Enterprise Explains: Venture debt. Venture capital — where investors provide funding to small businesses with long-term growth potential, in exchange for equity — has become a core component of startup financing. VC is actually a subset of private equity, although the two types of investment differ substantially. And it’s booming, with global VC investment exceeding USD 675 bn in 2021. But venture debt — or, as Bloomberg puts it, VC’s lesser-known “baby cousin” — is also seeing soaring growth.So what is venture debt, exactly? It’s a kind of loan offered by banks and nonbank lenders that typically combines the traditional features of a loan with some aspects of VC financing. It’s designed specifically for early-stage, high-growth companies that may not yet be in the black, but are performing well and generating strong revenues. It’s not generally available to seed-stage companies, but is “designed for companies that prioritize growth over profitability,” a Silicon Valley Bank explainer notes.It’s important to understand that venture debt doesn’t replace VC investment. It complements it: “Venture debt really piggybacks on venture capital,” says Alex Baluta, CEO of alternative asset investor Flow Capital. It’s debt that supports the equity and serves as a bridge for high-growth, venture funded companies — to their next funding round, IPO or sale, he adds. Companies without VC investors face significant difficulties in attracting any venture debt, says SVB. “The venture lender wants to follow in the shoes of investors they know and trust, rather than risk lending to a company without venture backing,” it adds.What’s the big advantage of this kind of financing? It’s non-dilutive: For business founders, venture debt provides growth capital with minimal equity dilution. Founders get relatively fast access to a predetermined amount of capital, without having to give up another big chunk of equity. This can fuel growth, so borrowing companies could achieve a higher valuation before their next VC funding round. Venture debt investors usually have a hands-off approach as well, and generally don’t require board seats, says VC firm Emergence Capital.Plus, venture debt is more flexible than traditional bank debt. And it’s becoming more and more creative in the types of loans offered, says Baluta. “Some [investors] will do it based on your ad spend; some offer short-term loans, or perpetual loans.” Recurring revenue loans might be provided to companies with a regular, expected income; product-based loans often center around particular technology, which the borrowing company has developed and is trying to sell; and equipment financing is secured by the equipment owned by borrowers, Bloomberg notes.The size of loans can vary considerably: Industry leader Silicon Valley Bank issues venture debt loans as big as USD 30-40 mn, while Flow Capital — a smaller operation — tends to stick within the USD 1-5 mn range, says Baluta. Loan types and sizes vary significantly based on the scale of the borrowing business, the quality and quantity of equity it’s already raised, and its objective for raising venture debt, notes SVB. The principal amount of debt is often around 30% of the total funds raised in the last round of equity financing, according to an explainer by online platform Corporate Finance Institute.How are they structured? Venture debt usually incorporates three elements, notes UK-based asset manager BOOST&Co. These are a fee of 1-2% of the approved loan amount, an annual interest rate of 10-12%, and an equity kicker worth 10-20% of the loan. The equity kicker is usually structured as a warrant, giving the lender the right — but no commitment — to purchase a relatively small amount of equity within the borrowing company at a fixed price within a specific period of time. The debt should usually be repaid within three-four years, CFI notes.The global venture debt market is booming: The market for potential venture debt investments based on VC investments stood at some USD 47 bn, as of March 2021, according to Bloomberg. Total venture debt activity grew to roughly USD 25 bn in 2019 from USD 5 bn in 2010, and the boom in special-purpose acquisition vehicles (SPACs) could speed its growth still further, it added. The largest proportion of venture debt is funneled into tech companies, which borrowed some USD 18 bn in 2020, according to data company Pitchbook.And in MENA, appetite for the funding mechanism also appears high: Some 80% of investors and startups surveyed by Magnitt and Shuaa for their recently released MENA Venture Debt Sentiment Report (pdf) plan to use venture debt as a funding tool in the near future. 74% of investors had at least one portfolio company that had previously raised venture debt. And some 31% of the startup founders surveyed had raised venture debt to finance their startups. 40 investors were interviewed for the survey — 30% of whom were from the UAE, 20% from KSA, 23% from the rest of MENA, and 27% from other parts of the world. 70 startups were surveyed — 52% in the UAE, 19% from KSA, 9% from Egypt, and 26% from the rest of MENA.

