Mena Vc Report August 2012

7/31/2019 Mena Vc Report August 2012

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REPORT

2012 Update

& 2011 Year in Review

2nd Venture Capitalin the Middle East & North Africa


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TABLE OF CONTENTS

01. INTRODUCTION 03

02. CONTRIBUTORS 04

03. INFORMATION ON VC MENA 05

04. DEFINITION OF VC IN MENA 05

05. MENA VC COUNTRY OVERVIEWS 06

GCC KINGDOM OF SAUDI ARABIA

KUWAIT

UAE

EGYPT

IRAQ

LEVANT JORDAN

LEBANON

MAGHREB ALGERIA

MORROCO

TUNISIA

06. MENA VC INVESTEMENT DATA 17

07. REPORT SUPPORTERS 19

08. ABOUT THE MENA PRIVAYE EQUITY ASSOCIATION 2009. APPENDIX 1: NOTE ON DATA CRITERIA 21

List of Acronyms

KSA Kingdom of Saudi Arabia

GCC Gulf Cooperation Council

ICT Information and Communications Technology

MENA Middle East and North Africa

PE Private Equity

SME Small and Medium-sized Enterprises

UAE United Arab Emirates

VC Venture Capital

MENA: For the purpose of this report, MENA refers to the following countries in the Middle East and North Africa: Algeria, Bahrain, Egypt, Iraq,

Jordan, KSA, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Sudan, Syria, Tunisia, UAE and Yemen.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is or will continue to beaccurate. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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1

INTRODUCTION

Tarek Kabrit, Riyada Enterprise Development

The Middle East and North Africa (MENA) region has long been seen as a hub for trade,enterprise and discovery. This heritage continues to be championed by its people despite a year ofextraordinary political and economic change.

Today, the MENA region is approaching a turning point for innovation and entrepreneurship. Withthe majority of the population below the age of 30, peak levels of unemployment, a spreading senseof youth empowerment, and improved regional prospects, it is the optimal time for entrepreneursto propel their businesses to the next level. Although small in size, innovative high-growthcompanies are disproportionately important for economic growth in our region.

However, while small and medium-sized enterprises (SMEs) constitute the majority of businessactivity in the MENA, they lack the necessary support to expand and develop. According to theWorld Bank, SME bank lending in the MENA accounts for less than 8% of total lending. In the GulfCooperation Council (GCC) states, it is dismally low at 2%. Lack of access to capital is often citedas one of the key constraints to the scaling up of SMEs in the region. Yet, this gap also representsan opportunity for private equity (PE) and venture capital (VC) rms to provide the nancial andstrategic support that such rms need.

2011 has been a challenging year globally for most industries. However, the VC industry faredrelatively well, with the United States VC industry growing by 22% in dollar terms from theprevious year and recording close to USD 3 billion in VC investments (one of the highest levels inthe past 10 years). Similarly, the MENA region witnessed a 28% growth in the number of VC andSME deals executed in 2011 over 2010. This can be partly attributed to the nascent nature of theindustry in our region, but it also illustrates the increased attention such investments have receivedregionally from policy makers, academics and investors.

A key difference between the VC industry in our region and the US is that in the US over half ofthe total transactions that took place were seed and Series A deals, with fewer deals consummatedat later stages. This funnel effect is reversed in the MENA region, with more deals taking place atthe Series B and C levels. This can be attributed to the fact that we remain relatively risk averse asinvestors in this region, but it also demonstrates that entrepreneurs and young growth businessesneed to be better educated on the VC industry and the benets that such investment can bring.

The future prosperity of this region depends on our ability to support high-growth businesses. It

is our hope that the investor community will continue to recognize the vital importance of the SMEsector in fostering employment and innovation, and enable its continued development at a timewhen the regions entrepreneurs need this support most.


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This report was a collaboration between the MENA Private Equity Association, the AssociationsVC Taskforce, KPMG, Zawya and industry professionals.

MENA Private Equity Association VC Taskforce

Ali Arab, Zawyawww.zawya.com

Ahmad Takatkah, N2V

www.N2V.comAmer Mardam Bey, Merchant Edgewww.merchant-edge.com

Basel Roshdy, IT Ventures/Nile Capitalwww.nile-capital.com

Emile Cubeisy, IV Holdingswww.iv-holdings.com

Feroz Sanaulla

Ghazi Ben Othman, Malaz Capitalwww.malazcapital.com

Philip Boigner, Dubai Silicon Oasis Authoritywww.dsoa.ae

Sami Beydoun, Berytechwww.berytech.org

Tarek Asaad, Ideaveloperswww.ideavelopers.com

Tarek Kabrit & Elie Habib, Riyada Enterprise Developmentwww.riyada.com

Walid Hanna, Middle East Venture Partners (MEVP)www.mevp.com

William Fellows, Maghreb Advisor, Silatech SME Programwww.silatech.com

Other

Brad Whitteld, KPMGwww.kpmg.ae

Imtiaz Murshed, National Technology Enterprises Company (NTEC)www.ntec.com.kw

Salam Saadeh, Y+ Venture Partnerswww.yplusventures.com

Francoise Giraudon, AMIC

CONTRIBUTORS

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This report is an update on our rst MENA VC Report launched in March last year. For furtherdetails on venture capital in MENA, including a guide to MENA VC for entrepreneurs and adirectory of Venture Capital Firms in MENA and related entities in the Middle East, please see:

