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Trust As a Revenue Driver

In the world of private equity, trust is a force multiplier: Trust brings you better deals in the origination stage. Trust enhances value and efficiency during the lifetime of an investment. And trust attracts buyers willing to pay a premium when the time comes to exit and pass an investment into new hands.

How do you create trust in the corporate world? It’s hardly rocket science: Trust is the product of good corporate governance. In today’s climate of rising competition from investment banks, strategic investors and other private equity firms for the lucrative business opportunities in the Middle East and North Africa, it’s one of the best investments any company can make.

It would seem obvious that hometown firms have the inside track on the best regional deals, but competition could change that. In fact, global giants have strong appeal to MENA businesses looking to sell or attract new investment. One of the chief attractions of going with a foreign partner is the assumption of trust: It’s simply easy to assume that large multinational investment houses that must answer to shareholders are more fundamentally trustworthy in their dealings and capable of posting better returns.

The reality is that Western firms — the best of them, anyway — are seen as well-run corporations that follow strict codes of ethics and corporate governance.

To maintain their competitive edge, Middle Eastern players must adopt similarly solid codes of governance and conduct. As they do, regional firms will attract not just new foreign capital and the pick of local opportunities, but will also be able to expand beyond their present geographical footprints.

As a leading regional private equity firm, Citadel Capital has several unique competitive advantages, chief among them being our deep insights into local markets, a solid base of contacts that serves as an unparalleled origination network, and our ability to hire top talent to run portfolio companies in each of the industries in which we invest.

In high-profile deals ranging from the acquisition of Canada’s Rally Energy in a transaction valued at more than US$ 1 billion to an ongoing consolidation play in the regional foods industry to one of Egypt’s largest-ever private-sector greenfield projects, this formula just works.

The factor that underpins it all? Trust.

Citadel Capital would never have emerged beyond the borders of Egypt were it not for our iron-clad commitment to good corporate governance, which regulates everything from how management interacts with shareholders to our dealings with management at the companies in which we invests.

There’s no secret to how Citadel Capital has achieved this. We maintain that good governance isn’t merely about obeying the letter of the law, but also about institutionalizing principles of fairness, openness and transparency.

Citadel Capital maintains separation between management and stakeholders. The firm retains the services of only the most reputable audit firms for both due diligence and ongoing audits. Strict internal controls and reporting standards are a must at every Citadel Capital portfolio company and its subsidiaries. The firm demands that results and reports be made consistently and transparently to all parties with a vested interest — from management and board members to shareholders.

Today, as more and more family businesses are looking to raise funds, sell out, restructure or offload non-core assets, many of them are turning to private equity firms. To remain attractive, the businesses too must institutionalize decision-making and reporting structures that emphasize transparency and performance. Good corporate governance and the trust it creates are no more optional for private firms than they are for listed companies.

Indeed, good governance makes a quantifiable monetary difference at every stage in a private equity firm’s deal cycle. On the origination side, good governance makes you a trusted partner who can easily obtain the backing of investors and financial institutions with lower costs of capital.

Once the deal is made, good governance is a fundamental enabler of corporate performance. The structures good governance creates reduce risk and help executives better identify internal and external threats. Good governance also aligns the interests of management, shareholders, the board of directors and portfolio companies. And it makes possible quick, well-informed decisions — a must if regional private equity firms are to snap up opportunities in our fast-changing regional business climate.

Best of all, institutionalizing the principles of good corporate governance at subsidiary companies makes it possible for private equity firms to exit their investments through IPOs or trade sales at a premium. Worldwide, two-thirds of investors are willing to pay an average 11% premium on shares in a well-governed company, according to a recent McKinsey global survey.

If that’s not the ultimate argument in favor of creating a climate of trust and transparency, we’re not certain what is.

Ahmed El Shamy is managing director and chief financial officer at Citadel Capital, the leading regional private equity firm based in Cairo, Egypt, with US$ 8.3 billion in investments under control in sectors ranging from food and retail to transportation and the complete oil and gas value chain. El Shamy was previously founder and chief financial officer of Fayrouz International and CFO of Heineken’s Al-Ahram Beverages Company.