Egyptian investment bank EFG Hermes will finally complete the joint venture with QInvest, a Qatari Islamic investment bank by the end of this month after the Egyptian Financial Supervisory Authority (EFSA) finally approved the deal. Despite being agreed upon by shareholders in May, the deal was suspended by EFSA in September because the company had not clarified certain aspects of the joint venture, including points on minority rights.
Through the joint venture, EFG Hermes aims to further penetrate its core markets in the Middle East and Africa, maintain its prime position in regional M&A and increase its assets under management by $1.6 billion.
Moreover, QInvest has a healthy market capitalisation of $750 million, which will buttress EFG Hermes's financing position to continue to grow its business. The deal comes amid a constrained financial environment where some international players are retreating from emerging markets.p
“The reason that it’s taken this much time to reach closure is because we operate in multiple jurisdictions across MENA,” says Kashif Siddiqui, head of asset management and the CIO at EFG Hermes, and future co-CEO of the joint venture.
“We are by far the largest investment bank in the region and we have to seek regulatory approvals in all of those markets, the main one being Egypt. The Egypt regulatory approval took a bit longer than we anticipated, but now that we have that we are just finalizing the approvals of the markets that are left and we are hopeful that by the end of November we will close this transaction. We are very optimistic that now the deal will go through quickly.”
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| The new head quarters of Egypt-based investment bank, EFG Hermes |
The joint venture will see QInvest pump $250 million in capital into EFG Hermes for a 60% stake in the business. EFG Hermes will remain in control of the remaining 40%, with the option to sell the rest of their shares to QInvest within a two-year period after the contract has been signed for one year. The deal comes at a time when global banks are retreating from emerging markets amid tigher financial regulation and balance-sheet constraints, while the Arab Spring has slammed the brakes on deal flow, corporate capital-raising and economic activity, more generally. This is a very different picture to seven years ago, when huge growth in MENA capital markets brought international and regional players into Egypt and the wider region.
And although country and pan-regional competition still exists, while EFG Hermes has navigated its way through the financial crisis in 2008 and the Arab Spring in 2011, the level of regional, well-capitalized competition has diminished, says Siddiqui. Nevertheless the market is in line for a rebound.
“We are not worried from a regional perspective because we don’t see an EFG Hermes equivalent today," he says. "This is just part of the evolutionary process of the market. Regions throughout the world are going through an evolutionary phase. Where our business is present, the capital markets are developing rapidly and will continue to develop over the next 10 years. As a result, other competitors will grow and healthy competition will emerge.”
The joint venture will include EFG Hermes’ brokerage, investment banking, asset management and research businesses, but not include Credit Libanais, EFG Hermes’ commercial outlet in Lebanon, or the majority of its private equity business.
“On the private equity front, the joint venture will be taking the infrastructure fund that was launched in 2010 because this is a new product that the joint venture will take control of,” says Karim Awad, head of investment banking at EFG Hermes and the other future co-CEO of the joint venture.
“But the legacy funds will stay with EFG Hermes Holding for a variety of reasons, mainly because most of them have come to the end of their investment cycle.”
Gamal Mubarak, the son of fallen president of Egypt, Hosni Mubarak, owns an 18% stake in EFG Hermes private equity business.
According to Siddiqui and Awad, the joint venture will ensure EFG Hermes has a strong foothold in the burgeoning economy of Qatar, will provide EFG Hermes with added financial power, and will also help develop the company's Islamic business.
“QInvest’s capabilities in [sukuk] are truly valuable. We very much look forward to leveraging that skill set to offer new products to our clients across the region,” says Awad.
Although the regional economic climate and political turmoil makes it difficult to outline the company’s short-term outlook, both Siddiqui and Awad highlight that the joint venture will initially focus on the markets it is present in but not fully penetrated, including Egypt, Saudi Arabia, United Arab Emirates and Qatar before entering periphery markets including Iraq and Libya. Following this, the joint venture has its sights set on emerging markets such as Turkey and Asia.
“In the next couple of years we aspire to have $5 billion of assets under management [from $3.4 billion currently]. We feel this is easily achievable given the time frame we are talking about,” says Siddiqui.