MENA PE Association www.menapea.comVC Ecosystem Directorywww.menapea.com/vcecosystem

VC is dened as the provision of long-term equity investment and strategic support by nancialinvestors to innovative, scalable companies at the early growth stage.Key criteria used to dene VC investments also include:

* Revised March 2012 (removed minimum commitment of USD 1 million to reect the global trend toward investing insmaller deals)

3

INFORMATION ON VENTURE CAPITAL IN MENA

4DEFINITION OF VENTURE CAPITAL IN MENA

Investments are in non-listed companies (private companies)Investment commitment over the life of the deal can average USD 3 to 5Millionbut can also reach up to USD 15 Million*A typical plan exit through IPO, mergers & acquisition, management buy-out ortrade saleAbove average returns expectedSeed/angel or investments by non-nancial shareholders do not count as VC)VC is not conned solely to technology investments, but technology is often a

core factor that creates the level of scalability required in a VC deal


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Overviews of VC and VC type activity, and the entrepreneurial environment in a selection ofcountries across MENA, based on experience of our taskforce team members and availability ofinformation.

Gulf Cooperation Council Kingdom of Saudi Arabia, Kuwait, United Arab Emirates

Kingdom of Saudi ArabiaGhazi Ben Othman, Malaz Capital

In 2012, VC and overall SME activity in the Kingdom of Saudi Arabia (KSA) increased signicantly,driven by two key factors, 1) overall robust growth of the Saudi Arabian economy, and 2) therealization by the Saudi government of the importance of SMEs to economic and social prosperity.

Entrepreneurship:

Buttressed by rising oil prices, the Saudi economy has seen solid growth across the majority of itseconomic sectors. This has enabled the Saudi government to expand its already massive spendingon physical infrastructure and to increase its investments in various sectors. Already the largest

economy in the MENA region, Saudi Arabia has now grown into an even more attractive marketfor SMEs. As a result, we are seeing an increase in the creation of SMEs natively in Saudi and asignicant increase in MENA-based SMEs opening subsidiaries in Saudi to tap this market.

The robust economic activity has also generated additional wealth in the country. As a result, weare seeing a still nascent but growing appetite amongst sophisticated investors for the VC assetclass. This is driven mostly by a desire from investors to diversify their portfolios away from realestate, industrials and other physical investments.

After years of invisibility, the Saudi SME sector has nally attracted government attention, withpolicymakers now viewing the support and promotion of SMEs as a strategic priority. Much ofthe debate over how to support SMEs and increase their contribution to the economy has thus

far revolved around making bank or debt nancing more accessible. However, the role of equitynancing, especially as it relates to Islamic nancing, has now entered the discussion. As a result,the role of VC as a supportive form of nancing for SMEs is becoming more understood.

We are seeing encouraging signs from various institutions in the Saudi government that are pushingfor more VC-style equity nancing for SMEs. Just as importantly, those same institutions are alsostarting to lower or eliminate structural barriers to the native VC industry in KSA.

Venture Capital:

Several funds using pure equity or structured equity approaches are being launched targeting theKSA SME sector. The Saudi government has announced several initiatives and programs to expandnancing access to SMEs in KSA. There is even talk of creating an SME-specic authority in KSAto promote the sector.

SMEs operating in KSA are reporting good growth prospects for 2012, driven by strong governmentand private demand, especially in the information and communication technology (ICT) sector.In fact, the prospect of tapping the growing Saudi market was one driver that led to the recent

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acquisition of a leading KSA internet games developer by a Turkish game development company.While the current level of VC and SME activity in KSA is clearly increasing, it is still signicantlylower than what it should be for this half trillion dollar economy. However, the realization of the

economic importance of the SME sector and the advantages of VC nancing, seems to be makingsteady progress. The dialogue does not seem to be anymore about whether or not to support SMEs,but rather about what is the best way to achieve that.

We would like to see the positive activity weve described above be translated into meaningfulsums of money being invested in VC funds in 2012, so that a signicant number of innovativeSaudi SMEs may be funded in 2013.

KuwaitImtiaz Murshed, National Technology Enterprises Company (NTEC)

Entrepreneurship:

Kuwait has always been commercially active due to its geographic position and natural traderoutes, but with its new found oil wealth it has struggled to develop entrepreneurs from thiscurrent generation. With the governments commitment to provide a government job to everynational that requires one, the unemployment rate is around 3% and Kuwait benets from one ofthe highest GDPs per capita in the world, of around USD 40,000.

Kuwait is still bustling with entrepreneurs and new businesses, but these are not run by Kuwaitinationals. The void is lled by expatriates who carve out a living within the mineelds ofbureaucratic red tape and unscrupulous partners. The market is predominantly made up of tertiaryindustries, but new governmental and private initiatives are being developed from the ground up

in an effort to expand the nations economic activity beyond the hydrocarbon eld.

Venture Capital:

Even though public benets and jobs may fuel the lack of entrepreneurship, the government hastried to stimulate the VC market via a KD 100 million fund developed by the Ministry of Financeand the Kuwait Investment Authority (KIA) in 1997. The fund was structured to support Kuwaitientrepreneurs by nancing up to 80% of the project costs for start-up ventures. It was rst utilizedby the Kuwait Small Projects Development Company (KSPDC) and, over the last few years, by AlRaeda and KAMCO. This has helped the current situation, all-be-it at a very slow pace.

