August 16, 2005
Pimping Equity or Pissing it Away?: Private Equity & US Gov Efforts, some quick notes
A somewhat quick note building off of a comment by the esteemed Nadezhda in regards to my rapid note on a new US Gov private equity fund (also with more rough perso comments at Lounsbury ) backed by the Overseas Private Investment Corporation, a US parastatal investment insurance and financing house whose main line of business is political risk insurance on US direct investments in risky locales.
I have been intending - and still intend to - write some commentary on this specific issue of private equity (or in general equity finance) in the MENA region, but I thought some quick notes on this OPIC backed private equity fund for the MENA region are in order, and in response to some notes by Nadezhda - whose name I have learned to spell now.
First, context. It is not entirely public information, but I think it is well known in the circles I travel in that US Gov is moving more strongly into development equity finance in the MENA region of late (following in a sense the established footstaps of European efforts such as CDIC and its private spin off, ACTIS, the French PROPARCO, the Dutch agency, etc. etc. - the Europeans have about a decade of time depth in trying to use equity financing tools in the MENA region, dating back to the Med Basin initiative.). The Euro govs have financed a wide range of private equity or other development equity vehicles in the MENA region, essentially the Med Basin countries.
Besides this particular fund, there are two more in the works, one is which is a Middle East Partnership Initiative (State Department, Liz Cheney) proposal that has been kicking about for several years and seems to have risen from the dead if the rumours are right.
Historically, I may add, the US Gov, has financed only one "pure play" for MENA to my knowledge - a peace initiative play back in 97-98. The other US Gov development equity vehicles in the region have either been global sectoral funds or African continent funds that 'accidentally' include Egypt, and the Maghreb. There are have, I am sure, microfinance facilities, but I am not concerned with that overhyped little fad.
Now, this fund, as my initial post indicates is a proposed 225 million USD fund (of which up to 75 million USD from OPIC) covering effectively the entire region and every sector: "Morocco, Algeria, Tunisia, Egypt, Lebanon, Jordan, the West Bank and Gaza, Bahrain, Kuwait, Oman and Iraq. The fund will focus its investments on sectors including food processing, consumer-related retail and distribution, telecommunications, media, energy, light manufacturing, transportation, chemicals, logistics and financial services."
Knowing how these things are structured, I do note that the wording clearly indicates that they have not raised the private capital yet (or had not closed it as of press date); as it does not make note of a minimum capital to raise it is not clear if there is actually a minimum capitalisation (usually there is, I'd guess probably 45 million USD or so) - keep in mind then this is not a done deal unless minimum closing threshold is hit.
However, getting to some substance, or the questions and notes from Nadezhda:
With that sort of scope (sectors and geography), looks to me like they're just trying to get their feet wet and do some business under the theory that just about any private sector investment in the region is a good thing.
Perhaps, I might suspect bureaucratic efficiency (easy to parcel out a big chunk of change to one operator, rather than do seperate funds) played a role, in which case 'any private sector investment' becomes a post facto justification.
I also think it not true (i.e. that anything is useful), but that is another question entirely.
Now here Nadezhda asks a question or makes an observation that I made to my peeps:
I'd be interested in what they're targeting as their standard size investment. With that size fund, and assuming say 20? investments, average $10 mil for, what, max 1/3 -- that's average project size $30 mil? Seems a bit large for me for private equity as we normally think of it.
Indeed targetted investment size and what size deals they are willing to consider are the key questions as to what this Fund is actually going to do.
Presuming that they hit their max capitalisation (and to cover the scope they bloody well need to be up in the 150 plus range), deal sizes of 10-15 million USD are about what they need. If they take minority positions, which I presume they probably plan to do, that presumes investment project sizes of 30 to roughly 45 million USD.
Now, those are not "large" sizes for developed market private equity, indeed they are typical smaller fund sizes. However, for emerging markets, these are big chunks, above all given the size of average projects in the region - in my experience, excl. infrastructure and hydrocarbons.
Now, of course there is another quesiton - what stage? Early (venturing)? Mid (growth)? Late (what the French charmingly call "transmission" or what we Anglos call Mezzanine or Buy Out, depending on whether it is an expansion deal on a 'new' firm or a turnaround play on an established firm)?
I would put real money on a bet their real thinking, never mind what they told US Gov, is Mezzanine to Buy Out plays, or if "start up" mega projects.
There is no other way for them to make this work.
I was originally suprised in regards to this scope as I had understood from 'sources' so to speak that they were looking at growth company financing, but looking back at their RFP they said:
one or more private equity funds that will invest for long term capital appreciation in private companies in the Middle East and North Africa (the "MENA Region"). OPIC intends to consider providing up to $100 million in debt financing to one or more selected investment funds in the MENA Region (the "MENA Region Funds"), which financing will represent between 33 percent and 50 percent of a fund's total capitalization. The amount of leverage will be a factor in OPIC's selection.
