Private Equity Activity, Growth and Performance in Morocco

LAGOS, Nigeria, Capital Markets in Africa: Morocco has begun to emerge as a real operational platform for African investment seeking to position for the new economic dynamic in Africa. Building on a cornerstone location between West Africa, North America and Europe, and leveraging its own solid decade of successful market reforms and extensive, international-standard infrastructure expansion, Morocco is a bridging platform between the north and the south. Longstanding Africa commercial, cultural, and political ties and the new emerging economic dynamic in Africa led to the 2010 launch of Casablanca Finance City Authority (CFCA). The CFCA, building on successful financial and business reforms, aims to provide a full-service ecosystem as a hub for business and investment, for financial companies, professional services providers and regional or international holdings. To date, more than 100 international institutions and investors, of which the AfDB’s Africa50 fund and Wendel Africa, have already chosen Casablanca as their platform for Africa.

Behind Morocco and Casablanca winning attention as a platform are ambitious sectorial strategies to develop an industrial platform for key industries as renewable energy and value added agribusiness, while enabling automotive and aeronautics industry, setting an improving business climate. Private Equity has profited from legislative and regulatory reforms and Morocco’s VC and PE Association, AMIC, has helped achieve with Moroccan government a reformed regulatory framework of Law 45-01 passed in 2015, intended to enable Casablanca as a PE hub. This sets an improved, more investor friendly regulation with better flexibility and tax attractiveness corresponding better to the GPs and LPs needs.

Although little known in English speaking circles, Morocco developed over the last decade a uniquely dynamic local VC and PE industry rooted in developing fundamental domestic industry and services, drawing on local institutional capital and focused on emerging Small & Medium sized Enterprises (SMEs). In fact, with a 2015 PE&VC penetration rate of 0.06% of GDP, Morocco outperforms all MENA region countries, while on the African level of 823 PE transactions between 2010 and 2015, 86 were in Morocco, i.e. more than 10% for a country representing less than 3% of Africa’s population.

Its development over time is unusual in the Middle East North Africa (MENA) region for a genuine SME focus and focus on innovation within the basic industries of most relevance to developing economies as in Africa, like renewable energy and innovative value-added agribusiness. At the same time of practical interest for African oriented PE players looking at regional expansion and consolidation opportunities, the Moroccan VC & PE industry has built up a current portfolio of well governed, modern firms with regional potential and interest.

The industry initially got a timid start in the early 1990s with the backing of Development Finance Institutions (such as IFC and European Investment Bank), but really took off circa 2000 with the first generation of independent funds and managers. Benefitting from an increasingly liberal investment environment, the aforementioned regulatory reforms and infrastructure investment, the industry expanded dramatically USD41 million in cumulated assets in 2000 to USD1.7 billion in 2015 (including infrastructure) for investment in the local and Maghreb markets. Along with this, Morocco quietly developed a reasonable ecosystem for VC and PE, with 24 local fund managers having executed more than 175 investments, in local enterprises, largely in SMEs.

Further, AMIC is one of the few national associations in either Africa or MENA to regularly publish vetted industry data. AMIC partnered with respected international VC and PE associations, such as South Africa’s SAVCA, France’s AFIC, the US NAVC and EMPEA, to establish best practice services to its members. AMIC has, in partnership with Grant Thornton, collected and published national PE statistics continuously over the past eight years and is continuing to improve the standards each year to keep them in line with best international standards, now in close collaboration with EMPEA. This effort has been a key factor for the market in understanding the potential and the impact achieved to date, and has helped both government and private players to understand key issues.

Country focus: Morocco
The emergence of the PE sector has been supported by a sustained and importantly applied economic reform that has significantly improved the business climate, and established a real liberty of investment. Excepting a few narrow cases, like primary agricultural lands, there are no restrictions on the type or structure of investments for either locals or foreigners. Without nationality restrictions on ownership, nor hard restrictions on where and how funds can invest, funds have been free to raise both local and foreign capital, and secure win-win partnerships with foreign investors – to date mostly European. This flexibility has helped the Moroccan PE and VC sector emerge, and perform comparatively better than many peers, and overcome a lack of strong fiscal incentives for SMEs or risk capital funds. As important, the past decade has seen truly substantial and well-integrated investment in infrastructure with nearly universal national electrical and telephone network coverage and an international standard national highway network that has now connected every major and most secondary cities, more than halving travel times in many instances.

