Private equity competition rife in the region

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CAIRO: “The private equity market is growing too fast, there is only so much ‘sand in the box,’ and there is more competition than before in the market,” Karim Sadek, managing director of Citadel Capital, said Tuesday.

Speaking at the SuperReturn Africa — a private equity and venture capital conference taking place for the first time in Egypt — Sadek added that “it will take time for people to get used to investing” on the continent.

Joachim Schumacher, head of Equity and Mezzanine, noted that there are new funds of varying types, but the private equity environment is lacking compared to Asia, Eastern Europe and Latin America.

He stated that this is due to private equity investors’ “lag in the perception of reality.”

As far as private equity funds in Africa are concerned, Schumacher explained, they are smaller in size and need to create deals on their own, which results in lower returns. This makes Africa a more challenging private equity environment, he added.

Sadek, however, underscored that before most investors were “pessimistic” about the continent, but now all primary economies are demonstrating signs of growth, which is promising for private equity investors interested in Africa.

He also noted that making 13-14 times a return on an investment is “unlikely,” but that doing so isn’t the objective for a local player, such as his firm, Citadel Capital. Rather, obtaining three to five times on a return is possible so long as a firm adheres to specific principles such as backing solid management teams.

Interestingly, Schumacher highlighted the different strategies that international versus local funds apply when establishing funds on the continent. “Local funds establish themselves according to region and sector, while in more mature markets, funds are driven by competition to differentiate themselves.”

Focusing on the role of consumer spending in private equity, Rick Phillips said, “We are at the tipping point” for the creation of a consumer spending society in Africa.

To support his claim, he noted that by 2020 there will be 128 million consumer households, which will represent $1.4 trillion in consumer spending. Furthermore, “a middle class is being created faster on the continent than in other emerging markets.”

He also explained that consumers want to shop more infrequently and are increasingly demanding brand consistency.

As well, in the food retail sector, shoppers are “fed up with inconsistent quality in the food they buy” at supermarkets, Phillips said.

Big firms, he stated, “can no longer get by offering substandard products because African consumers are becoming better integrated into the international economy, and thus, know a bad deal when they see one.”

Phillips also noted that the traditional restaurant sector is ready to be tapped into by the modern restaurant business sector. For instance, in Egypt, 98 percent of restaurants are still traditionally owned, while the remaining 2 percent are owned by the modern restaurant sector, which represents 24 percent of revenues generated in the sector, Phillips said.

Local firms, he warned, can no longer be uniquely focused on local and regional markets, but must think of targeting the international market, because Chinese, Indian and Brazilian firms are gearing up to compete in Africa.

Thus, he recommended that local firms adopt best practices, hire highly qualified staff to drive businesses forward, and seek support from private equity funds to inject added value to fulfill these two objectives and guarantee that local firms will be able compete with international players.


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