No mention of stage.
Returning to Nadezhda:
But then the EMP folks are more in the infrastructure business and are used to boxcar numbers. So your assumption that the fund will wind up having an infrastructure focus, even though that's not emphasized in the laundry list of investible sectors, is probably right.
Well, I know the players, as it were. It's my business to have some knowledge about them.
They're going to go for big ass deals.
The question that arises here, however, is why?
Not what from an incentive basis, it's clear on a pure private money play that this would make a lot of sense (although it is a more crowded market space).
Why bother with development capital insofar as I don't see much signs that there is a lack of equity capital flowing to big infrastructure and related investments in the region.
It's the next step down that is capital starved.
I'm puzzled overall.
Another good question posed:
My other question is whether the EMP group intends to take the lead in scaring up and assembling projects, or whether they think there's other private equity floating around in the region that has projects and is looking for someone to come in. Again, with those wide-ranging investment objectives, looks like they expect to tag along rather than lead. So maybe your new fund can flog deals to this outfit.
An excellent observation, I have to expect the answer is that they are probably going to try to run it like an IFC shop, tag along with local market players.
The group has some decent connexions in the Gulf region, I would not be surprised if the money flows to its investible scope there. Fucking waste, really, but there it is. I don't see them getting deals out of the Maghreb.
The OPIC staff may have sold the fund on the basis of grand political objectives. But I expect the real thinking to be that, based on the experience of this fund, they can refine their objectives -- both investment and political -- for the next fund. Or if this fund looks like it's being wildly successful during invest-up, it will draw in competing funds to the region who won't need the OPIC angle as part of a fund package in the future.
I should think Nadezhda's thinking on US Gov thinking here is probably right, but such thinking is rather misplaced Ishould think. I don't have the sense that the market play they are targetting is where the lack is.
Overall, a queer and I think misplaced policy choice.
Posted by The Lounsbury at August 16, 2005 05:45 AM
Filed Under: Business, Private , Economic Development , Economic Policy , Foreign Policy & MENA , Gulf , Levant , MENA Region General , North Africa , US Foreign Policy
TrackBack URL for this entry:
Many thanks for the extended remarks -- quite helpful.
Very good points on the financing stage. I doubt this is going to be a lot of early stage (other than infrastructure, of course). I'd also expect that, outside of telecoms, if they finance expansions, those are much more likely to be project finance -- cash flows and legal issues if for no other reasons.
The Gulf angle you mention is interesting. Not unexpected but, as you say, a bit disappointing. But with all the petrodollars being plowed back into the Gulf, there's a deal flow there that EMP can probably count on even though the marketplace is a lot more crowded, as you note. If they're confident they can place two-thirds of their funds in pretty solid, largish Gulf infrastructure deals, they've got more scope to "play" with the other part of the fund in some of the more, shall we say, challenging sectors or countries, or in smaller investments.
The US Gov, as you point out, is under a lot of pressure to be seen to be making stuff happen in the region overall. And the Americans are indeed behind the curve and scrambling. I was shorthanding all of that with the "get their feet wet" comment.
I agree that the broader policy question is how to get investment into areas where there are decent opportunities but no low-hanging fruit: (1) smaller-sized deals, (2) sectors with growth potential that are bumbling along with famiy capital but could use some sort of catalyst and (3) harder to reach regions, like the Magreb. But that's always the challenge for multilateral or donor-sponsored investment programs in any part of the world.
So "what would Lounsbury do"? That's not snark, btw. I sure don't have an answer. I'm not well versed in what's happening in MENA either equity- wise or sector-wise -- other than being generally disappointed with the way the insiders seem to be able to glom onto everything that's privatized. Nor do I really have a feel for how much the investment funds are confronting a local "family capitalism" structure versus hooking up with FDI. Also, I'm clueless as to whether/how the exits are improving, etc.
A long way of saying that I'm looking forward to your post on MENA equity.
Posted by: nadezhda at August 16, 2005 11:33 AM
Two quick comments: the Gulf has some much liquidity now you have a seriously problem of seriously overpriced opportunities. Plumping for something in the Gulf may be an easy way to invest the Fund, but I would put money on it being an easier way to lose money in the long run by having overpaid for assets.
I find this just a piss-poor use of US Gov money, but perhaps they were going for moving the money. They do have to cure a hangover from the failed peace fund.
Else, well, shall have to do this MENA equity post.
Posted by: The Lounsbury at August 16, 2005 12:14 PM
"(following in a sense the established footstaps of European efforts such as CDIC . . ., dating back to the Med Basin initiative.)"
I'd go back to Ferdinand de Lesseps and La Compagnie Generale de la Suez Maritime Canal (or whatever), UK gov't financed, French-operated, Egypt-Turkey chartered, Egyptian labor on unskilled areas.
