Foreign appetite for smaller Egyptian stocks is strong but political and legal risks and a volatile exchange rate are blocking more investment, a top official at investment bank Naeem Holding said.
"Foreign investors who talk to us say emerging market strength lies in SMEs (small and medium-sized enterprises). Now is the era of SMEs and the time of M&A in this sector," Nora Helmy, managing director of the bank's unit Naeem Funds, said at the Reuters Middle East Investment Summit.
"But the major concern for them is the exchange rate and the political risks, including laws and the enforcement of laws."
Economists say a lack of affordable capital is one reason why Egypt is struggling to achieve the levels of investment needed to create enough jobs to absorb a growing labor force.
Banks stung in the past by bad loans are still holding back from lending to smaller firms, while a slow and unpredictable legal system and political uncertainty add to investment risks.
Helmy said the potential rewards were also great.
"There is big room for making profits in the SME sector in Egypt. You can easily achieve 30 percent IRR (investment rate of return) — this is not fiction," she said.
She said Egypt had about six investment funds dedicated to smaller companies, worth no more than US$1 billion combined.
"This is not enough and the market has room for more," said Helmy. Egypt's NILEX exchange for smaller companies "can see (share price-to-earnings) multiples of 10 times and 20 times, which the main market may not see."
Almost four months after Egypt launched NILEX, an exchange offering cash-starved smaller firms a new way to raise capital, some executives say the timing of the new bourse was not ideal but they expect its performance to improve.
Last December, Naeem launched an SME fund with a target capital of 200 million Egyptian pounds (US$34.87 million) to invest in promising small and medium-sized firms that plan to list in Nilex.
The fund is still awaiting regulator approval, and Helmy said she expected this to come soon.
"The fund adopts a pre-IPO model, it targets firms with annual net profit of at least 3 million pounds, turnover of nearly 100 million pounds and paid-in capital of no less than 5 million," she said.
Naeem invested in Nilex-listed Masria Cards MSRC.CA and now holds a 10 percent stake in it, and plans to move this stake to the fund once it starts activity, said Helmy.