Mindspeak- Karim Sadek Citadel Capital

A couple of weeks back, I had the chance to go for Mindspeak , Aly-khan Satchu's business club in Nairobi. The speaker was Karim Sadek, CEO of the Largest private equity fund in Africa, Citadel Capital.

Established in 2004, Citadel has 17  opportunity- specific funds with $9.5 billion under management, with around $800 Million being the partners' assets. It has since returned $2.3 billion in cash to its investors.

What struck me the most about Citadel's approach is its rather common sense approach towards investing in Africa. Karim spoke of Citadel's concentration in investments in 'bottom-of-the-pyramid' sectors. He contends that performance here is more consistent in comparison to higher-end markets. He brought up the example of the Egyptian Real Estate market which had for aeons been controlled by politically correct individuals and depended on a luxury offering. Its fortunes had adversely changed post the 2011 revolution bringing it to virtual collapse. He coyly made comparisons with the current real estate boom in Kenya and clearly stated that Citadel would not invest in Kenya's real estate market. That should be food for thought for anyone trying to invest in the real estate market in Kenya.

He also spoke of their bias towards energy-centric investments in Africa. He believes that the cost of energy will increase over time due to higher extraction cost. He talked of Egypt's over-reliance in energy subsidies where a litre of Diesel  retails at $15 cts. This has structurally messed the economy and its impact once dropped will fundamentally change Egypt's competitive edge. To this end, Citadel brought together a consortium to finance the Egyptian Refinery company (ERC) which will supply a bulk of Diesel in Egypt. It is the single largest FDI post the Egyptian revolution.

He also talked of Citadel not having a pre-determined exit strategy for any investment. He fell short of saying that they would hold an investment for an infinite time period but made it clear their investments are not short term in nature.

He commented on the interest garnered by Africa in the west which he welcomed but was quick to add that it hadn't translated into cheques!

Karim spoke quite plainly about the challenges they had face so far in investing in the region. Especially  with their flagship investment in  Rift Valley Railways ( RVR). He talked about the nature of Publi-Private Patrnerships (which RVR is) and the irrational expectations that governments have on concessionaires. Generally speaking, structuring a concession agreement is tough especially because Government's (justifiably so) on Private equity firms as vulture investors. The only way is to form very close working relations with the government and create a win-win proposition.

He spoke a length about RVR. The key points were;

• RVR will reduce transportation costs in the region by  about 35% by avoiding trucking. East Africa has among the highest transportation cost in the world.It costs more to transport inland than to import from major world port to Mombasa.
• Citadel has raised $300 Million ( from IFC, ADB & KFW) for a 5 year turnaround program. These includes; Surgical intervention to improve rail infrastrucuture, Implementation of automation in operations (MS Excel is the existing level of automation),Rehabilitating the fleet and the add new assets after 2014.
• Restructuring of RVR system wise will definitely lead to labour restructuring. The business' growth will lead to realignments within company, hopefully.
• The key challenges facing RVR are; changing the internal culture from parastatal to private sector and sensitizing the community along the rail regarding the importance of the rail ( Click here ). They are looking into out-sourcing  some services to members of the community.
• Managing expectations on delivery of projects and returns are key aspects ensuring a PPP works out.

The session went to question-time. One question centered on how Citadel was able to weather the revolution in Egypt. Citadel maintained distance with the Mubarak regime and consciously avoided questionable investments. He also talked of demographics as a key factor in the revolution. Mubarak started out as a war hero but couldn't ride through the revolution on the back of his past. The youth could care less. African governments have to deliver basic universal rights to avoid this.

On the question regarding how to manage relations with governments. Karim had free advise for governments;

Governments need to invest in regulators not assets. He thinks the private sector is best suited for managing businesses while the government should work to attract qualified talent to regulate industries.

On the question of  the Lamu Port Southern Sudan Ethiopia Transpoert Corridor -LAPPSET being a competitor to RVR and Citadel intentions in the project, Karim says he does not believe it is a competitor to RVR.  He also thinks that private sector involvement in this is not financially attractive. In as much as China has loads cash  devoted to Africa, its role in financing of LAPPSET is still unclear.  Also, recent t talks between Sudan and South Sudan throw more uncertainity in the future of the project. He was also also asked if a standard gauge railway would be a competitive threat to RVR; RVR has rights to participate in future standard gauge rail. He's therefore not worried if the government decides to build one be it in the LAPPSET project or elsewhere.

On Citadel's biggest investment failure; Karim spoke of a failed investment in oil and gas exploration in Egypt.  There were too many uncertainties and a higher capital requirement for exploration. The only way to fully verify a discovery is to pump it. This should be a red flag for those pegging the hopes of LAPPSET on the oil discoveries in Nothern Kenya.

He also talked Citadel's venture in farming in Southern Sudan and S. Sudan's legendary high cost of food ( ) He feels that the biggest problem in farming in SSA is financial intermediation. Banks not to keen on financing farming and that transportation also a problem.He went on ahead to criticize banks and capital markets not helping in financing the economies of  SSA. Banks are too keen in financing Real estate which is not not a very productive sector and enjoy obscene interest rates spreads are too high.

His advise to foreign investors seeking to invest in Africa-never go in on your own. Go in with locals.

With that , another insightful midspeak session was brought to a close.