Not to be too cynical, but I suspect in the OPIC case the (foreign affairs) political goal of regional socio-econimic-political progress is not secondary but tertiary -- primary is opportunity for US carpetbaggers/contractors, offered for reward-based political (internal) reasons (the same reason ambassadors and CPA people were/are often appointed), rent-seeking is not just a MENA thing; secondary is enhancing local friendships-relationships, third is regional "reform". I am not so cynical as to dismiss the sincerity of that last one, or the second one, but the first two may help explain the irrationality.
But I'm not too close enough to the market over there to call it right.
Posted by: matthew hogan at August 16, 2005 02:41 PM
I'm extremely cynical about rent-seeking in government-supported economic development programs and have pretty finely-tuned BS/rent-seeking detectors. That being said, I don't see this sort of project as driven by capture of the government decision-making apparatus nearly as is typical with government contracting stuff. Programs involving government contracting become especially problemmatic when aid or finance has to be tied to businesses of the home-country. Tied aid is bad for a lot of reasons, but rent-seeking is definitely high on the list.
In fact, the advantage for the government in using investment funds -- passing off investment decision-making to a private sector group that has performance incentives -- is that it insulates the government officials from the political pressures of pure rent-seekers. Another advantage of the funds -- as distinct from contracting -- is there's a lot more private sector accountability. Contract performance is often hard to measure, and poor results can easily be blamed (often with justice) on third parties. With a fund, you know whether the manager got the funds invested, in what, how fast, how much money they made, and what they took out of the deal in expenses, fees and carry.
Is there rent-seeking from the potential fund managers who want their hands on OPIC financing? A bit. It's not a gigantic subsidy (see Lounsbury's remarks on the insurance element in his previous comments). As important to a fund manager/promoter is that OPIC is providing the first nut of capital, which makes it a lot easier to raise more once the fund is launched. The combination of the two factors was apparently enough for EMP to get into the MENA business, where it probably wanted to go but was unwilling to go on its own.
I'd only worry about this sort of effort if it was likely to crowd out a bunch of private equity otherwise wlling to go into the region without the subsidy. I doubt that's the case, but Lounsbury can speak to that possibility.
I sincerely doubt that that the pressure behind the OPIC fund program has been potential emerging markets private equity fund managers. I don't imagine there's a whole crowd of them who have pushed OPIC into trying to design investment funds for MENA. Lounsbury points out that the phenomenon of the US trying to promote investment in MENA via fund-type vehicles is found across the whole Bush Admin MENA foreign policy apparatus.
IMHO, the political agenda is the driver. That creates problems for the economics, because political agendas don't necessarily make much sense as investment criteria. Which is part of what I take Lounsbury to be saying is wrong with the programs he's seen, including this one.
Posted by: nadezhda at August 16, 2005 03:15 PM
Just to clarify -- prior comment was addressed to matthew hogan comment.
Lounsbury -- Well I think we agree that this fund isn't going to be doing much on the "promote entrepreneurship" front. As for it being a plan to lose money, the risk of overvalued assets is clearly high. I'm assuming the EMP folks think they are well-enough connected in places like the Gulf to get in on the right deals now they have enough walking-around money in the form of an OPIC commitment for their friends in the Gulf to take them seriously.
When you get around to your equity post, I'd be interested in your thoughts on the supply of "entrepreneurship" in the region -- caveat, I do recognize that MENA isn't, of course, a single region.
On the broader policy issue, here are some of my questions. Can financing tools like funds make a difference -- that is, are the opportunities and the entrepreneurs there, and is it mostly a scarcity of reasonably savy, patient capital that's the key constraint? Or instead, for example, are the business environment problems overwhelming, so policy has to get straightened out first? If the latter, how do you keep the current elites from capturing the reform process for their own benefit as they've done so well in the past? Any chance there will be competition among old and new elites for what constitutes meaningful reform?
Apologies if I sound like I'm "assigning" you a series of posts to write for my personal edification. But when I wonder about the equity climate and the policy question you posed originally, those are some of the issues that spring to mind.
Posted by: nadezhda at August 16, 2005 03:36 PM
First, in the interest of transperency I confess I am personally close to the relevant people on this. I feel I can state that these are not corrupt people. Also having no small information in re the selection process, I don't see any real influence on log rolling - indeed this selection was not first cut but third (due diligence found bad things with others).
The real issue here is the selection process, which while more rigorous than in the past, I think actually lost track of the policy reason OPIC does these funds and became, ironically, too private sector. Internal to the process I am sure it was easier to do, given the new heavy reporting requirements and due diligence, to do one "mega fund" relative to the region than a series of smaller funds.
They've funded a fund that is likely to do something where OPIC money is low added value, not really necessary for the region.
More comments later, Nadezhda has some interesting points I very much want to comment on. Right up my alley so to speak.
Posted by: The Lounsbury at August 17, 2005 06:18 AM