Investor interest in the Middle East and north Africa remains cautious

THE hot money may rush in and out—Egypt’s Case 30 index has posted a 29.3% gain so far this year, for example, after shedding 49.3% in 2011. But a more meaningful gauge of investors’ perceptions of the Middle East and north Africa is the flow of longer-term money.

The private-equity industry is still a long way off its pre-crisis peaks. The high point was 2007, with $4.1 billion of deals (these figures exclude Turkey, a hot destination which counts as European in the industry data, and Israel, an entrepreneurial ecosystem all of its own). Many of the regional funds that operated back then have closed, and only the most intrepid investors, most of them local, remain active. The average deal size has dropped from $172m in 2007 to $30m last year.

Egypt, whose 85m-strong population helped make it the most popular destination for private-equity investments in the region between 2003 and 2008, has suffered from both the financial crisis and the revolution last year. But the prospect of lasting change in the aftermath of Egypt’s presidential election excites many. “Egypt is not very different from Turkey before Recep Tayyip Erdogan and Brazil before Lula da Silva,” says Ahmed Heikal, who heads Citadel Capital, a fund in Cairo. “If there is some stability, we will witness significant growth.”

Turbulence today also gives brave investors useful negotiating leverage. “We see Egypt as more favourable than before the revolution because the competition has backed off,” says Romen Mathieu of EuroMena II, a Beirut-based $100m fund that has just invested in a chain of eye clinics in Egypt. Mr Mathieu reckons that it is easier to win concessions about the level of control funds have over portfolio firms.

Saudi Arabia is the only other country in the region with comparable heft to Egypt. Algeria has huge potential but the regulations change too often for it to appeal. Other countries are small or, like Syria, off-limits for obvious reasons. So funds often look for portfolio firms with regional potential. “The Arab world is only 350m people so we go for businesses that can capitalise on this by being regional or expect to expand regionally,” says Mustafa Abdel-Wadood of Abraaj Capital, a $7.5 billion emerging-markets firm based in Dubai. That requires expertise many funds lack. “Most funds realise they need operational managers who know how to grow a business in the region,” says one local analyst. “But they can be hard to find.”

None of which makes an immediate uptick in Western funds’ activity seem likely. The potential for further political upheaval remains great, and there are many obstacles to private equity’s growth. Most businesses are family-owned and it can easily take a year to earn the trust needed to complete a deal, says Mr Mathieu. There are barriers to taking controlling stakes in portfolio companies, particularly in Saudi Arabia. Exit opportunities are not obvious. An investing revolution to follow the political one will take time.