Egypt remains a key African investment destination despite economic challenges

Egypt continues to stand out as one of Africa’s key investment hotspots, despite the country’s mounting economic challenges. While successive currency depreciations and the increasing takeover of the economy by the army have crimped private investment in recent years, the north African country was the stand-out venue for deals on the continent in 2022, thanks in no small part to the role of UAE state and state-affiliated investors.

Healthy levels of mergers and acquisitions (M&A) activity in Egypt stands in contrast to much of the rest of Africa. In line with international trends, the continent saw a downturn in M&A activity in 2022, following the explosion of deals in 2021. Nevertheless, M&A activity remains healthy within the continent’s finance and fintech sectors. While much of this activity centred on Egypt, significant deals were also recorded in the continent’s other major economies, notably Kenya and Nigeria.

If 2021 was the year when the world dared to dream of a return to normality, as the spectre of Covid-19 receded, 2022 was a year of frustrated expectations. Russia’s invasion of Ukraine in February cast new uncertainties across the global economic landscape, with funding for deals severely restricted as interest rates rose globally throughout the year.

After surging by nearly two-thirds in 2021, global deal values fell back 36% to $3.8tn in 2022, according to data from Dealogic. The slowdown was particularly sharp in the second six months of the year, with values falling by a third compared with the first half of the year.

Hit hard

The trend was even more pronounced in Africa, following a record year in 2021 that saw values increase by more than 700%. While deal volumes in 2022 saw a year-on-year rise of 17%, values fell back 71% to $24.4bn, broadly in line with the five-year average for the continent prior to the pandemic.

“In 2021, interest rates were still very low, while private equity and venture capital investor capitals had significant funds to deploy. With deals in the developed world becoming increasingly expensive, African companies became increasingly attractive, given the continent’s demographics and medium-term growth potential,” says Michael Louw, head of M&A at KPMG South Africa.

“The drop off in values in 2022 came as management policy tightened in a more challenging economic environment, both in Africa and elsewhere, with other investors choosing to take a wait-and-see approach until interest rates flatten out again.”

While the extractive industries of mining and oil and gas together accounted for a third of total deal values, the finance and technology (including fintech) sectors saw greater volumes, accounting for a third of all deals announced on the continent during 2022.

Deals within Africa’s financial sector in particular proved especially buoyant, bucking the decline witnessed across other sectors. Deal values in the financial space grew by 16% to $2.9bn for 2022, with volumes up according to Dealogic. Perhaps unsurprisingly, the continent’s three largest economies — Egypt, Nigeria and South Africa — remain dominant in terms of overall deal-making, together accounting for seven of the continent’s 10 largest deals announced during the year.

The single largest deal across Africa’s financial services sector for the year was the acquisition of a 17% stake in Commercial International Bank (CIB) — Egypt’s third-largest lender by assets — by Abu Dhabi-based sovereign wealth fund ADQ. The shares were acquired from National Bank of Egypt, the country’s largest lender, for $910m.

The CIB deal was the largest component of deals worth $1.85bn announced by ADQ in April 2022, in a potent demonstration of the deepening political and economic relationship between Egypt and the UAE at the government level.

“With its large economy, huge population and geographic proximity, Egypt has always been an attractive investment destination for Gulf Co-operation Council (GCC)  companies,” says Tarek Fadlallah, CEO of Nomura Asset Management (Middle East).

“It is now GCC governments that are leading the new phase of investments into mutually beneficial industrial developments.”

Following the CIB deal, ADQ announced plans in October to invest up to $20bn into a wide range of sectors over the coming decade, in partnership with the Sovereign Fund of Egypt.

Such a commitment is set to be matched by Saudi Arabia; the country’s Public Investment Fund last year launched the Saudi Egyptian Investment Company, with a view to investing in sectors including infrastructure, real estate development, health care and financial services.

UAE interest

UAE interest in Egypt’s banking sector extends beyond the ADQ deal. First Abu Dhabi Bank (FAB) — the country’s largest lender by assets — announced an offer for a majority stake in Egyptian investment bank EFG Hermes in March 2022, only for the offer to be withdrawn the following month. The move followed FAB’s announcement of the acquisition of beleaguered Lebanese lender Bank Audi’s banking network in Egypt in 2021, with the deal completing in June 2022.

Strengthened by the uptick in oil prices since late 2020, FAB is in full-on international acquisition mode. Reports emerged in January 2023 that the bank had been working for nearly a year to buy Standard Chartered, an unprecedented acquisition for any Middle Eastern lender. FAB quickly withdrew from the deal as news broke, although the Financial Times in February reported that the lender could re-engage with the process in July, following a mandatory six-month cooling off period, citing sources close to the process.

Fellow UAE lender Abu Dhabi Islamic Bank, the UAE’s seventh-largest Islamic lender, in early January 2023 increased its stake in its Egyptian operations to 52.6%, according to bourse filings. During 2022, the bank announced its intention to offload its majority stake in Cairo National Securities.

