe as a whole, for example.
Africa is a geographic entity with “different or opposing dynamics…and the challenges of doing business will vary from country to country.” Thus, the conference will help identify these issues for investors eyeing the continent.
Africa is a “high risk” environment, but also presents potential high returns, “provided you are guided and have the right local partner,” Helal said.