Ceramic manufacturers have secured easier repayment terms for natural gas debts after the Oil Ministry agreed to let them pay over 10 years at 7% interest, the local press reports. The Egyptian Federation of Investors Associations has been lobbying the ministry to offer companies better terms and originally wanted a 15-year repayment period.Two pieces of oil and gas news for you this morning: SDX Energy finally struck gas at its South Disouq concession in December and estimates to have found 24 bcf of gas at the exploration well, the company said yesterday. Meanwhile, United Oil and Gas has kicked off its first drilling campaign in Egypt this year with its ASH 3 development well at its Abu Sennan concession, it said in a statement. The oil well is expected to be cleared for production in two months time once testing and drilling is complete.Other things we’re keeping an eye on: Sarwa Life Ins. Company has launched (pdf) its first fixed-income investment fund. It will be managed by Misr Capital and will invest in treasury bills, corporate bonds, sukuk, central bank certificates and repurchase agreements, and other short-term securities, with tenors of no longer than 150 days.Shuaa Capital is investing in music streaming service Anghami, as the fund directs its portfolio towards technology and services.Egypt Ventures invested EGP 104 mn last year in startups and accelerators.

REGULATION WATCH- Bourse enables ETF market makers to place orders without a minimum amount: The EGX has scrapped regulatory requirements for minimum order quantities for investments in exchange-traded funds (ETFs) in a bid to clear the way for smaller players to invest in the asset class, according to an emailed statement (pdf). The minimum was previously set at EGP 14k.

The Financial Regulatory Authority has granted short selling licenses to 51 brokerage firms, an unnamed FRA official tells Reuters. We know from previous news reports that Pharos was among the latest to acquire the license in September, joining a growing list that also includes EFG Hermes, CI Capital, Prime Holdings, HC Securities, Cairo Capital Securities, Shuaa Securities, Arqaam, the Arab African International Securities, and Premiere Securities. Short selling could officially be introduced to the EGX as early as next month.

Headline inflation falls to six-and-a-half year low in August, confounding expectations: Egypt’s annual headline inflation rate fell to 7.5% in August from 8.7% in July, a low not seen January 2013, official data showed yesterday. Figures released by Capmas showed that monthly inflation slowed to 0.7% last month from 1.8% in July, driven in part by a slowdown in fruit and vegetable prices. Central bank data, meanwhile, showed that annual core inflation fell to 4.9% in August from 5.9% in July. On a monthly basis, core prices saw mild deflation, falling to -0.4% compared to 0.1% growth in July. Inflation was widely expected to rise in the summer months after the government raised fuel prices by between 16-30% in July. Bloomberg and Reuters also have the story. Headline vs. core: Headline inflation accounts for a basket of goods and services in an economy while core inflation removes volatile products such as food and fuel. A favorable base effect is being touted by analysts to explain the surprising figures: Esraa Ahmed, senior economist at Shuaa Securities, wrote in a note that the drop is “highly attributed” to the favorable base effect, as well as slowing fruit and vegetable price inflation. Jean-Michel Saliba, economist at Bank of America Merrill Lynch, also said the positive figures were due to the base effect. Inflation in August 2018 came in at 14.2%. Analysts across the board had predicted a rise in inflation following fuel subsidy cuts: Inflation over the past two months has defied analyst expectations, who predicted that the effects of lifting fuel and electricity subsidies would push figures higher into double digits. Beltone’s Alia Mamdouh predicted in July an average inflation rate of 13.8% in the months following the subsidy cuts, while Pharos forecast in May 14% inflation through the summer months. All of this puts us odds-on for a rate cut this month: Capital Economics is forecasting the central bank to cut rates for the second consecutive month, suggesting in a note yesterday that the Monetary Policy Committee would cut the overnight deposit rate by 50 bps to 13.75% when it meets on 26 September. “August’s inflation, coupled with shift towards looser monetary policy elsewhere, means that the MPC won’t hesitate in lowering interest rates again at this month’s meeting,” it wrote in a note. Radwa El Swaify, head of research at Pharos Securities, told us she expects the MPC to be more aggressive. She forecasts a 100-150 bps rate cut, putting the overnight deposit rate at either 13.25% or 12.75%. Egypt’s rate cuts in 2019 and 2020 could be the second-deepest in emerging markets after Turkey, Bloomberg also cited BNP Paribas as saying. The CBE last month cut rates by 150 bps, bringing the overnight deposit and lending rates to 14.25% and 15.25% respectively. The main operation and deposit rates were both cut to 14.75%. Thinking long-term: Pharos sees little chance of inflation rising back into double digits this year, and predicts an average inflation rate of 9.1% for the rest of 2019 and 9.2% for the remainder of the current fiscal year. Capital Economics sees the central bank pushing ahead with an extended easing cycle, bringing interest rates down to 9.75% by the end of 2021.