Several privately owned companies have tried to invest in the local VC market, with some greatsuccess. However, over the last couple of years many operations have either been scaled back orceased due to the current nancial situation in many investment companies.

One company that is currently trying the bridge the gap between governmental and private VCis the National Technology Enterprises Company (NTEC), which is fully owned by the KuwaitInvestment Authority (KIA) but is operationally set up as a private company. NTEC focuses onenergy, cleantech and water, life sciences and ICT, where they are actively developing projects inKuwait and the region by leveraging close links with Kuwaiti ministries and the private sector.


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QatarIhab Asali, Qatar First Investment Bank

Qatars economy is backed by huge natural gas reserves (third largest in the world), strongconsumer spending power (highest GDP per Capita in the world) and sound corporate governance.Moreover, the successful bid to host the FIFA World Cup 2022 has transformed Qatar into a land ofopportunities. Ofcial estimates put the planned spending on World Cup infrastructure, hotels and12 eco-friendly stadiums at about $50 billion. This among other factors, created an environmentthat fosters business innovation and entrepreneurship.

Entrepreneurship:

Qatars commercial activity has been constantly on the rise in the past few years due to itsgeographic position and natural trade routes, but with its relatively new oil and gas wealth it hasstruggled to develop entrepreneurs from this current generation.

Following a period during which the SME sector was generally overlooked, SMEs in Qatar arestarting to gain signicant attention from the government as well as nancial investors. Today,Qatars SME sector constitutes around 10% - 15% of the economy, with most rms focused on thedomestic economy.

Government support: It has been afrmed that the future of the Qatari economy mainly rests on thegrowth of the private sector which will in turn boost productivity and provide real opportunitiesfor entrepreneurship and innovation.

In this regard, Qatar has established Enterprise Qatar, a QR2 billion initiative for fostering SMEs, toact as the catalyst and principle driver of Qatars entrepreneurial spirit. Enterprise Qatar supports

SME development by providing funding, training & education, legal counsel, nancial andhuman resources support, advanced IT bundles and network infrastructures, and advocating newcorporate governance policies aimed at the SME sector in Qatar.

Moreover, Qatar Exchange is creating a junior bourse for SMEs to give a boost to this sector. Theestablishment of a secondary market will give SME owners an opportunity to list in the boursein accordance with more exible regulations, while gaining access to further nancing sources inorder to grow and expand their businesses.

Venture Capital:

To date, venture capital has not taken hold in Qatar, however, the factors outlined below, and thechange in the entrepreneurship/SME environment will likely lead to growth of the VC sector in

the near future.

Financial institutions are dedicating more resources to tap into the SME sector in Qatar. Lendinginstitutions have recently relaxed some of their criteria to provide proper nancing to SMEs withmajor Qatari banks already joining Al Dhameen program an initiative undertaken by QatarDevelopment Bank to help foster Small and Medium Enterprises.

As for Private Equity rms, the inherent risk of early stage SMEs shifted the PE focus towardsmore sustainable, protable and established business models. Given Qatars Government latestinitiatives together with the 2022 successful world cup bid, PE rms have been increasinglyexploring the Qatari market for potential investments in small and medium sized enterprises.


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United Arab EmiratesPhilip Boigner, Dubai Silicon Oasis

Entrepreneurship:

The effects of the Arab Spring have provided the United Arab Emirates (UAE) with a ready inux ofpotential entrepreneurs and educated engineers that are eager to start companies. However, somesignicant hurdles make the UAE environment relatively difcult for start-ups. The high cost ofliving in the UAE is a signicant impediment to the success of cash-strapped start-ups. In addition,the lack of qualied engineering talent coming from domestic UAE universities makes scalingoperations for start-ups in-country expensive and time consuming. This leads to many start-upsremaining in their Arab home countries, while establishing sales and marketing operations in theUAE.

Even so, entrepreneurial activity and start-up support in the UAE, especially in Dubai, is

quite extensive. In the past year, Baraka Ventures and Dubai for Acumen ran a business plancompetition in the UAE. 60 entrepreneurs competed, representing 22 projects. Two groups wona prize of 100,000 UAE AED to startup their business, and received mentoring packages fromthree organizations to assist them with legal setup, branding and nancial business planning. TheKhalifa Fund provided 50% of the prize money.

The number of incubators and start-up support companies has also increased. Establishedcompanies, such as du, a major telecom operator in the UAE, are fostering engagement in theentrepreneur space. New incubation initiatives from free zone authorities, such as Dubai SiliconOasis, Dubai Internet City, and potentially the Telecommunications Regulatory Authority (TRA),are also expected to be launched. The UAE is also home to two Social VC companies, BarakaVentures and Willow Impact Investors.

Venture Capital:

VC rms that are based in the UAE tend to target region-wide investment opportunities and notjust those in the UAE. The current landscape of VC activity in the UAE is a mixture of older fundsthat have reached the end of their investment cycle, funds that are being formed, and somewhatestablished active funds.

However, the fund environment in the UAE is changing, as some institutions are expected to scaledown their VC investment activities in the country, while new players have entered the market.The year 2012 promises to be a very exciting one for the venture capital industry in the MENAregion, and for the UAE specically.


