Egypt, more than any country in the MENA region, has a wealth of investment opportunities. The less charitable commentators may see those opportunities as sharp reflections of the challenges Egypt faces (population, resources, space) but proper risk investors see them for what they are – chances to deploy capital to generate supernormal returns.
As developed market interest rates stall or fall and the inflation-adjusted returns on most sovereign debt drops to negative territory once again – the global search for yield by institutional investors is as urgent as it has ever been. This, as much as anything, is driving the huge flow of institutional capital into private investments. The illiquidity and scarcity of private investments (real estate, private equity, infrastructure, private credit) are supposed to deliver the higher returns which investors need if they are to fulfil their mandates to their trustees and stakeholders.
Investors have already moved into EM equities and bonds but remain underexposed to private investments in emerging and frontier markets. This is an opportunity which Egypt must take if it is to attract the capital flows it needs to develop its economy in a post-FDI age. The future of international investment lies not with Fortune 1000 corporates – but private capital managers like Blackrock, KKR and Brookfield.
There are headwinds, however. The collapse of Abraaj Group last year has soured sentiment amongst global investors towards emerging-markets based (and Middle-East particularly) private equity managers. Note, the sentiment is sour towards where the managers are based, not where their funds invest. The alleged governance failures of Abraaj have been interpreted by investors as being a function of weak regulatory regimes in emerging markets – DIFC in the case of Abraaj. True, DFSA’s recent announcement of its largest-ever fine does look quite a lot like shutting the stable door after the horse has bolted but investors must share some of the responsibility too.
Private capital needs scale, opportunity, comfort and local partnership. Witness the recent $4.6bn investment by GIC, Blackrock and KKR into ADNOC’s pipeline business in the Gulf. One of the first commitments of significant private capital into the MENA region shows that with the right asset and the right partner, there is an appetite for deployment from global private capital titans. And they have financial firepower which dwarfs both development institutions and corporates. Preqin, the private capital analytics firm, estimated that global private equity dry powder (raised but uninvested capital) topped $2trn in January 2019.
Global private capital likes to work with local partners – in fact, it requires it. Local partners from government, from corporations and local private capital investors. If the regional private capital industry is to recover from the Abraaj debacle then it will do so more quickly if it partners with its global peers. Local knowledge, insight and presence deliver real value to global players – it’s an opportunity which managers here in Egypt can capitalise upon if they seize the opportunity. Good partnerships also mean that more of the returns and expertise stay within Egypt, making its growth more sustainable.
Private capital can be a real and enduring source of investment for Egypt – if Egypt creates the right projects and the right legal environment for it to have a home in the country. It should prioritise this and building its relationships with both local and international private capital managers. That will be good for Egypt and good for the global investors who need the returns that this growing nation can provide.
Richard Banks is a consulting editor to Euromoney Conferences, the opinions in this article are his own.