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A Return to Our Entrepreneurial Roots

Most of us accept that we are heading into one of the most challenging economic cycles the Middle East and North Africa has ever seen. But while many would sound the death knell for private equity, those among us with truly creative, entrepreneurial spirits will use the year ahead to put together deals that portend serious returns when growth accelerates in the next decade.

In the past four years, the private equity space has been marked by mega-deals, a great many of them leveraged to the hilt. With debt almost impossible to obtain and investors increasingly unwilling to commit new funds to any asset class, let alone private equity, these have ceased to be features of our landscape.

This does not, as some in the global financial press have speculated, herald the beginning of the end for private equity firms — not in our region, at least. Instead, it signals that we must return to our roots as patient builders of investments — and as we do so, we will find that consolidation plays, distressed deals and greenfields are the dominant items our of investment menus.

With that in mind, I am confident that the theme of 2009 and heading into 2010 will be mid-to-large-size deals executed in multiple phases. Call it an “incremental” approach to private equity, if you will: one in which you can lock in large, attractive investment opportunities with very little in the way of up-front capital commitments. In this way, we will be able to conserve our lifeblood in a very difficult operating environment.

Obviously, not every deal is innately flexible enough to lend itself to an incremental execution. But by their very definition, most consolidation plays will allow this. And as we review the distressed assets that are now appearing on the horizon, we should look for bite-sized opportunities that can be cobbled together to create a new, larger, healthier asset.

And when planned properly, it is even possible to incrementally build-out greenfield plays.

Take, for example, an investment in an inland transportation and logistics business centered on the River Nile, with cargo transportation, river ports and sea-ports connected to the Nile. Together with our regional co-investors, Citadel Capital is making phased investments in the business even today, and we are doing so because — by definition — this business is modular: One can start with three barges and extend to 50 in stages instead of doing 50 in a single play.

This shift in private equity will undoubtedly favor the well-prepared control investor who is willing to roll up his sleeves and help build the platform companies in which his funds invest. In a sense, then, we are entering a climate in which the most entrepreneurial among us will thrive.

It may not be as thrilling as the boom years that have just come to an end, but the phase ahead will separate the financial engineers from those among us who understand what business is all about: Creating value for limited partners and shareholders alike by building viable businesses for which others will be willing to pay a premium.

Ahmed Heikal is Chairman and Founder of Citadel Capital, a Cairo-based private equity firm whose 12 Opportunity-Specific Funds control platform companies with investments worth more than US$ 8.3 billion in sectors ranging from energy and agrifoods to transportation and logistics.