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EgyptTarek Asaad, Ideavelopers

Over the past decade, the ICT sector has emerged to become one of the most signicant contributorsto GDP in Egypt. Fueled by strong demand for mobile services and infrastructure, the sector hasremarkably sustained its double digit growth even in times of economic slowdown. The growth ofthe sector has enabled local players to go beyond the countrys borders and become regional andinternational leaders in their sectors. Companies like Orascom Telecom and Raya have establishedsuccess stories that serve to inspire entrepreneurs and attract investors to the technology sector inEgypt. In 2011, the Egyptian revolution has demonstrated the incredible power of social networksin the country and has driven Egyptians to join the online world. Facebook users from Egypt havealmost doubled in the year.

Entrepreneurship:

Egypt is the Middle Easts most populous country and a traditional center of education and contentcreation in the region. Egyptian Universities graduate over 14,000 engineers per year out of a totalof 330,000 graduates. This large pool of young educated talent is the main driving force behindEgypts healthy entrepreneurial environment. Given the general populations increased adoptionof the internet after the revolution, many (if not most) of the start-ups created in 2011 have beenfocused on Internet or mobile.

The start-up scene in Egypt includes a number of me too companies, replicating successfulmodels in advanced economies, and local plays that are built on local technology or businessmodel innovations. With 16 million and 80 million Egyptian users of web and mobile respectively,and with quick uptake of broadband connectivity on both wired and mobile networks, Egyptianstart-ups have the advantage of a large platform to leverage. As Egyptians adopt internet and

mobile technologies more aggressively, Egyptian start-ups are nding new ways of offering thislarge connected population ways to buy goods and services, play games, share ideas and opinions,plan and book travel, etc.

An emerging trend in Egypt has been the creation of cross-border start-ups that operate in a largeestablished target market, namely the US, and in Egypt. Typically, the client-facing organizationis located in the target market country and the Egyptian organization focuses on technologydevelopment and operations. Companies with linkages to Silicon Valley (through an investmentor mentorship from the valley to local entrepreneurs) are appearing in the market.

Although most start-up companies are based in Cairo, the economic hub of the country, Alexandriahas seen a fair share of technology start-up companies. Built on the strength of the renowned Facultyof Engineering at the Alexandria University, these start-ups have been able to make inroads in both

the local and global markets. A number of incubators have also been formed, serving early-stagecompanies. Flat6 (the brainchild of the founders of Sawari Ventures), Tamkeen and Tahrir Squarein Alexandria are notable ones. Flat6 graduated its rst batch of highly promising companies in late2011 and plans to repeat this cycle periodically.

Additionally, Egyptian start-ups have received funding from investors that are not based in Egypt.The new wave of start-ups in web and mobile has attracted funding from GCC countries and, in afew instances, from US-based investors.

A number of are a number of NGOs and business associations promoting entrepreneurship andinnovation in Egypt are also active, such as EJB (Egyptian Junior Business Association), EPEA


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(Egyptian Private Equity Association), MCSBE / MAKSABY (Middle East Council for SmallBusinesses and Entrepreneurship), Endeavor, and others.

Angel investment:

Angel investment has seen a strong ramp-up in activity in Egypt in the past two years. The prolesof these investors include:

Efforts are still underway to develop a network that connects angels to each other and toentrepreneurs. As of the writing of this report, there was no established organization providingthis service. Current angel investment is largely based on personal contacts.

Venture Capital:

VC investment is still a relatively new concept to Egypt, with only a small number of active players.Egypts largest and oldest VC rm is Ideavelopers, the VC arm of EFG-Hermes. Ideavelopersmanages an Egypt-focused USD 50 million fund, sponsored by government-owned organizationssuch as Telecom Egypt, Egypt Post and other banks and insurance companies. As of the end of 2011,Ideavelopers had 16 active companies in its portfolio including two semiconductor companies,two electronic payment companies, and a number of other start-ups covering different areas ofinnovation and technology. Ideavelopers has been very active in 2011, investing in three newinternet and mobile companies as well as making two follow-on investments in existing companiesin its portfolio. IT Investments/IT Ventures, another active VC rm in Egypt, made a number ofinvestments during the period of 1999-2003 in ICT and media/content sectors, and is looking topursue new investments in 2012.

Sawari Ventures is another strong player in the venture space in Egypt. The fund has completedseveral investments in Cairo and Alexandria with a particular focus on mobile technologies.

Egyptian executives based in the region or Europe / US who have returned toEgypt after the revolution wanting to contribute to their home countryEstablished successful businessmen who have created wealth from theirexisting businesses, mainly in the technology sectorEntrepreneurs who have been successful in building technology companiesSenior managers in multinational companiesCross-industry investors who are interested in the technology sector


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IraqAmer Mardam-Bey, Merchant Edge

Venture Capital is not yet active in Iraq, however, we highlight below a few points of interest inentrepreneurship.

Historically, the power of government dominated everything in Iraq through the entrenchment ofwelfare and state. Corruption, tribal and religious power exclusion dominated business activities.As a result, government occupations were more attractive than business ownership, therebyslowing the formation of new businesses. The governments control of networks, distributionsystems, business revenues and expansion also became a disincentive for entrepreneurship andrm growth.

More recent policies (generally after 2003) aimed at recovery and post-conict reconstruction havespecically targeted private sector and entrepreneurial strengthening, and range from efforts to

create regional or international trading partnerships to a large provincial-level growth program.By mid-2009, small business development centers (SBDCs) were established in key cities, usuallyin partnership with local chambers of commerce.

The importance of bank nancing for entrepreneurs is traditionally a fundamental cornerstonefor any growth in entrepreneurship. Although progress has been made with restructuring andsetting up banking activities, interest rates charged by local banks in Iraq on loans to entrepreneursremain substantially higher than in neighboring countries. As a result, most entrepreneurs accessfunds through personal and social networks.