Supported by on-going business environment reforms and stable government policy, the pace of investment and fund raising has been maintained. In 2015, fundraising reached USD73 million, surpassing most peer emerging markets highlighting ongoing investor confidence, particularly as 54% of current fund investors are foreign. Supporting investor confidence, in addition to the environment is a bedrock of AMIC members who are players with confirmed track records and market expertise that have been able to launch a 3rd generation of funds from 2011. At the same time, the level of investment has been stable in 2015 despite the crisis, and more local fund managers are expanding regionally, especially at the level of the Maghreb and Sub-Saharan Africa, particularly West and Central Africa, following Moroccan and Maghrebine entrepreneurs and firms expansion. Similarly exits, dominated by trade sales followed by IPOs like most markets, have maintained reasonable levels despite the crisis, at USD20 million in 2015.

Perhaps most important for reflecting on the potential for expanding risk capital financing in the MENA, Morocco has perhaps uniquely shown that it is possible to build a genuine grass-roots SME focused growth capital (late stage VC or ‘small’ PE) based industry in the region by a focus on innovation in a broad sense. The vast majority of investments is made, and continues to be made, in deals around USD 5 million – and mostly representing significant minority stakes. Investment has also been highly diversified, across a wide range of sectors. The current ecosystem in Morocco resembles that of the 1970’s in the US, where a focus on unlocking value by innovating in traditional industries was a key investment theme (the example of FEDEX).The Moroccan example suggests that in the emerging MENA markets, a back to basics approach in private equity inspired by the fundamental management transformations is a key to success in the SME space – along with government policy allowing the maximum investment flexibility in a positive business climate environment.

The impact, both economic and social, of investment in innovating (in business terms) and modernizing SMEs has been demonstrably important, and has been financially rewarding. Reported gross IRR from 1993 to date, across all investment stages and member funds, is 13%. In 2015, Turnover of invested companies increased by around 17,6% and number of employees by 5%. Across the board for key indicators on robust governance and economic management, the impact of AMIC members’ intervention is impressive, for example the implementation of key management tools such as active management strategy monitoring, financial monitoring and analytical tools jumps post investment from 40-50% of companies ‘flying blind’ pre-investment to 100% of companies implementing.

As in other countries in the region, there remain cultural challenges, as entrepreneurs and established SME owner-managers remain uncomfortable with outside ownership, and AMIC’s membership universally agrees that a significant part of their job is education and confidence building. The sustained and increasing level of investment suggests that the decade long investment by the local management groups is slowly paying off, particularly with the younger generation of SME managers, although more work needs to be done. AMIC’s local membership, focused on initial rounds of investment of early stage and growth capital in SMEs need patience, as they are working on the frontier of building a modern business sector, but their investments have had good potential payoff with an adapted approach to the local market culture.

There is good future potential as aforementioned infrastructure development has opened up investment all over the country. Whereas up to 2005, 74% of investment was in the Greater Casablanca urban area, this has declined to 45% as investment in other regions in the country has grown substantially, such as around the new industrial hubs in Rabat and Tangier.

Although clear challenges remain to be resolved to maintain and improve competitiveness, the grass-roots fundamentals focus of Moroccan PE, based in the core industries most relevant to developing markets growth are a clear foundation for a Casablanca PE hub for Africa. With experienced teams, a regional platform in the CFCA and international class infrastructure, Casablanca is opening a stable, efficient and convenient door for emerging African opportunities.

Contributor’s Profile
Françoise Giraudon De Donder, graduated in Law from the Catholic University of Louvain-la-Neuve (Belgium), She starts her career as a lawyer at the Brussels’ bar. In 1990, after a LLM in International Trade and Banking Law at the American University in Washington, DC and an internship in a lobbying firm focused on African countries, Françoise works for RSCG, a global communication group in Paris as a communication and lobbying manager. Expatriated in Sydney, Australia, from 1994, she works as a freelance corporate and institutional communication consultant. Moving to Johannesburg, South Africa, in 1997, she joins the French South African Chamber of Commerce and Industry as Commercial Manager and then in 1999 sets up an export business to Europe of South African craftsmanship products. Moving to Casablanca, Morocco in 2003, she works as a journalist for various economic newspapers before joining in May 2008 the Moroccan Private Equity and Venture Capital Association as Managing Director.

This article was featured in the INTO AFRICA July edition, with focuses on Private Equity in Africa and is titled Private Equity: Africa’s Trump Card.