Private Equity and Venture Capital in Emerging Markets: A Case Study of Egypt and the MENA Region By Ayman Ismail BSc in Engineering, American University in Cairo, 1995 MBA, American University in Cairo, 1997 ARCHIVES MCP, Massachusetts Institute of Technology, 1999 Submitted to the Department of Urban Studies and Planning in partial fulfillment of the requirements of the degree of DOCTOR OF PHILOSOPHY MASSACHUSETTS 04MMI r-. in OF TECHNOLOGY INTERNATIONAL ECONOMIC DEVELOPMENT at the SEP 2 4 2009 MASSACHUSETTS INSTITUTE OF TECHNOLOGY LIBRARIES September 2009 © Ayman Ismail. All Rights Reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document/ in wholer in part. Signature of Author I -- -epetment6 of Urban Studies and Planning / August 24, 2009 Certified by VI Alice H. Amsden Barton L. Weller Professor of Political Economy Thesis Supervisor Accepted by. Eran Ben-Joseph Chair, Ph.D. Committee Z.Z'z Department of Urban Studies and Planning Private Equity and Venture Capital in Emerging Markets: A Case Study of Egypt and the MENA region By Ayman Ismail Submitted to the Department of Urban Studies and Planning on August 10, 2009 in partial fulfillment of the requirements of the degree of Doctor of Philosophy in International Economic Development ABSTRACT Private equity and venture capital investments in emerging markets grew significantly over the past five years (2003-2008), both in absolute and relative terms. In this study, we examine the industry's role in emerging markets, in terms of key actors, business processes, and impact on portfolio companies. We use a case study of private equity and venture capital in Egypt, and the Middle East and North Africa region. We focus on two key questions: (i) Why did private equity activities grow so much and so fast in Egypt?; (ii) What is the impact of private equity firms on their portfolio companies? And what are the broader economic development implicationsfor the country? In addition to a number of global and macroeconomic trends that created a positive environment for private equity investments, we identify two key factors behind the industry's success in Egypt: first, the industry is dominated by local firms that rely on a mix of local knowledge and expatriate expertise, and have developed key competencies that provided them with a strong competitive advantage and enabled their growth. Second, these firms, while adopting global best practices in the industry, have adapted their business model and practices to the local market needs. In terms of their impact, we found that in most transactions, private equity firms acted as a catalyst for initiating,consolidating, professionalizing, growing and globalizing their portfolio companies, and in doing so, they increased their competitiveness and expanded their operations in regional and global markets. Based on these findings, we argue that private equity firms in emerging markets are providing a new type of "financialentrepreneurship" that is increasingly playing a positive role in economic development. Dissertation Committee: Alice H. Amsden (Thesis Supervisor), Barton L. Weller Professor of Political Economy Karen R. Polenske, Professor of Regional Political Economy and Planning Antoinette Schoar, Michael Koerner Professor of Entrepreneurial Finance ACKNOWLEDGEMENTS First, I would like to thank my dissertation committee: Alice Amsden, Karen R. Polenske and Antoinette Schoar. Alice, my advisor and committee chair, guided me through this intellectual journey and challenged me to think in a creative way. Karen, a dear friend and mentor, supported me since my first year in the PhD program. I would also like to thank Joe Ferreira, who has supported me since I first came to MIT for my masters many years ago. He has always been a great advisor, mentor and friend. I am grateful for the support of Ahmed Galal and Calestous Juma during my general exam. I also received valuable feedback from Frank Levy, Martin Rein, and Stephen Meyer. I would like to thank my family. They have always been a source of inspiration, encouragement and love, and I would not have made it without them. My parents Adel Ismail and Nagwa Rabie; my uncle Amr Ismail; and my brother Ihab, his wife Sena and their lovely daughter Mariam. Many friends helped make the journey worthwhile. My friends in Cambridge: Georgia Antonopoulos, Khaled El-Refaie, Mohamed Raafat, Osamah El-Refaie, Sherife Abdel Messihe, Tamer Elkholy, and Waleed Farahat. My best friends from undergrad: Ihab Naguib, Loay El-Shawarby, Mohamed Younis and Shima Barakat. My PhD comrades: Nancy Odeh, Xin Li, Kyung-Min Nam, Georgeta Vidican, and Will Bradshaw. I am also grateful to Alaa Rady, Dina Lotfy, Lisa Feng and Tewfik Cassis who provided invaluable help with my research. :'I-il-- -"-I~-----xl~~-r~ri;~;_;-i-~ ~,;;;-_,;;--i;.