Other constraints such as political instability and insecurity in certain provinces remain a concernfor both investors and entrepreneurs. However, many of these stressors are now being addressed,

allowing entrepreneurs to begin playing an important role in Iraqs reconstruction period. Ashas been the case in other recovering countries, entrepreneurs can often deliver services moreeffectively, cheaply and reliably than anyone else. Hence the promise of entrepreneurship in Iraqis highly important. Internet access has also begun to catalyze more start-up businesses acrossthe country. In addition, an incubator recently established in Iraq under the name of sYnergy andappears to be active.


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USD 50 million fund investing in Jordanian SMEs. Funding has also witnessed an unprecedentedincrease from non-institutional sources, with angel investors specically showing record interest inVC-style investment. Oasis* 500s angel network helped companies raise USD8.8 million in 2011.

In terms of investments placed, Jordan saw some record numbers in 2011, both in the number ofventures receiving funding, and in the total amounts invested. At the seed-level, Oasis 500 alonehas to date made more than 50 investments from the fund it raised in 2011. While exact numbersfor early and expansion stage funding are not available, activity at these stages was also strong,with numerous ventures raising rounds in excess of USD200,000. This included a number ofinvestments by IV Holdings fund. MENA Ventures Investments also made 10 local investments in2011, with examples including Kharabeesh, a Middle East web media and entertainment network,and Curlstone, a 2D/3D animation studio.

Investments into Jordanian ventures also came from international investors. Here, it is worthnoting the example of MarkaVIP, a Jordanian e-commerce platform which raised USD3 millionfrom a UK based VC fund and then an additional USD5 million from two U.S.-based funds in 2011.

Other examples include Choozon, which raised USD4.5 million from a consortium of local andglobal VCs and angels, and gaming company Maysalward, which received an investment fromTurkey-based Timar Ventures. Jeeran and ShooFeeTV, two of IV Holdings portfolio companies,also raised follow-on funding from global sources, with Intel Capital participating. On a moremacro level, another global player to enter the sector in 2011 was Cisco, which announced in May aUSD10 million commitment for local funds to invest in innovative Jordanian technology ventures.In broad terms, this increase in global funding is validating the position of Jordan as one of the keycenters of entrepreneurship in the region.

LebanonSami Beydoun, Berytech & Walid Hanna, Middle East Venture Partners

Entrepreneurship:In parallel to the emergence of the local VC industry, a support structure for entrepreneurs hasslowly evolved and taken shape into what is now a vibrant ecosystem of entrepreneurship. Thereis a full set of organizations providing all types of support for entrepreneurs: incubators, NGOs,mentorship programs, business plan competitions, grant schemes, corporate assistance programs,networking platforms, etc. Additionally, thanks to building a strong network of support throughLebanese expatriates, it has become increasingly easier for Lebanese start-ups to access markets andresources from international hubs in Europe and the US. Moreover, throughout 2011, an increasingnumber of companies have beneted from the Kafalat Innovative loan guarantee scheme.Venture Capital:During 2011, the VC industry in Lebanon grew from its fragile childhood to a yet immatureadolescence. A notable new fund that was launched in 2011 is Abraajs Capitals USD 50 millionLebanon Growth Capital Fund targeting Small and Mid-Cap Lebanese companies, the fund closedits rst investment in Nymgo, a VoIP company based out of Beirut. Moreover, most of the existingvehicles have moved rather aggressively into the market, closing several deals. Among the mostactive are Berytech Fund and MEVP whose portfolios have reached 10 and 8 companies respectively.While Berytech Fund has invested exclusively in Lebanon-based technology companies, MEVPhas diversied its commitments across sectors and countries in the MENA.Another positive sign is that several co-investment talks took place and are underway betweenmarket players. Berytech has also ofcially declared its willingness to launch another, much larger

1 Oasis 500 investments are not included in MENA VC data as Oasis 500 does direct deals and is not a structured VC fund,however, this information included here helps to give a clearer picture of overall VC type funding activities.


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multi-sector fund to cover the region. Performance remains untested, as the market has not yetwitnessed any exits. However, the exit environment looks promising, given that several Berytechand MEVP portfolio companies have received second stage nancing.

The MaghrebAlgeria, Libya, Morocco, Tunisia

William Fellows, Silatech

Following the Arab Spring there is a renewed effort on the part of the governments in the Maghrebto boost entrepreneurship and generate new competitive rms, although policies to this endare still being explored. Two of the Maghreb countries, Morocco and Tunisia, have emergingdomestic VC and PE industries that have begun to attract international investors, particularlyfrom Europe. Funds domiciled in the Maghreb raised approximately USD 746 million over 2006 to2011, according to the Moroccan VC association. Approximately half of this was from international,

mostly European, investors. Tunisian fundraising from 2007 to 2010, according to the TunisianVC association, was approximately USD 280 million, which may be expected to improve withcurrent reforms undertaken by the government to address problems with the old VC framework.Algeria and Libya, both economies historically dominated by state-owned oil and gas sectors,substantially lag behind their two Maghrebi neighbors in development of private, growth-orientedentrepreneurship. These countries have yet to develop advantageous legal frameworks for venturetype investment, and lack well-functioning nancial and capital markets.

