Virtualy every observer agrees on the fact that it may be too soon to assess the political and social impacts of the “Arab Spring”. On the economic level, the downturn affecting the “revolutionary” states if not the whole region sounds like a bad omen. Two years after its revolution, Tunisia is still struggling with an alarming 17% unemployment rate (it reaches 30% in the impoverished interior regions), Egypt’s elected president have been overthrown as a direct consequence of the dire economic situation of the country and the Syrian economy is in its death throes with the Syrian pound hitting rock bottom levels. In fact, the economic failures that pushed millions on the street across the region are still very much present and seem to be unanswered by fragile governments.
Beyond its appeals for democracy, social justice and human rights, the Arab Spring was also a revolt against the established economic order. The post-colonial Arab state (be it an oil producer or not) was characterized by oligarchic structures fuelled and sustained by a rental system that stifled innovation and entrepreneurship both deemed dangerous threats. Indeed, the Arab region was one of the least hospitable for Small and Medium Enterprises development trailing behind other third world regions like Southeast Asia, Latin America or even Sub-Saharan Africa. One of the key obstacles hindering the growth of a real SME network in Arab economies is the lack of access to capital. Indeed, financing networks have traditionally been very weak in the region with banks very often reluctant to finance new entrepreneurs and keeping their funds for well-connected family offices or bulge bracket corporations.
According to a January 2011 report from the World Bank, only 20% of SMEs had access to a loan/line of credit from a financial institution. In Latin America the proportion was more than the double. Both the global financial crisis and the Arab spring reinforced this state of affairs leaving entrepreneurs short on cash.
Within this environment, alternative sources of financing can fill an important part of the funding gap. During this last decade, taking advantage of several free-trade and deregulation reforms that swept across the region, the Private Equity industry experienced a huge boom with a total of USD19 Billion funds raised between 2003 and 2012 representing 0,9% of 2012 GDP. The MENA region surpassed major emerging markets like China, Brazil and Russia. Nevertheless these figures need to be tempered. Indeed, whereas Private Equity firms succeeded in raising notable amounts, the investment activity remained very embryonic reaching in 2012 as a percentage of GDP only 0.05%.
Moreover, during the whole decade, the vast majority of the Private Equity deals consisted of buy-outs within large corporations (notably in the telecom industry) and very rarely investments in early-stage companies or SMEs. It seemed
that the PE industry was heading in the same direction as the banking industry and that the same privileged financing mechanisms already in place in the banking sphere would replicate themselves in this new growing industry. But here comes the Arab Spring.
The 2011 upheavals greatly impacted the PE industry with fundraising levels plummeting at USD385 million in 2011 (a 53% decrease from the 2010 figures). Truth be told, the Arab spring confirmed an already downward trend with levels of fundraising showing signs of decline back in 2008 with the global credit-crunch. But the political upheavals that shook the region made Limited Partners the more wary at the idea of investing their remaining money in the region. The conjunction of the financial crisis and the Arab Spring altered the basis upon which a very young PE industry build its success: a steady flow of money. This first “crisis” may very well have a defining impact on the structure of the industry. Indeed, in front of the drying up of LP’s money, the General Partners are beginning to reshuffle their product lines. The rise of Growth and Venture Capital funds during the years 2011 and 2012 is a reflection of this. One of the common characteristics of these types of funds is that their investments tend to be smaller, minority stake investments. Thus, they need smaller levels of capital commitments from Limited Partners. During difficult times, one needs to tighten its belt. Faced with an increasingly difficult and unpredictable environment, GPs are aware that they will need to work harder and hold onto their investments for longer periods so as to increase their values. Portfolio management and not the search for a quick return will increasingly be the norm.
These apparent changes could very well play in favour of the myriad of little entrepreneurs and SMEs that have been desperately waiting for financial and management support. One of the underreported dynamic following the Arab Spring is the increasing number of start-ups that have been popping out across the region. They caught the attention of investors that used to stay away but are now apparently prepared to take the plunge. We may very well be at the onset of a new era in MENA investing where venture capital might blossom. In this sense, from the uncertainties and dangers of the Arab Spring a greater good may be in the making. But the road to create and sustain a venture capital ecosystem remains long and arduous. But at least, and to paraphrase Dan Geller’s excellent movie on the origins of the venture capital industry, it appears this road is currently ventured…