Egypt’s inverted yield curve: The financial press last month was awash with commentary on the brief inversions of the 2-year 10-year US treasury yield curve. Here in Egypt, the yield curve has been inverted since the EGP float in November 2016. But in contrast to the prophecies of doom we’ve come to expect in the US, nobody in Egypt so much as bats an eyelid at the fact that the yield on Egyptian 10-year treasuries is currently almost 140 bps below that on 2-years. We could put this down to normalization, but in the immediate aftermath of the currency float Bloomberg was describing the inversion as a “welcome signal” from the bond market that “vindicates Egypt’s decision” to devalue the EGP. An inverted yield curve isn’t necessarily a bad thing: Shuaa Securities’ Esraa Ahmed wrote yesterday that the inverted curve “conveys a positive perception” among bond traders of the inflationary trend and the central bank’s accommodative monetary policy. It reflects market expectations for continued easing, a path that signifies the central bank’s growing confidence in the economy. Yields are on a downward trend: Rates have fallen more than 300 bps across the board since the beginning of the year as foreign investors piled into Egyptian debt. Unexpectedly low inflation readings and the appreciating EGP have also contributed to the strong downward pressure on yields, Ahmed says. But the curve is unlikely to flatten anytime soon: It may be a while before yields on long-term bonds normalize and rise above short-term treasuries. The curve has actually steepened since the CBE cut rates last month: In the first auctions after the 150 bps rate cut, yields on 10-year bonds fell further than rates on short-term t-bills. The government is taking action to try to hold down short-term yields by limiting its t-bill issuances and intends to shift its focus towards bonds with longer maturities.

A warning to real estate developers: Increasing property prices in response to rising fuel costs risks weakening demand and hitting sales, Sara Maher, equity analyst at Shuaa Securities, wrote in a note. The impact of the subsidy cuts is already reducing consumer purchasing power, and passing the added cost burden of developers onto prospective homebuyers will only make it more challenging for low and medium earners to afford property. Having said that: Buyers in the upper echelons of the pay scale will be less affected by the rising cost of living, and are unlikely to be swayed should property prices increase. Developers are unlikely to see their input costs rise: The decline in steel and cement prices over the past year will help to soften the blow of higher fuel costs, making it unlikely that developers raise their prices, Maher wrote. However, some companies have said that they will wait to assess how the subsidy cuts will affect their costs before making a decision about pricing. Watch prices in new developments: Although Shuaa is confident that developers will ultimately not want to risk raising prices, it believes that any increases will be applied to new projects and phases. Sales in the primary market will “most definitely” fall if this happens, Maher says, and smaller companies may eventually be forced to shut up shop.

