“Small and medium enterprises (SMEs) are a key pillar of modern economies,” said Walid Bakr, director and executive committee member of Riyada Enterprise Development (RED).
While SMEs contribute about 25 percent to Egypt’s GDP, this figure is far below the global average, sitting at about twice that amount, Bakr told Daily News Egypt in an interview.
Since SMEs contribute the bulk of employment in all countries — constituting around 80 percent of employment in Egypt, “the health of that segment is essential to effective growth and prosperity of any community,” he added.
Seeking to capitalize on the Egyptian SME market — woefully unexploited according to many within the business community — private equity group Abraaj Capital launched RED, the firm’s SME investment platform, in 2009. It will encompass the MENA region as well as Turkey and Pakistan.
Abraaj itself operates in the Middle East and South Asia (MENASA), with close to $6.6 billion in funds and more than 35 investments in 11 countries since its inception in 2002.
RED has $700 million at its disposal to invest in burgeoning SME businesses — with less than $50 million in value — in the MENA region that need a financial kick start. The fund buys up minority or even majority equity ownership, as well as cultivating knowledge through training.
RED provides cash ranging from $500,000 to $15 million per firm as well as support for instilling good governance business practices in partner SMEs.
Commenting on the total amount of capital available through the fund, Bakr said, “The overall size of the funds may grow as more local capital pours in.”
As it happens, RED’s structure is two-tiered, extending to both regional and local levels, driving capital in both top-down and bottom-up directions.
At the regional level, the RED director explained, the fund will attract investors interested in opportunities in MENA countries. Investors’ funds are then redirected toward local, national funds, which are then dispersed, in concert with “local and ‘patriotic’” capital, aimed at SME businesses that have an enticing lucrative future.
RED’s local Egyptian fund, operating since January 2010 and otherwise known as the Egypt Growth Capital and Innovation Fund (EGCIF), has already infused between $80-100 million into its purse, which will go to building a portfolio of 15-20 companies in the coming three to four years.
The EGCIF will be able to provide up to $10 million per company, with an estimated $6 million a pop.
Although EGCIF has yet to execute any deals in Egypt to date, Bakr said, several transactions are underway, which are “in various stages of evaluation,” and the company expects to announce its first set of transactions “very shortly.”
Sizing up SMEs
Bakr has little doubt that RED’s funds will find eligible candidates in both Egypt and the greater Middle East, as a general shift in the investment banking industry has taken place with more fund managers sizing up SMEs.
According to the fund’s director, investment firms have been keenly studying the SME sector, having identified it as a “prime investment target” due to the “gap existing in SMEs contribution to economies across the region” as well as the abundance of opportunities coalesced with “very limited competition” as a result of a lack of investors and funding in the sector.
Bakr attributed the change in strategy due to the “phenomenal growth rate” of private equity funds, dating prior to the financial crisis, which resulted in fund managers investing non-negligible sums of money geared toward “large-ticket equity transactions.”
Once the economic downturn swept the region, investors were re-examining the investment landscape, Bakr said.
For his part, Bakr believes that the next few years will experience “tremendous growth in institutional investments,” which is “indeed an opportunity.”
Bakr identified specific industries in Egypt in which SMEs are ready to take off: IT, education, healthcare, in addition to export-oriented manufacturing and processing, especially in food and agri-business, chemicals, leather, textiles and furniture.
Despite the wealth of potential, Bakr noted several hurdles facing the development of SMEs in the Middle East: Access to finance in the form of both equity and debt is restricted, regulatory red tape is ubiquitous and a weak grasp and exercise of good governance practices persists. There’s also an inability to attract and keep talent, especially in knowledge-based industries.
To become competitive local and regional firms, Barks says SMEs need to benefit from knowledge and technology transfers as well as stay ahead of the curve as regards consumer habits.