Good luck raising money these days. The era of cheap money has given way to a high-interest-rate environment both globally and at home, making it difficult for venture capital funds to raise money and harder still for startups to tap VCs. The FX crunch, meanwhile, has strategics and private equity players alike looking to keep their dry powder … dry. Who wants to invest today if they think it likely they will tell their investment committee one later that they’re going to have to take a charge post devaluation?

Securing financing and deploying capital are now more difficult — and delicate — for those on all sides of the table. But there continues to be cautious optimism that capital is still out there — and that Egypt could attract a good chunk of it.

We brought together a panel that spoke to the different sides of the coin during the first day of the Enterprise Finance Forum. Joining us were Tarek Assaad, managing partner at Algebra Ventures; Sherif El Kholy, both partner and head of Middle East and Africa Infrastructure and of private equity in MENA at Actis; and Dalia Wahba, CEO of Hassan Allam Utilities (HAU), Hassan Allam Holding’s investment and development arm.

Let’s get one thing clear: There are funding challenges — and conditions out there are tough: “We are in the middle of the worst drought we’ve seen,” said Assaad. “Venture capital firms that once invested in emerging markets have gone away, GCC-based funds have embraced a ‘wait and see position’ and while Egypt-focused funds are still investing, there are fewer funds.” Wahba agreed, noting that, while it’s a natural and common cycle to go through a dip in activity, the current situation “is moving faster than previous cycles.”

A toxic soup of rising interest rates, the FX crunch + a weakened EGP has made it difficult to do business: HAU has seen its engineering and construction projects’ day-to-day costs impacted significantly by the FX crunch, which has affected the availability and cost of imported materials, while the recent devaluations have reduced the number of projects that HAU can undertake outside of Egypt, said Wahba. The economics on projects has changed over the past several months in tandem with the Central Bank of Egypt’s monetary tightening cycle: Interest rates that stood at 11-12% when HAU broke ground on development projects have shot up to north of 20%, Wahba added. “Growth in business has slowed, but the volume of business has not shrunk,” she said.

It’s not just Egypt — macro trends are diminishing risk appetite for emerging markets: Some investors still have appetite for emerging markets, but there’s a lot happening in the macro backdrop that has made risk aversion has been the name of the game for the last 18-24 months, El Kholy said, pointing to the impact of high interest rates in the US (and other developed economies) in the post-covid era alongside Russia’s war in Ukraine. “Additional returns have been overshadowed by the need for averting risk … you’ve seen that manifest itself by the drop in the volume of capital coming into emerging markets.”

There’s still a case for Egypt, but… “Egypt has deep enough fundamentals that there’s still a cast to be made through the cycle to long-term investors, but the operating challenges — and the economic overhang — are chipping away at those fundamentals very strongly,” said El Kholy.

Capital is also still being deployed — in the right niches and at a price. Before writing a ticket, “a sector needs to make sense and there has to be [market] demand. Then you need to look at the capacity of the sector to adjust its pricing and its revenues [in response to market and macro changes],” Wahba said. “There is money in the market but the issue with FX is overpricing and no one wants to overpay,” said Wahba. “The lack of visibility means it is becoming very hard to make decisions. This is the most challenging bit — when the project is there, but you need to find the right price” at which to transact.

The way around the pricing assets conundrum: growth. One of the ways Actis mitigates risk right now is by looking for businesses that are market leaders in defensive sectors, with secular growth trends meaning that they can grow independent of the wider economy.

What do our panelists like? That means physical or social infrastructure projects from water, roads and power to healthcare and education, El Kholy said. Wahba, meanwhile, likes logistics, while Assaad points to agriculture and fintech.

Algebra is actively investing: Algebra has already drawn down from its second fund — which was backed by LPs that include leading development finance institutions (DPIs) — to make five investments, with another two expected to close in the next few weeks and a third in advanced discussions, Assaad said. Algebra is typically interested in later stage companies to allow ticket price growth that attracts investors. “We’ve been through some of these cycles before, so we do see the long term potential,” Assaad said, “but there aren’t very many other investors who are shouldering that sort of a burden.”

At the base of it, taking a long-term approach is key, said Assaad. At some level, pricing doesn’t really matter: As an early stage investor, Algebra could get the pricing wrong, but if the product fit is there, the investing adventure can be forgiven, he said.

So, where’s the capital coming from? Actis counts among its limited partners a range of sovereign wealth funds, public pension retirement systems from the US and Europe, and large family offices, El Kholy said, while adding that there are few challenges to obtain debt financing. Both Actis and HAU look to DFIs for support. Actis also likes DFIs, saying they provide long-term USD debt at the most competitive pricing and tenors, crucial for Actis to continue investing in transactions and providing the capital that’s needed, said El Kholy. DFIs are also comfortable with emerging-market and macro risk, added Wahba, and HAU looks to them to act as a partner for growth capital at a project level.

“There is still a very decent quantum of funding that’s working in Africa,” said Wahba. HAU targets private equity firms to fund its large-scale projects, while for local construction projects in the local market it focuses on debt financing from local banks, she added.

And for startups, the funding crunch is pushing them to show signs of dynamism: The mentality of growth at any cost has disappeared, and that’s yielding a more prudent approach, Assaad said. A small handful of local startups have taken securitization issuances to market, he said. While we’re unlikely to see a huge uptick in the number of startup securitizations, “when that dynamism starts to happen … that also encourages foreign investors to come in and look at companies with a strong local footprint. We’re hoping that this will happen in Egypt. It will take time and there is a gradual experimentation aspect to it.”

Looking forward, investors need to be disciplined and nimble to shift capital allocation in line with today’s difficult idiosyncratic conditions in the market and prepare for future interest in high risk markets, El Kholy said. Egypt may have a slowing pipeline of projects, but investors need to undertake asset selection with care as the pipeline will continue, Wahba agreed. Long-term value must be at the forefront of investors' minds, said Assaad, adding that founders who receive capital now, will not only face less competition in the market, but are likely the most resilient.