Egypt’s equities are attractively priced compared to current global averages and relative to their own historical averages, Shuaa Securities’ Ahmed Abdelnaby suggests in a research note (pdf). According to Abdelnaby, equities on the benchmark EGX30 index are the third-cheapest in the Arab world, and the sixth-cheapest globally. Across MENA, Egypt leads the pack both in terms of earnings with a compounded annual growth rate of 34% in 2018-2021, and has the highest return on equity in the region at 31%. Internal and external macro conditions are undermining performance: “Egypt equities have recently been undermined by (1) a slower pace of further interest rate cuts by the CBE, (2) strong EGP vis-à-vis USD, (3) money migration from existing emerging markets globally and locally to Saudi Arabia and Argentina which were recently upgraded to emerging markets status by global index provider MSCI and index compiler FTSE, and (4) a wave of margin calls,” Abdelnaby writes.

Inflation is driving the conversation on the economy today after news that annual headline inflation rose to 14.1% in May from 13% in April, dampening hopes for an interest rate cut. With fuel and electricity subsidy cuts expected by the end of the month, most research houses are calling an inflationary spike in 3Q2019 followed by a cooldown in 4Q2019.How much of a spike can we expect? Beltone’s Alia Mamdouh expects a 2.5-3.5 ppt increase in annual headline inflation throughout 3Q2019 driven by subsidy cuts. Beltone’s research note is here (pdf) if you’d like to dig deeper.Shuaa’s Esraa Ahmed expects inflation to peak at 16% early in the third quarter, which starts in July. A gentler rate of increase on electricity prices than last year and current oil prices will help mitigate the inflationary bite, Ahmed suggests. Shuaa’s note is here (pdf).Pharos’s Sandy Eskaros, meanwhile, is a bit more optimistic, suggesting inflation will hover around 14% in the period running June through August. Pharos is revising its inflation forecast for 2019 upward, noting that it expects average inflation in 2019 of 12.8%, up from an initial expectation of 12.4%.EFG Hermes’s Mohamed Abu Basha and Mostafa El Bakly wrote yesterday that the “outturn [in May] came below our forecast of 15%” and noted that while it was up, inflation “recorded one of its lowest increases in the past few years, considering the Ramadan seasonality.” They see inflation at just 10-11% by end-2019 and predict coming subsidy cuts will have a muted impact: The cuts will “likely be half or less than the 40% average increase of last year” thanks to the appreciation of the EGP and a decline in oil prices. Lest you had a doubt, don’t expect the central bank to cut interest rates before fall. Such is the clear consensus among analysts, who differ only on the finer details.Pharos’s Eskaros is calling 100-200bps of rate cuts in the fourth quarter, while over at EFG, Abu Basha and El Bakly write that, “policy rates are set for a 100-200bps of rate cuts in 2H19, starting with September at the earliest. We foresee another 200-300bps of rate cuts in 2020 as inflation normalises further.” Expect lots and lots of news on the legislative front from now until the end of this month and maybe into July. Why? The House is getting angsty about summer recess: Like procrastinating college students trying to get their papers in before summer vacation, our elected representatives are rushing to push through new bills and amendments to existing legislation before they hit the beach in Sahel.Lots of business-relevant legislation came up for discussion yesterday, among them the stamp tax, the Investment Act, the Capital Markets Act, as well as pensions increases. We have chapter and verse in this morning’s Speed Round, below. The next hot item for the House will be the FY2019-2020 budget. Look for plenty of news from House committees next week before the general assembly reconvenes on 22 June.The earliest the House can recess is 1 July (each session lasts a minimum of nine months) and MPs are constitutionally required to be back in their seats by the first Thursday in October for the fall session. Among the events you may want to mark on your calendars before you head off for summer break: Our friends at Pharos are holding their annual investor conference (pdf) in Hurghada this month from 19-20 June;President Abdel Fattah El Sisi is expected to attend US-Africa Business summit in Mozambique, which runs from 18-21 June;Middle East and Africa Rail Show will take place at the Egypt International Exhibition Center, Nasr City on 16-18 June;Seamless North Africa will be held at the Nile Ritz-Carlton on 17-18 June;Cairo