To address the Maghreb markets, local VC and PE funds have adopted a broad approach toinvestment. Most funds are sector agnostic, focusing on investment theses built around innovationfor growth and competiveness across a range of industries, from agribusiness to services andindustry. Focused on small investment stakes between USD 1 and 3 million, investors target rms

with strong competitive potential to export value-added products to both traditional markets inEurope and to new markets globally.

As in much of the MENA region, there has been a tendency in policy-making circles in the Maghrebto look at VC from only one side of the equation, as a jobs creation tool, and neglect considerationsof how to sustainably attract private investors to invest in VC funds that generate long-terminvestment in more innovative, competitive rms. However, Morocco and Tunisia have in 2011begun to promote public-private venture investment fund concepts to support more competitiverms.

There is also rising awareness that a more entrepreneurial managerial culture needs to be built.Local managers and business owners have proven to be very conservative in opening up theircapital to outside investors and adopting modern management and governance. Also challengingis the environment for exits, with trade sales to regional or international groups being the dominantpositive form of exit, due to thin public markets and deep entrepreneur reluctance to go public.Regrettably, intra-regional trade and investment, as well as trade and investment with the widerMENA region, remains low and well below potential. There are signs that the Arab Maghreb Unionmay see new life and perhaps progress can be made on regional trade integration. However, formaland informal barriers continue to restrict markets to the national level, which impedes the growthof regional companies and more competitive, scalable investments.


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Algeria

Entrepreneurship:

Although the Algerian government has made certain efforts to promote private entrepreneurship,the overall climate remains challenging. More Algerian entrepreneurship occurs outside of thecountry in Europe and North America than in Algeria, while the national economy remainsdominated by large state-owned petrochemical concerns. Programs such as the Algerian Start-up Initiative (ASI), and Cyberparc Sidi Abdellah are seeking to help kick-start more innovativeentrepreneurial activity and to raise awareness for the need to support entrepreneurship. However,little has come of these efforts thus far.

Venture Capital:

One of the key elements preventing Algeria from achieving its entrepreneurship potential is ageneral lack of VC or similar nancing for innovative new ventures and SMEs in the private sector.The banking sector remains dominated by large state banks that have not proven very adept atnancing private sector SMEs or innovative new private rms. Algerias public bourse also remainsmoribund, with only three equities listed and two bonds traded.The Algerian government recently launched a series of state-backed risk capital funds (e.g. El-Djazar Istithmar Spa) in an effort to promote venture nancing and more structured investment inSMEs.. Several Maghreb-region funds are also opportunistically investing in growth opportunities,such as Tuninvest, which has an ofce in Algiers.Compared to its Maghreb peers Morocco and Tunisia, Algeria lags seriously behind in other formsof venture nancing, especially those focused on young entrepreneurs. A sustained increase ininnovative, high-impact entrepreneurship in Algeria is unlikely to emerge until a stable enablingclimate for private sector SME nancing and VC investment emerges.

Morocco

Entrepreneurship:

Morocco weathered the Arab Spring well, and its government took lessons from the economicdrivers behind the revolutions: to double down on trying to promote more entrepreneurial andparticularly higher value entrepreneurial activity. Ten years of infrastructure investment andeconomic policy reforms have begun to show signs of paying off. Morocco was a World BankDoing Business reform leader for 2011, and the country has seen a stepped up economic baselineof non-agricultural growth. The outgoing Moroccan government also launched a comprehensive

new program for upgrading industrial competitiveness, including integrating new support forinnovation such as public-private venture funds and technical assistance nancing. Infrastructureinvestment is also opening up new investment possibilities across the country, although theCasablanca region remains Moroccos economic hub and the center of economic activity, generatingroughly 60 per cent of GDP.

Seeking to improve economic competitiveness and upgrade its technology base, the governmenthas launched a series of initiatives to boost investment and higher productivity. There are plansfor a series of business innovation centers co-located with major universities, and a secondmain technology centre, the new Rabat Technopolis, was launched, anchored by Nemotek,a semiconductor rm partnered with a leading Silicon Valley technology company, Tessera.Nemotek develops semiconductor products and hosts its own wafer fabrication facility. This


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expands on the Casablanca Technopark, launched roughly a decade ago, and the highly successfulCasablanca Nearshore centre, focused on BPO off-shoring primarily for French-speaking markets.The government and private sector are also working on a series of sector-focused technology parks

ranging from automotive technology (linked to Renaults new EUR1 billion factory in Tangiers), tobiotech and agricultural/agribusiness innovation.

Thus, the relevant authorities in Morocco see the need to promote and support higher-value-added,innovative rms and start-ups. Government initiatives such as Maroc Innovation, and the varioustechnopoli and innovation cities, are helping to address market weaknesses. However, the levelof effort dedicated to fostering entrepreneurship, and particularly addressing challenges such aslegal and regulatory rigidities (nancial and corporate), still lags behind needs. The environmentremains difcult for young, innovative rms, who continue to face challenges posed by the under-developed ecosystem and conservative corporate culture.

