Abraaj CapitalAbraaj Capital bought a stake in AlBorg Laboratories in May 2008, and the Egyptian medical testing company has performed surprisingly well.DUBAI — After Abraaj Capital bought a stake in AlBorg Laboratories in May 2008, the Dubai-based private equity firm braced for a rough ride. Over the next four years, AlBorg, an Egyptian medical testing company, weathered the global financial crisis, the economic downturn and the revolutions that swept the Mideast.
When the turmoil faded, Abraaj was shocked with the results. AlBorg had not only emerged unscathed — it emerged stronger. In the first half of 2012, the company’s earnings rose 30 percent, according to Abraaj.
“Certain sectors, especially health care, have experienced a renaissance of sorts since the dust settled post-revolution in Egypt,” said Ahmed Badreldin, the co-head of large cap private equity at Abraaj Capital. “These sectors are performing surprisingly, unexpectedly well, especially in the first quarter of 2012.”
Such pockets of strength are increasingly common across the private equity landscape in Egypt, traditionally one of the biggest markets for Mideast buyouts. And industry professionals are hoping that the trend will persist, reviving the moribund deal-making environment in the region.
Amid the tumult in recent years, big investors damped their expectations for Egypt, figuring their companies would be lucky to notch single-digit gains, if any at all. But last year, a number of private equity-owned businesses in the country increased their earnings by 40 percent or more, with consumer-oriented companies showing the most resilience.
In some ways, the companies are benefiting from the Arab Spring. In 2011, the Egyptian government increased salaries and introduced a minimum wage. With increased purchasing power, the country recorded record high sales in consumer goods, especially in the first few months of 2012.
Private equity is broadly betting on the rise of the middle class — and the demand for power, food, health care and goods that comes with it.
Eastgate Capital, the private equity arm of the Saudi bank, NCB Capital, bought the jewelry firm L’Azurde, a subsidiary of a Saudi company in 2008, and took a $40 million stake in the generic drug maker Sigma, the next year. The firm’s portfolio of Egyptian companies, according to Eastgate, increased earnings by roughly 40 percent this year, far exceeding expectations of 5 percent to 10 percent.
“This growth is driven by robust consumer spending, supported by the large population and increase in salaries post-revolution,” said Nasr-Eddine Benaissa, managing partner of Eastgate Capital Group.
“From a practitioner’s point of view, we just have to see how the political situation plays out,” he added. “And if stability is achieved, it’s very likely that Egypt will regain its reputation as a key private equity market.”
Amid the tumult, private equity companies have had to be opportunistic to drive earnings at their companies. Some have turned to deal-making. AlBorg Laboratories bought a stake in a Sudanese company, Ultralabs, earlier this year, capitalizing on weakness in the region.
Private equity firms have also focused on operations. Sigma, one of Eastgate’s portfolio companies, expanded geographically and opened a state-of-the-art manufacturing plant in Egypt. To help AlBorg navigate the uprisings, Abraaj introduced a new management team and posted two executives from its firm to support the transition.
“One of the key ways that we were able to help AlBorg increase revenues is by paying attention to human capital, which has traditionally been a bottleneck in Egypt,” said Mr. Badreldin.
Not all sectors are performing well. Tourism, real estate, construction and other cyclical sectors influenced by economic and political instability have been struggling. “Real estate, nobody wants to touch because our private equity clients feel that prices peaked over the last few years and the political outlook is still uncertain,” said Omar Bassiouny, head of mergers and acquisitions at the law firm, DLA Matouk Bassiouny.
The market conditions also remain shaky, making it difficult for private equity firms to sell companies or take them public. In July, Citadel Capital canceled its plans to sell National Petroleum.
But private equity firms are hoping to leverage the new strength in their portfolios to raise money and make more deals.
When the financial crisis hit in 2008, deals were suspended, firms retrenched, and investors grew cautious. While activity slowly returned in 2010, it all but dried up the following year during the Arab Spring, and even the most risk-tolerant investors sat on the sidelines.
“When it comes to new private equity acquisitions, there is that ‘wait and see’ attitude about the environment, and for financing to become available,” said Ahmed Heikal, chairman of the Egyptian private equity firm Citadel Capital.
Fund-raising efforts have slumped, too. In the first half of 2012, private equity firms raised just $96 million, according to data from the Emerging Markets Private Equity Association.
For now, private equity firms are focused on the small areas of opportunity, mainly health care and infrastructure. In April, the Lebanon-based EuroMena Fund bought a 51 percent stake in Al-Oyoun Al Dawali Hospital, worth $11 million. In June, the Egyptian Refinery Company secured $1.1 billion in equity financing from a consortium of investors, including the private equity firm Citadel Capital and InfraMed, a fund focused on Egypt.
“My expectations at the end of last year were very different: no stability, lots of turmoil, not exactly attractive for private equity funds,” said Mr. Bassiouny. “I was pleasantly wrong about that.”