Chairman’s Message

Ahmed Heikal

Whether you are talking about global markets or our core Middle East and Africa footprint, it has become something of a cliché to refer to the year just past as “difficult.” Although 2009 surely brought with it challenges, I am more convinced than ever that we will look back upon it as having been an outstanding vintage year for private equity investing. And as I will shortly explain, we expect 2010 to be a similarly strong year for new investments.

That isn’t to say that we did not react in 2009 to the fallout from the global economic crisis: Throughout the first half of the year, we maintained a particular focus on nurturing our existing investments. Part of that task involved ensuring that all Platform Company business plans were fully funded, and part of it meant making sure Platform and Portfolio Company management was up to the challenges they faced.

In that respect, I note that we engaged five new chief executives for key Platform and Portfolio companies: Amr Bahaa joined the Sudanese Egyptian Bank (under Finance Unlimited) as managing director; Tarek Salah, Citadel Capital’s Managing Director for greenfield projects, took over as CEO of ARESCO (under ASEC Holding); Alaa El-Bolock assumed new duties as General Manager and Board Member at ASEC Engineering (also under ASEC Holding); Paul Woodward joined us as head of ASCOM’s Technical Calcium Carbonate plant in Minya; and Rob Bennett became TAQA Arabia’s Gas Construction and Engineering arm.

By fall, it was clear that our platforms were on track, including those that we had identified at the end of 2008 as showing some signs of stress. Negotiations for the US$ 2.25 billion financing package for the Egyptian Refining Company (ERC) were on track, with promising feedback from development finance institutions and export credit agencies leading us to conclude we will finalize the facility in 2010. Meanwhile, we have secured project financing for Designopolis, Bonyan’s innovative home furnishings destination, through an EGP 185 million syndicated loan. New steam technology is showing promising results at NOPC / Rally Energy, and the National Petroleum Company (NPC) is now cashflow positive. Indeed, we have recorded important production upticks at both NOPC and NPC even as we have opted to leave these as impaired on our Net Asset Valuation (NAV) at year end.

We knew by fall that we were on the right track when projections suggested median average sales growth of 23% and EBITDA growth of 25% at our five mature Platform Companies, including TAQA Arabia, ASCOM, ASEC Holding, Gozour and NOPC / Rally. By October, our focus had shifted to making new investments by executing from our strategy of incrementally building-out our platforms, thereby locking in future returns with lower up-front capital commitments and thus lower risks to both the firm and LPs.

In the latter part of the year, we executed three deals that we think have very exciting prospects. The first involved the creation of Wafra, our Sudanese agriculture platform, which now has long term-leases to more than 500,000 feddans of land in north and south Sudan including full irrigation rights. Rights to just under half of the land Wafra now controls were acquired in 2009 for portfolio company SEAC. Also last year, we engaged experienced management teams for both SEAC and sister company Sabina. Sabina is on track to have 2,000 feddans in production by June, while SEAC is presently engaged in on-site development work to have a significant area of land ready for seeding at the onset of the rainy season in mid-2011.

In November, we announced that we had acquired two innovative solid-waste management companies to serve as the nucleus of Tawazon, our eighteenth platform investment. Those two companies are ECARU and ENTAG. Based in Egypt and founded in 1997, ECARU has contracts to collect and process more than 500,000 tons per year of agricultural solid waste, particularly rice straw, which it converts into compost. ECARU is also studying the production of medium-density fiber board, fuel pellets and paper from rice straw. Moreover, its operations include a landfill built to the highest international standards in the 15th of May City. The company is also on the cutting edge of carbon credits trading, being one of the first Egyptian organizations to sign a greenhouse gas emission reduction purchase agreement with the World Bank. ENTAG, on the other hand, was established in 1995. It specializes in the design, manufacturing and erection of solid waste management systems.

Equipment supplied is partly procured from the world’s leading waste management equipment producers and partly designed and manufactured locally in Egypt.

Our last transaction of the year, finalized in 2010, was our investment in Rift Valley Railways (RVR) of Kenya and Uganda, where we acquired a 49% stake in Sheltam Railways, the largest single shareholder in RVR. Rift Valley has a 25-year concession to operate a century-old rail line with some 2,000 kilometers of track linking the Indian Ocean port of Mombasa with the interiors of Kenya and Uganda. Citadel Capital and our limited partners will look to inject more than US$ 250 million over the coming five years as part of the restructuring agreed in 1Q10.