Aside from the conventional banking sector, the attractiveness of Egyptian fintech assets is only set to increase in the coming years, with regulations issued by the Central Bank of Egypt and the Financial Regulatory Authority in recent years creating an explosion of activity within the digital financial sphere.

Initiatives announced during 2022 included the country’s new fintech law, aimed at further boosting the use of technology in the country’s non-banking financial sector, and new plans by the Information Technology Industry Development Agency to increase foreign investment in the local tech ecosystem.

Beyond the CIB stake acquisition, one of the other highlights of ADQ’s April deals splurge was the acquisition of a 12.6% stake in electronic payments provider Fawry for $69m, the second-largest fintech deal in Africa in 2022, behind the $110m joint investment in Nigeria’s Interswitch by LeapFrog Investments and Tana Africa Capital.

Local telco, Vodafone Egypt, announced in April that it had increased its shareholding in local fintechs Bee and Masary — both subsidiaries of Ebtikar Holding for Financial Investments — to 9.99% each, via a subscription in capital increases for the two entities.

However, such deals have been dwarfed by the $400m worth of funding raised by fellow Egyptian fintech MNT-Halan in February 2023, led by Chimera Abu Dhabi. The deal will see Chimera — part of Abu Dhabi’s Royal Group, controlled by the UAE’s national security adviser and billionaire businessman Sheikh Tahnoon bin Zayed Al-Nahyan — take a 20% stake in the company for $200m. Other funding partners include Development Partners International, Apis Growth Fund II and Lorax Capital Partners.

Other international investors from beyond are also being drawn to Egypt’s fintech space. Payments-enabler Paymob secured $50m worth of Series B funding in May 2022, with PayPal Ventures, Kora Capital and Clay Point leading the round. The same month saw Amazon agree to acquire $10m worth of EFG Hermes global depositary receipt  shares with an option to convert them into a 4% stake in ValU — the bank’s rapidly growing buy-now, pay-later arm — adding ValU as a payment option for amazon.eg from July.

Kenya on a roll

Outside of Egypt, Kenya remains one of the key centres of deal-making within the continent’s banking space, prompted by the growing regional rivalry of the country’s two largest lenders, and by inbound regional investment.

In August, KCB, the country’s second-largest lender, acquired an 85% stake in Trust Merchant Bank of the Democratic Republic of Congo (DRC) for CnFr4.9bn ($2.39m), increasing the bank’s footprint in east and central Africa to eight countries. The move follows arch-rival Equity Bank’s entry into the DRC in 2019, with the acquisition of a controlling stake in Banque Commerciale du Congo.

Equity, Kenya’s largest banking group by assets, announced it would acquire certain assets and liabilities of Spire Bank from local lending co-operative Mwalimu Sacco, in a rescue deal for the struggling bank backed by the Central Bank of Kenya.

South Africa’s Standard Bank in 2022 raised its shareholding in Kenya’s Stanbic Holdings to 75%, completing an increase in its shareholding in the bank (held via holding company Stanbic Africa Holdings Limited) that began in 2018.

In July 2022, Umba, a US digital banking start-up with operations in Kenya and Nigeria, acquired a majority share of Daraja, a Kenyan deposit-taking microfinance bank, for an undisclosed amount. Umba, whose backers include Monzo founder Tom Blomfield, is targeting further opportunities in Ghana and Egypt.

Nigeria’s Access Holdings, meanwhile, suffered a setback in its bid to increase its foothold in Kenya, which it first secured with the acquisition of Transnational Bank (now Access Bank Kenya) in 2020. The banking group — Nigeria’s largest by assets — announced a deal in June to acquire an 83.4% stake in Sidian Bank for CnFr4.9bn from Centum Investment. However, the parties announced in January that they had been unable to finalise the deal within the originally agreed timeframe.

Such a setback is unlikely to dent Access Holdings’ wider acquisition strategy, both across the continent and beyond. In a statement confirming the termination of the Sidian deal, the company reiterated its intention to increase its international footprint from 16 countries to 26 by 2028, with Namibia, Angola, Ethiopia and Egypt all on its African wish-list.

Access Holdings in October announced the proposed acquisition of a 51% stake in Angola’s Finibanco — which has around $300m in assets — for an undisclosed sum, via its Access Bank Plc subsidiary. The transaction is expected to close in the first half of 2023.

Consolidation continues within Nigeria’s own banking market. In a move that symbolises the rise of new digital entrants at the expense of the country’s traditional banks, Titan Trust Bank — a largely digital lender that launched services in 2019 — completed the acquisition of a 93.4% stake in Union Bank of Nigeria, the country’s second-oldest bank and 10th-largest by assets, in June 2022. Titan Trust Bank announced at the time that it had received a $300m intra-African investment finance facility from the African Export-Import Bank to fund the acquisition.

In October, the Central Bank of Nigeria announced the sale of troubled lender Polaris Bank to Strategic Capital Investment for N50bn ($108.6m). The central bank revoked the bank’s licence in 2018, when it was trading as Skye Bank and failed to meet capital requirements from the lender’s ill-fated acquisition of Mainstreet Bank in 2014.