Private Equity in the Maghreb: An Interview with Albert Alsina of Mediterrania Capital Partners

Albert Alsina is the CEO and Managing Partner of Mediterrania Capital Partners, a private equity firm focused on small- and medium-sized enterprises (SMEs) and mid-cap companies in North Africa with total assets under management of more than US$200 million. In this interview, Albert discusses the opportunity set available to private equity investors in North Africa, the role of regional integration in promoting investment, and why global firms are paying increasing attention to these markets. For more information on this topic, please stay tuned for our upcoming Special Report on Private Equity in the Middle East and North Africa, produced by EMPEA Consulting Services.


Why should global institutional investors want private equity exposure to companies based in the Maghreb?

There are several reasons why institutional investors should consider investing in the region, but two are key: the potential for higher returns and a development impact.

Returns in the Maghreb and Africa have the potential to be higher than in many other regions due to a number of factors, including future growth expectations, lack of competition, relatively stable markets and a strong pipeline of good companies in fundamentally strong sectors. Moreover, the region is experiencing exponential growth in terms of demographics: 50% of the population is below 25 years old and the middle class population is increasing dramatically. All of these factors will continue to drive GDP growth for many decades to come.

In this macroeconomic context, firms will be able to realize higher returns through three primary exit channels: secondary transactions, strategic sales and initial public offerings (IPOs).

  • Secondary transactions: Larger private equity firms have seen the benefits of pan-African buy-and-build strategies. To expedite expansion plans, many of these firms are now looking at secondary transactions more openly. In addition, after receiving initial rounds of private equity funding, a number of local companies are able to reach the next level of their development by working with private equity firms that are able to invest increasingly larger amounts of capital.
  • Strategic sales: As a consequence of the global financial crisis, many European companies have started considering Africa as their next growth market. In that sense, the Maghreb countries are playing a strategic role as the “gateway” to the continent, with private equity portfolio companies extremely well positioned to open this door. We have closed many transactions over the last few years that fall in this category.
  • IPOs: The IPO markets in the Maghreb are set to rise in the next five to ten years. Algeria cannot wait much longer to invigorate its capital market; it is an imperative need for the country’s economy. Following the establishment of a new constitution, government and geopolitical landscape in Tunisia, the country will likely return to its pre-Arab Spring growth levels—notably, a high level of recent activity is demonstrated by over 20 IPOs in the last 18 months. Finally, Morocco will continue the growth trend that we have seen over the last decade.

Secondly, private equity investment is crucial for the region’s development and stability. Investments through private equity create new jobs, drive economic growth and encourage further investments in related sectors. Also, private equity-backed companies can expand their reach quickly and enter new markets or customer segments thanks to the added financial and business support. It is proven that when private equity firms are involved in the management of companies, the risk of entrepreneurial failure is lower, with consequent benefits for the local community.

The social impact of private equity investment is multiplied by the fact that many firms implement socially responsible policies when they invest. These include encouraging female employment and offering employees secondary benefits. Finally, private equity firms support environmental policies to achieve energy efficiencies and/or to preserve natural resources.

You mentioned seeing greater activity in the region from private equity investors. What are the factors driving this interest?

Many private equity investors see Africa as a new market, and as they become more educated on the continent, they learn that Africa is actually not one continent, but rather 54 very distinct countries. Africa is comprised of many different markets with great pockets of growth, but also significant areas of risk. Understanding that is critical. For example, Algeria, which has traditionally been viewed as a high-risk country, boasts the largest number of cars purchased in 2014 in Africa, with companies growing in double digits for the last five years, and customers paying in advance—and in cash—for the products they need. Fully understanding this unique reality of Algeria is key for investors as it helps them to arbitrage the risk.

The myths of Africa and North Africa are being knocked down one by one, and this attracts smart money, particularly from global fund of funds and South African investors that are now reaching further into North Africa. This trend will drive more investors to the region.

Your paper on Private Equity in the North African Region details how the tax and corporate legal frameworks in Morocco and Algeria are not sufficient to develop the private equity industry. Has there been any forward progress since the paper was published in July 2013? What still needs to be done to move the needle?

We have seen major improvements in the region. In Morocco, we have been lobbying with the local association, Association Marocaine des Investisseurs en Capital (AMIC), to change Law 41-05. It has taken several years, but the modification of the law recently passed in Rabat and completely changed the legal framework. The new modification to Law 41-05 allows OPCR (Organismes de Placement en Capital Risque) to be tax-transparent. The main requirement is that at least 50% of the companies in a fund are not listed on the stock market. The previous law required that the fund have at least 50% of its investments in SMEs. This modification falls within the definition of traditional private equity; and therefore, all private equity funds based in Morocco under an OPCR legal framework will take advantage of this. This change is a major step towards an investor friendly regulatory framework in Morocco. The other markets in the region have not yet experienced any changes as significant as this one.

Challenges remain, however, with regional funds. The central banks in the Maghreb continue to restrict the movement of capital across the region. This creates a major roadblock for local investors to invest in regional funds, and for transactions to occur from local funds to other countries. Many private equity firms have established external vehicles in Malta, Mauritius, Luxemburg, etc. to skirt this issue. But it’s an issue for Maghreb countries themselves as they cannot attract regional fund structures or local money.

What are the prospects for greater regional integration? Are there any initiatives (government or private sector-led) in the Maghreb that will make it easier for companies to invest and expand cross-border?

Regional integration among North African countries is happening already, but probably at a lower speed than needed, with private equity firms and regional corporations as the main drivers. Offshore investment vehicles allow transactions to happen quickly and smoothly; however, the region is missing an estimated 200 to 300 basis points of GDP growth due to the lack of regional governmental cooperation with regard to the free movement of goods, people and capital. Trade between Morocco and Algeria is one of the lowest in the world, and it will remain low unless there is a willingness to change it by local governments. On the other hand, Tunisia and Morocco are good trading partners, and are extremely well-positioned to keep being so due to cultural, economic and geopolitical factors.

North African and Sub-Saharan African integration is also a new trend that is taking root. Particularly in the French speaking countries, Moroccan businesses are establishing strong commercial, economic and political ties in the sub-continent.

What is the current role of banking institutions in financing small and mid-size companies in the region? How active are they in providing loans for growing businesses?

Overall, the banking system in the Maghreb is below the necessary size to play a big role in the region. That being said, Moroccan banks are clearly taking a leading regional role, not only in North Africa but also in Sub-Saharan Africa. Algerian banks are subject to heavy intervention as the major banks are public institutions and non-performing loans are still strongly present in the market, while in Tunisia the banking system remains small and fragmented.

The lack of sophisticated products available for the SME segment in general and the lack of risk assessment know-how for the sector are still major handicaps for the development of SMEs, which represent 95% of the economy in the region. Banks are not keeping pace with the accelerated development of the region’s SMEs; they are still demanding 110% guarantees for companies’ financing needs, they are still requesting asset-based guarantees from owners, and companies are still using overdraft facilities to finance long-term investments. Until banks are able to adjust their policies in order to support SME and mid-cap companies properly, private equity will continue to remain a crucial source of financing.