In that sense, the RVR deal marks a turning point of sorts for Citadel Capital as we look to weight our new investments toward Africa, Saudi Arabia, the Levant and Iraq with a view to seeing our investments in Egypt proportionally decline to 40-50% of our portfolio in the years ahead.

Indeed, one of the joys of private equity investing is that we can take the long view: With investment horizons in the 5-10 year range, we see the macro-level drivers behind our strategy unchanged. For example, commodities will continue to be in high demand, supporting our investments in agriculture, oil and gas and mining.

The middle class across our Middle East and Africa footprint is large, fast-growing and essentially un-leveraged, supporting plays such as consumer foods, glass manufacturing, and microfinance. Energy prices will continue to be de-regulated and subsidy budgets trimmed, hence our investments in petroleum refining, energy distribution and fuel-efficient transportation.

A hallmark of our business model is that we are principal investors alongside the limited partners in the Opportunity-Specific Funds we raise. In this sense, we are an investment company that manages third-party money. To ensure our ability to invest over the coming decades, we opted to list Citadel Capital on the Egyptian Stock Exchange in December 2009, thereby ensuring our access to new capital. Although our share price came under some pressure in the final weeks of 2009, I am entirely confident that we will look back and say the listing was clearly the right decision at the right time.

Since we founded the firm in 2004, Citadel Capital has raised more than US$ 4.3 billion — and generated more than US$ 2.5 billion in cash returns to our shareholders and co-investors on investments of US$ 650 million. We have done this exclusively through the use of Opportunity-Specific Funds, raising a pool of capital to acquire or create a single platform company in a single industry. More and more institutional investors have taken note of the Citadel Capital story and the compelling fundamentals to which it is exposed.

With that in mind, we are now raising our first two standing sister funds: the MENA Joint Investment Fund and the Africa Joint Investment Fund. We completed dry close in October 2009 of the MENA Joint Investment Fund with the International Finance Corporation (IFC) and the European Investment Bank (EIB). Working with development finance institutions, the firm is also proceeding toward a first close of the Africa Joint Investment Fund. We are targeting a combined initial close of US$ 150 million for both funds.

The sister funds are intended to allow Citadel Capital to further expand its investor base and will match Citadel Capital’s principal investments on a 2:1 basis in every transaction into which Citadel Capital enters from the closing of the funds onward.

Outlook

We are optimistic. Cautiously optimistic. As I noted above, our held-at-cost investments are all on the right track. Moreover, the coming two years present unparalleled opportunities for the following reasons:

  • Secular trends in the Middle East and Africa (MEA) continue to develop, including:
    • Energy earnings flowing into the Gulf Cooperation Council (GCC) countries and around the region, estimated at US$ 450 billion in 2009;
    • Strong sovereign fiscal positions based on historic and projected earnings continue to support the substantial economic diversification and infrastructure spending programs announced by many regional governments;
    • Government legislative and fiscal support for private sector development remains strong;
    • The region’s banking system, with a handful of exceptions, remains robust, with strong underlying systems and an average loan-to-deposit ratio of approximately 65%;
    • The essentially un-leveraged consumer class across the region stands at more than 320 million people — and growing; and
    • Energy-intensive industries continue to shift from southern Europe to North Africa despite Europe’s slow recovery from the global financial crisis.
  • The outlook for commodity plays in Middle East and Africa continues to be favorable, whether we are discussing oil and mining or soft commodities. We expect the coming period to witness stable, if not increasing, prices.
  • Many regional governments have over-stretched balance sheets, a development that creates new room for the private sector.
  • An under-developed private sector in many geographies leaves significant room for a limited number of private equity players such as ourselves.
  • A large number of distressed sellers are disposing of good assets at reasonable prices.
  • A large number of distressed assets are now in the market, allowing us to capitalize on our strength in distressed investing.

So why are we cautious, then? The fundraising environment is not ideal because risk appetite has yet to recover. In addition, the need to conserve cashflow from our own balance sheet to meet unforeseen obligations is causing us to restrain ourselves, leading to the question of why we do not increase our own capital. At this point, raising our capital would be highly dilutive for our shareholders.

Fellow shareholders, I look forward to an exciting year as we continue to create value across our unrivaled footprint, developments about which we will report to you regularly in our Quarterly Business Reviews.

Ahmed Heikal
Chairman and Founder