A challenging start to a promising journey

The opportunity to invest in Algeria is greater than any time before. This unprecedented historical opportunity is, as per experts’ analysis, rooted in two main reasons. The first is the economic transition that Algeria has to undergo and the second is the country’s exceptional exponential demographic growth.

The Algerian government has explicitly declared its intention to lessen its long-lasting dependence on oil and gas revenues, and has loudly stated its adoption of severe austerity measures, which entailed a set of institutionalised restrictions on imports, backed by a great deal of intentional support for local production. This opens the field for local private sector companies to lead this economic transition.

The Right Time

Moreover, Algeria is experiencing its demographic “sweet spot”, due to its expanding middle class, which constitutes about 75% of the continuously growing 40m-person population. This growth creates an urgent need that needs to be filled in sectors that are directly and/or indirectly driven by consumer demands. The combination of these two key factors makes the Algerian private sector an attractive target for investments. Parallel to all of that is the fact that the list of investment alternatives and vehicles presented to local investors has been very limited. An average Algerian generally invests in real estate or commodities such as gold, which is fine for capital preservation, yet not very lucrative in both the short and long terms. That is why other means of profitable investments should be introduced. On the top of that list is the critical private equity segment.

Private equity is defined as funds invested in unlisted private companies, with an aim to enter in their capital and ultimately in their management after evaluating the company’s growth rate over a mid-term period. Following this entrance of capital, private equity permits companies to grow at a faster rate. After a predetermined period of time, investors later exit the company’s capital after achieving the expected rate of return.

Boosting Development

Private equity investment is crucial for Algeria’s development and stability. Investments through private equity boost job creation, stimulate economic growth and support other investments in related sectors. Also, the investee companies can expand their reach quickly and penetrate new markets and untouched customer segments due to the added financial, management and business support.

It is proven that when private equity firms are actively involved in the management of companies, the risk of entrepreneurial failure and unsustainability is much lower, which is eventually reflected in the development of local communities. Speaking of which, the social impact of private equity practices is backed by the fact that many firms implement socially responsible management and governance policies when they execute an investment.

Many private equity investors see Algeria as a new market, and as they learn more about the country they realise Algeria is actually a mosaic of potential sectors. Algeria is comprised of many different markets, each with great potentials for growth and relatively little areas of risk. It has seen its companies growing by double digits for the past five years, with a customer base paying cash in advance for any product they might require. When this is well understood, the unique reality of Algeria should become apparent to investors and can help facilitate their risk mitigation task.

Regionally speaking, Algeria’s neighbours Morocco and Egypt dominate the private equity industry, absorbing 81% of all deals dedicated to the region. Morocco holds a slightly lead over Egypt, with the countries accounting for 41% and 40% of the total value of deals, respectively. Algeria stands fourth, behind Tunisia, which is in the third spot, with 13% of the deals. In terms of the number of deals, Morocco accounted for 46% of the total, followed by Tunisia with 25% and Egypt with 24%; while Algeria accounts for only 4% of the total deal flow by volume and around 5% by value.

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The Report: Algeria 2016

Financial Services chapter from The Report: Algeria 2016

Cover of The Report: Algeria 2016

The Report

This article is from the Financial Services chapter of The Report: Algeria 2016. Explore other chapters from this report.