Venture Capital:

Morocco has one of the larger VC and PE sectors in the MENA region, and the largest in theMaghreb. Investment sizes have been and are expected to remain modest compared to the MiddleEast, given the structure of the economy; some 80% of investments have been less than USD 4.5million (largely for stakes in the 20-50% range). However, the World Bank and Union of Arab Banksreported that, in 2010, Morocco led the MENA region in the level of bank credit (as percentage ofportfolio) available to SMEs. In VC over time there has been a migration to more mature rmsafter unsuccessful experiences in early-stage investments. However, interest is returning to early-stage investing. In 2011, the government awarded preliminary contracts to two VC managementcompanies for two generalist rms to manage public-private capital funds, one of which is expectedto include a signicant early-stage allocation. Few funds are sector specialized, although in the lastyear several new agribusiness funds were launched. While sector-specialist funds have not yetourished, the past ve years have seen greater specialization by investment stage and investment

style, with turn-around funds emerging.

As in many other MENA region countries, there has been a tendency in policy-making circles tolook at VC from only one side of the equation, as an immediate jobs creation tool, and neglect themedium- or long-term considerations needed to sustainably attract private capital to the industry.The Moroccan VC association, created just over a decade ago, has been investing in structuringitself to promote a more balanced view, taking lessons from Europe but also from other emergingmarkets like South Africa. Representing around one third of the Maghrebs population and asthe regions most liberal economy, Morocco has real potential to develop a diversied venturenancing ecosystem that could set a standard for early-stage nancing for entrepreneurs in theregion. That Morocco pulls in approximately 60% of regional (Maghreb) PE investment despite arelative human capital decit compared to its Maghrebi peers suggests that the countrys liberal

investment approach is on the right path.

Tunisia

Entrepreneurship:

Tunisia catalyzed the Arab Spring with its revolution in December 2010 to January 2011, whichopened up a wave of reforms in the region and domestically. Although Tunisia long enjoyed areputation as being a liberal economy, the revolution highlighted that the economy was runningunder two unequal regimes: one quite liberal but offshored, the other not. A genuinely liberal,100% export zone economy was exempted from most controls or interference, while the on-shore economy (populated by any rm not exclusively dedicated to export) suffered from not


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only political interference, but also a heavy-handed regulatory regime that post-revolutionTunisian entrepreneurs have described as capping their ambitions. Despite those handicaps, anda heavy-handed internet censorship regime, Tunisia has continuously been over-represented in

entrepreneurship in the Maghreb thanks to an outstanding human resource base with among thebest education levels in the region.

Tunisia has also established a number of innovation-focused industrial and technology parksaround the country, such as the Al Ghazela north of Tunis. But like other such efforts in the Maghreband wider MENA region, these parks tend to be more appropriate for larger foreign rms seekingto set up off-shoring development or manufacturing than for local start-ups. Parks are often set upin remote locations, presenting transport challenges, and may lack technical services that wouldattract younger rms.

Although recovery from the economic aftereffects of the January revolution is ongoing, thereis optimism that the revolution has potential to further unlock innovative, growth-oriented

entrepreneurship in Tunisia. Entrepreneurship activity in Tunisia remains healthy, and given thepolitical developments, activity should grow in 2012 and beyond with further government andinternational support.

Venture Capital:

Following the January 2011 revolution, the interim government launched a number of reformsto address long-neglected issues for the on-shore economy including for VC, where there waswide consensus that the former system was sub-optimal. A revised and signicantly liberalized VCframework was proposed, and is currently being rened. In addition, the government launchedseveral strategic initiatives to help restructure state programs to effectively support innovativenew rms. The traditional state bank and related vehicles are reforming their approaches as well.Overall, although there have long been state-sponsored SME and entrepreneur nancing options,

the removal of historical constraints has opened up signicantly improved new horizons foraddressing the specic needs of innovative rms or start-ups, but also a wider base of innovativerms. All of the components of a successful and robust entrepreneurship ecosystem are present inTunisia: human capital, new opportunities for intelligent nancing for riskier enterprises, improvinginfrastructure, and an evolving understanding of these issues. However, like its Maghreb peers,Tunisias entrepreneurship potential is much larger than what is currently being achieved. To trulyunlock that potential, there is a need for Tunisia to address policy issues.

Libya

Entrepreneurship:

Historically, little innovative high-potential entrepreneurship activity in Libya was discernibleunder the Gadda regime. It is hoped that after the revolution, the factors holding back theemergence of Libyan entrepreneurship, such as an unstable legal and policy environment and ahostile business environment, will be radically improved.

Venture Capital:

There does not appear to be any substantial or institutionalized funding sources for Libyan SMEsfocused on innovation. Some regional funds had undertaken preliminary efforts prior to therevolution. However, the Libyan nancial system is not well developed, and not set up to nanceSMEs in general, let alone innovative ventures.


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Data Coverage:

The data covers only structured VC funds that meet the MENA PE Association VC criteria. Thedata does not direct investments, seed, incubation or investment programs investing in VC. Formore detail on the data criteria, see Appendix 1.

Morocco:

For Morocco, we have used data provided by AMIC (The Moroccan Venture Capital & Private

Equity Association). However, due to time limitation and differences in data collection, we wereunable to upate all the charts below. These differences will be addressed in later reports. Forfurther information on VC in Morocco, refer to the 2011 AMIC Report.

Data Limitations:

Given the nature and size of VC investments, a signicant portion are either not publicallyannounced or, if they are announced, the value of the investment is not. For the purposes of ouranalysis below, we have focused on transaction volume as opposed to value.

Investments:

As the MENA region continues to feel the impact of the global nancial crisis together with themore recent political instability in some countries, available data suggests that the VC industryhas recently experienced an increase in deal activity. While the VC industry in the region is stillconsidered by some to be in the early phases of the industrys development life cycle, the increasein activity indicates there are a number of VC investment opportunities in the region and that theindustry itself is growing despite the more macro level challenges.