--;:r--.:~ir--r:,_~l~__~___i~;ll_;_~_~;i- -i~l.. TABLE OF CONTENTS LIST O F TA BLES ........................................................................................................................................................... 9 GLOSSARY OF ACRONYMS AND TECHNICAL TERMS ............................................ ......... 11 CHAPTER 1: INTRODUCTION ....................................................................................................................... 13 1.1 OVERVIEW ... ................................................................................ 13 1.2 PRIVATE EQUITY DEFINED ........................................ ............................. 20 1.3 THEORETICAL FOUNDATION.......................................................... .................. 21 1.4 RESEARCH D ESIGN ............................................................................... 30 1.4.1 Research Questions and Hypotheses......................................................30 1.4.2 M ethodology ....................................................................... 32 1.4.3 Data ................................................................................................... ....... ............. 33 1.5 RESEARCH CONTRIBUTION ......................................................... 37 1.6 STRUCTURE OF THE DISSERTATION ................................................................... 38 CHAPTER 2: PRIVATE EQUITY IN EMERGING MARKETS AND THE MENA REGION .................... 41 2.1 EMERGING M ARKETS .......................................................................... 41 2.2 PRIVATE EQUITY IN EMERGING MARKETS ............................................................... ....................... 43 2.3 PRIVATE EQUITY IN THE MIDDLE EAST AND NORTH AFRICA (MENA) REGION ............................. 51 2.4 CONCLUSIONS .................................................................... 55 CHAPTER 3: PRIVATE EQUITY IN EGYPT: A GROWING INDUSTRY ..................................... .... 59 3.1 OVERVIEW OF THE PRIVATE EQUITY INDUSTRY IN EGYPT.................................. ............. 59 3.2 How BIG Is PRIVATE EQUITY IN EGYPT? .................................................................... 62 3.2.1 Private Equity and Foreign Direct Investments (FDI)......................................................63 3.2.2 Private Equity and the National Investment Plan................................ .......... 66 3.2.3 Private Equity and Domestic Bank Lending........................... ...................... 68 3.2.4 Private Equity and Stock Market Capitalization......................................... ...... 70 3.4 THE HOME-GROWN PRIVATE EQUITY INDUSTRY ..................................... ........................... 71 3.4.1 Key Actors: Private Equity Firms and Their Founders.................................................... 72 3.4.2 Key Com petencies ................................................................................. 80 3.5 CONCLUSIONS................ .... ....... ........................... ............. .... 82 CHAPTIER 4: THE PRIVATE EQUITY CYCLE ............................................................................................... 85 4.1 PRIVATE EQUITY BUSINESS MODEL IN DEVELOPED COUNTRIES............................. ............. 86 4.2 RESEARCH A PPROACH .................................................................................................................... 89 4.3 STAGE 1: FUND INITIATION AND SETUP .......................................... .................... 90 4.3.1 Setting up the Fund Structure........................................................ 90 4.3.2 Case Examples of Private Equity Firms Operating in Egypt ....................................... 93 4.3.3 Raising Capital ............................................. ............. 102 4.4 STAGE 2: INVESTING............................ ..... ........... .................................... 106 4.4.1 Types of Investments ............................. ... ............................. 107 4.4.2 Investments Demographics: Sectors and Company Size ...................................... .... 115 4.4.3 Deal Sourcing and Due Diligence............................ .. ........... ........................... 125 4.5 STAGE 3: PORTFOLIO MANAGEMENT ................................................. 131 4.5.1 Governance and Management ....................................... ..................... 131 4.5.2 Value CreationStrategies ......................................................... 135 4.6 STAG E 4: EXIT ........................................................................................ 138 4.7