Investec Asset Management's Peter Baird: 'Egypt has a very good macroeconomics story'

The asset manager has added Egyptian supermarket chain Spinneys to its private equity portfolio of investments.

Investec Asset Management’s private-equity unit has delved into Egypt’s retail market by acquiring a controlling stake in supermarket chain Spinneys. This is the asset manager’s first private-equity investment in Egypt and the eighth investment by its second pan-African private equity fund. 

Spinneys is also the third African grocery retailer that Investec has backed, with the other two including a stake in OK Zimbabwe, which Investec offloaded in 2018, as well as Kamoso, a Botswana-based retailer, which the asset manager is still invested in.

Spinneys – which operates 13 retail outlets mostly based in Egypt’s capital of Cairo and focuses on fresh produce, in-store bakeries, and in-house label ranges – is a big deal for Investec Asset Management.

Investec Asset Management’s managing principal of the Africa private equity strategy Peter Baird (pictured) said the firm is backing Egypt’s migration from informal to formal retail. In this interview with M&A Africa, Peter discusses Egypt’s investment potential, building scale in Spinneys, and rest-of-Africa markets Investec Asset Management is targeting. 

M&A Africa: Why is Investec Asset Management backing Egypt?

Peter: Egypt has a very good macroeconomics story. There are about 100-million people, with a large and growing base of middle-income consumers. Egypt has pretty good infrastructure, industrial base, and productivity. The country is looking at five percent to six percent real GDP growth for 2019 and inflation, which spiked after the currency devaluation, is trending down rapidly. The country also has easing monetary policy and an exchange rate that is attractively priced. There is good political stability, a good deal eco-system and good rule of law.

M&A Africa: And what about Egypt’s retail market?

Peter: The Egyptian retail market is still largely informal. A big part of the grocery retail chain investment thesis in Egypt is the country’s migration from informal to formal. There is an explosion of residential suburbs, particularly around Cairo. There are dual-income families that drive cars and want to shop. There is a boom in residential and commercial real estate, and Spinneys has the potential to be the anchor tenant in a lot of neighbourhood and regional malls. Spinneys only has 13 stores. It doesn’t take a lot to double or triple that store base.

M&A Africa: The life of the second pan-African private equity fund expires on April 2024. Investec is five years into the fund. Do you view Spinneys as a long-term hold?

Peter: One of the reasons we like Spinneys is that it can be held for a relatively short period. We think there will be strategic buyers for Spinneys and the possibility of listing the business if we grow it. Spinneys is a well-run business. They just need some capital and support, and we can provide all of that.  

M&A Africa: Investec didn’t disclose the full size of its interest in Spinney’s or what it paid for it. How is the pricing of assets in Egypt and the rest of Africa?

Peter: Not specific to Egypt, or to this transaction, our general observation is that entry valuations across Africa have come down materially over the last few years.  This has been driven by a real reduction in available risk capital. Across the board, we have seen entry multiples come down two to three times of Ebitda (earnings before interest, taxes, depreciation, and amortization). This reflects the risk premium and supply-demand imbalances in risk capital, and a prevailing negative sentiment toward emerging markets generally and Africa in particular.  From our perspective, we believe that it’s the right time to be buying assets.

M&A Africa: Is the pan-African private equity fund sector agnostic in terms of its investment preferences?

Peter: We have preferences, but we are not sector-specific. We are excited about businesses that have low market risk and low technology risk, are cash-generative and have market-leading positions. We generally don’t buy with any leverage at all. Our ideal transaction is to control (or own 100 percent of) an established and cash-generating entity it with no leverage at all. This leads us to sectors such as healthcare, education, consumer goods, and telecoms.

M&A Africa: Are you seeing a big pipeline of assets in those sectors throughout the continent?

Peter:  We are seeing great deals. I’ve been working in the private equity market for a long time and it now feels like the best deal-making environment that I have seen because of a scarcity of risk capital and a lot of good opportunities available. We are seeing that business confidence is strong in countries we are targeting, enthusiasm for investment and economic growth is strong.

M&A Africa: And which countries are piquing Investec’s interest?

Peter: As we’ve discussed, we like Egypt a lot.  We also like Morocco, where we have owned a great transport and logistics business for the last couple of years.  We have made three investments in South Africa, and like the recovery thesis in our home market.  We are interested in East African countries, particularly, Kenya, Uganda, and Rwanda. We are also watching Ghana, Senegal, and Ethiopia. We have quite a lot of exposure in Nigeria, through our investment into telecoms towers business IHS Africa. We view Nigeria with a little trepidation because its economic recovery after the recession has been weak. We are happy with being selective in terms of jurisdiction and finding pan African regional champions.