6

MENA VC INVESTMENT DATA

Source: Zawya Private Equity Monitorand AMIC
http://issuu.com/amicdocumentationhttp://issuu.com/amicdocumentationhttp://issuu.com/amicdocumentation


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During the last three years 120 VC transactions were completed compared to 62 during the threeyears 2006 to 2008. This is in contrast to the wider private equity industry in the MENA region,which has seen a signicant reduction in deal volume since 2009 (as per Zawya Private Equity

Monitor, 219 private equity transactions were completed during last three years compared to 317from 2006 to 2008).

The IT and the software sectors continue to be the most popular amongst the VC investors. Ofthe transactions in the region since 2006, 46 percent of the transactions were in these two sectors(representing 35 completed transactions since 2006).

We note the Others primarily represents the retail, agriculture, construction and nancial servicessectors.

Note: Due to limitations in provisionof data, the above chart is exclusiveof AMIC (Moroccan Venture Capital&Private Equity Association):investments data.Source: Zawya Private Equity Monitor



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Based on the available data, Morocco, Egypt and Lebanon lead the MENA region in terms of thenumber of VC investments with 106, 17 and 16 transactions since 2006, respectively. While Morrocoand Egypt benet from large and fast-growing populations, Lebanon has shown resilience to theglobal nancial crisis.

VC Funds:

Following a strong fund raising year in 2010, there were USD300million of VC funds raised inMENA during 2011. Although MENAs macro-economic fundamentals remain strong, the lingeringeffects of the global nancial crisis together with the political instability in key markets such as

Egypt has meant that fund raising remains difcult.

Note: Data includes the Riyada Enterprise Development, which has a focus on growth capital, but many of the transactions meet theAssociations denition of VC.


Note: Due to limitations in provision of data, the num of VC funds raising trend line in the above chart is exclusive of

AMIC (Moroccan Venture Capital & Private Equity Association) funds data.Source: Zawya Private Equity Monitor



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In addition to the VC Taskforce Team and content contributors, the MENA Private EquityAssociation would also like to thank our Research Sponsors for their support:

Egyptian Private Equity Association (EPEA)Dalia TadrosE-Mail : [email protected] Tel & Fax : (+202) 333 56 358

www.epea-eg.org

Moroccan Venture Capital & Private Equity Association (AMIC)Franoise Giraudon De DonderEmail: [email protected]

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MENA PRIVATE EQUITY ASSOCIATION

RESEARCH SPONSORS

SUPPORTING ASSOCIATIONS


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The MENA Private Equity Association is a non-prot entity committed to supporting anddeveloping the private equity and venture capital industry in the Middle East and North Africa.

The Association aims to foster greater communication within the regions private equity andventure capital network and facilitate knowledge sharing in order to encourage overall economicgrowth, and will actively promote the industrys successes to local stakeholders and build trustwith investors, regulators and the public regionally and internationally.

MENA Private Equity Association Members

ABOUT THE MENA PRIVATE EQUITY

ASSOCIATION8

Abraaj Capital

AfricInvest-TunInvest

Al Masah Capital

Amwal AlKhaleej

Capital Trust Group

CedarBridge Partners

Citadel Capital

Dubai Silicon Oasis AuthorityEastgate Capital Group

EFG Hermes Private Equity

Emerging Capital Partners

Gulf Capital

International Finance Corporation (IFC)

Investcorp Bank

Malaz Capital

Masdar Capital

Mubadala GE Capital PJSC

N2V

National Bank of Abu Dhabi - Private Equity

NBK Capital

New Silk Route Growth Capital

Qatar First Investment Bank

ReAya Holding

Riyada Enterprise Development

SEDCO

Swicorp

TVM Capital MENA Limited


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The funds included in the data analysis are those dened in terms of self-reporting by fund mandateor fund manager as VC funds or SME growth capital funds. At this stage of industry development,no attempt was made to determine whether such self-reported funds meet the criteria above. Thisreport also includes growth equity SME investment rms that invest in a wide variety of SMEsincluding those in traditional industries as well as earlier stage venture deals.

The analysis was prepared based on data sourced from the Zawya Private Equity Monitor.

KPMG member rms have not initiated any primary research in relation to this draft report and

have not sought to establish or conrm the reliability of the data provided by Zawya.

In analysing and determining the parameters of available data, it has been necessary to applycertain criteria, the most signicant of which are as follows:

Fund Size: In the case of funds yet to make a rst close or where no close information is available;fund size is equivalent to the target amount and is noted as such. For funds achieving at least one

ofcial close, fund size is reported as the capital raised to date, while for funds that have made anal close, the fund size is the total capital raised. Rumoured funds are excluded.

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APPENDIX 1: NOTE ON DATA CRITERIA

Funds managed within the MENA region but whose focus is to invest solely outsidethe region are excluded.

Investment size represents the total investment (both the debt and equity portions).However fund size only considers equity invested, as we have no visibility on debtexposure by funds.

The fund-raising totals are the amounts closed/committed for fund-raising funds,closed funds, investing funds, fully vested funds and liquidated funds.

Statistics are based on the market approach and funds are categorised based on theintended destination for investments (as dened in a funds announced mandate)as opposed to where the rm is located. With regard to multi-region funds, we haveincluded these to the extent that there is a focus on the MENA region.


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Documents

Transcript of Mena Vc Report August 2012