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Identifying investment opportunities post-COVID – Interview with Huda Al-Lawati

Identifying investment opportunities post-COVID – Interview with Huda Al-Lawati
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By: Moslem Ali

Mubasher: In a time when the region’s markets continue to cope with the impacts of the Coronavirus (COVID-19) crisis, it is always important to listen to the experts’ opinion as we review our broader outlook for the region’s markets in the coming year.

Mubasher had the opportunity to remotely-conduct an interview with Huda Al-Lawati to discuss the investment scene in the region, especially for SMEs.

Huda, who is a member of many corporate boards, is a Partner at Gateway Partners and has previously served as chief investment officer (CIO) at both Savola Group and Abraaj Group.

Based on your experience in the market, how do think the COVID-19 pandemic has changed the investment scene in the region? 

The pandemic is leading to a K-shaped recovery or a divergence of fortunes, at least in the short term. This bifurcation is not limited to sectors (restaurants vs. e-commerce) as even within resilient sectors, strong companies, operationally and strategically, are thriving and gaining market share, as the number of market participants shrinks. 

In the region, the overall growth trajectory has been revised downwards, especially as oil prices have come under pressure which has amplified the importance of investment selection and management capability, as you cannot simply rely on riding the wave – you need teams and businesses that can achieve growth and returns in a less forgiving environment. At the same time, investors have the opportunity to better evaluate and access opportunities to:

- Invest in resilient sectors - FMCG, connectivity providers, pharmaceuticals;

- Use the opportunity to partner with leading companies in temporarily affected sectors such as hospitality and F&B; and

- Gain access to fundamentally robust businesses, simply suffering balance sheet distress - driven by debt and liquidity issues

Having said that, executing on investments has become more challenging due to travel and movement restrictions to some extent, but mostly due to business planning and forecasting difficulties. In addition, attracting FDI has been more difficult especially due to the US stock market rally.

To compensate, the government has been an active player in the region, attracting FDI via issuances and into portfolios such as the ADNOC pipeline. It has also actively invested in local markets, through state-backed players engaging actively in regional M&A, where we should be seeing more activity is digital infrastructure or towards corporate digitization.

What are the implications of the pandemic on the region’s venture capital and SMEs? 

Tech and venture investments were already on an upward path pre-COVID-19. Momentum has picked up in online b2c, fintech and connectivity, the so-called ‘COVID beneficiaries’. Interestingly, this space has seen players ride the wave alongside their leading comparables. 

On the ‘non-tech’ SME side (an essential tool of employment and future diversification) the story is more tragic. A sector that already suffered historically has seen a bloodbath of closures, insolvencies, and overall inactivity. Unlike many developed markets, this sector receives little financial support from the public sector and has a high fixed operating cost, in addition to being largely unbanked. 

From your point of view, what are the legislative and regulatory reforms that are most needed now to empower SMEs?

The situation varies by country and several governments have reformed labour laws or introduced regulatory relief, such as extensions on licence renewals.

However, SMEs are fundamentally unsupported by the capital markets so restaurants, standalone retailers, small contractors, boutique consultants, nurseries and even hairdressers, all need lower operating costs. They compete with large conglomerates, whilst facing the same fixed costs, so COVID has caused many to disappear. 

How do you view the role of M&As in the MENA region in ensuring market recovery after COVID-19?

M&A will play an active and supportive role. Whether you benefit from COVID, are financially challenged or have been temporarily hit - there is a requirement for growth capital or funds to deleverage. As vaccines are (hopefully) distributed, visibility will become easier and capital can be allocated. 

M&A will also be driven by a focus on investment in technology by companies of all sizes (especially those that have underinvested historically), and the consequent need for capital.

The pandemic has also shown the benefits of scale and a lean structure. This will likely drive widespread merger and consolidation activity. 

What do you think is the best approach for Private Equity investments in the region? 

The ethos is the same: seek players in attractive sectors benefitting from tailwinds and focus on quality operators/managers attuned to trends of opportunity and disruption. Do not overpay for assets, be very specific on where the value will be added during the investment period and have a reasonable level of visibility on how you will exit.

COVID’s impact means the value add will require a huge focus on investing in technology, lean operations and potentially consolidation. 

The pandemic has clearly changed many sectors, including education. In your view, how would that affect our markets for years to come?

In my view, the pandemic actually validated the importance of schools - at least in the k-12 segment. These establishments are important not only for academic instruction, but also for social and mental development, the well-being of children, and parents’ sanity. Schools are where children play and engage in physical activity - both of which are essential to well-being.

That said, obviously, there is a drastic change in technology’s role, and hence the role of teachers. We need to repurpose schools and academic workers to improve the provision of holistic, seamless education, that is tech-enabled, whether it is in the classroom or provided remotely. AI, VR and AR will now enter classrooms faster due to COVID-19. 

There are many initiatives for digital transformation in the region, especially in Egypt, KSA, and the UAE, how do you think these efforts are reshaping the region’s markets?

I believe the discussion, initiative and focus are important in awareness building and education. We are at the start of the journey. Execution will require much expertise, focus and investment.

It is important to realize digitization takes several forms: in existing businesses, it can be in systems and back-end tools such as supply chain management/data-driven production level management. It could be in consumer-facing aspects such as loyalty programs, data-driven customization or connectivity enabled maintenance services. It may also be via investments in related, but tech-enabled products/services, either directly or through a corporate VC program (e.g. a brick and mortar retailer going online or Nestle’s $950 million acquisition of Freshly).

All this requires access to available technologies, being aware of what operations/consumers would benefit from, and how to select/invest.

At the government level, digitising spans many areas from car registration and license renewal to applying for corporate licenses and paying taxes. This is important from a convenience/speed perspective and should eventually support a long-term reduction in governments’ payroll bills.

Both private and public sectors need to invest in infrastructure for effective digitization, by channelling capital to data centres, connectivity, and operating systems. 

Finally, digitising via investment directly into the tech sector, and building an entrepreneurial ecosystem, should lead to further local innovation and start-up growth.

Digitization within corporates, and investment in digital infrastructure, offer a compelling and probably one of the largest investment and return opportunities.

How could digitisation help the region’s SMEs and small investors, as well as big corporates?

Smaller companies and investors can use tools and collaborations to reduce operational costs, accelerate speed to market, and even leapfrog using existing technologies in certain areas.

The new economy offers shared services. I can now hire fractions of capacity instead of making larger capital investments or fractions of an accountants time instead of paying a full salary. 

SaaS and shared services reduce the cost of digitization for companies. Centres servicing multiple companies can advise clients on how to professionalise HR/Finance functions and automate with the latest technology. 

The pandemic accelerated the digital drive at the SME level, via increased digital payments and online presences. Electronic commerce can provide a lower CAPEX expansion route for smaller businesses: presence can be increased and hence a faster speed to market with lower marginal costs - provided you have invested in the platform. 

Digital marketing and communication tools can support smaller companies in ways not available in the past. Previously, you could either afford a television ad or not. Now, you can engage in promotion with a lower absolute cash amount available to you.