Technology Week will run next week at the Hilton Heliopolis on 17-19 June. Egypt is definitely attending the Trump-Kushner Palestine economic summit in Bahrainlater this month. OK, so we pretty much knew this already, but now we have official confirmation courtesy of US officials. Reuters has more on the gathering, slated to run 25-26 June. The G20 summit will take place in Japan on 28-29 June. Not Egypt-specific, but worth breaking out the popcorn to observe from afar — and fear how markets will react. Are we seeing an economic recovery in the UAE and Saudi? The May purchasing managers’ index for both Saudi Arabia and the UAE showed each of the major Gulf players moving toward economic recovery. The UAE posted its highest reading (pdf) since October 2014 at 59.4, and Saudi its highest (pdf) since December 2017 at 57.3. Increases in oil prices and regional demand appear to be benefiting the private sector in both countries, but haven’t yet translated into more jobs or higher wages.We’re getting pwned by the GCC on the PMI: As we noted yesterday, Egypt’s non-oil business activity contracted in May after having expanded the previous month for the first time since August 2018. The latest purchasing managers’ index fell to 48.2, down from 50.8 in April. *** PSA- Speaking of which: The sadly indispensable website Have I Been Pwned is now for sale, its creator wrote yesterday. Have you never used Have I Been Pwned? Go run your email address through it now. Passive funds are suckers for the Tadawul: Fresh off its inclusion in the MSCI and FTSE Russell EM equity indices, Saudi Arabia could soon overtake India as the biggest receiver of inflows into exchange-traded funds, Bloomberg says. The largest Tadawul ETF saw almost USD 910 mn of net inflows in May alone, pushing total ETF inflows into Saudi equities to USD 2.2 bn as of yesterday (compared to India’s USD 2.5 bn). Investor relations directors (in the US) will have one less ESG survey to fill out after Paul Tudor Jones’ Just Capital agreed to use “metrics developed by the Coalition for Inclusive Capitalism in its rankings, which gauge US companies by the issues that Americans tell pollsters they care about more than shareholder returns,” the Financial Times reports. Our call for the next big business in ESG: The scramble to become The One Provider of Meaningful Certification to the investing community. ** Sign of the times: Extreme weather sends energy demand growth to a nine-year high, setting the stage for more climate change and … more energy demand. Go read the story in the Financial Times and then dig much deeper in BP’s Statistical Review of World Energy for 2019 (pdf), out now. International headlines worth knowing about this morning: Ebola has crossed from Congo into Uganda, marking what the FT calls a “significant escalation” of the epidemic. The story isn’t on the front pages yet, but it’s all over the global press, so watch this space. (Reuters | NYT | BBC)Next up on the conveyor belt of tech IPOs: Revenues at Slack will grow by up to 50% this year, the company projected on Monday as it prepares to debut on the NYSE later this month. (WSJ)Which UK Conservative minister will be next to sacrifice themselves on the altar of Brexit? The final 10 candidates competing to become the next Tory leader (and UK prime minister) have been announced. The BBC has all you need to know about the final 10 candidates. Some miscellany to help your morning commute pass just a little bit faster today: For photographers and gear nerds alike, Matthew Piers Robertson’s blog is great — and his list headlined Unsolicited Advice is not only photography advice, its good life advice, too.“The next big thing in fashion? Not washing your clothes” in Fast Company just made us … shudder, and not in a good way.Adam Savage (the one from Mythbusters with hair, but no beret) is back with a new show and a book. True nerds like us will enjoy this interview with the Wall Street Journal.

ANALYSIS- The question on everyone’s lips as we ponder the kickoff of budget season at most companies after the summer break: Where is the EGP heading? The EGP has been on a good run this year, appreciating by about 7% YTD against the USD to 16.7917. But this isn’t set to last: analysts polled by Enterprise predict that a period of depreciation will set in later this year, although few are speculating on a specific FX rate at the moment.It’s a matter of seasonality, says Mohamed Abu Basha, head of macroeconomic analysis at EFG Hermes. “We might see some additional appreciation in the coming months due to seasonal conditions of low demand during the summer. But seasonality won’t be as supportive to the EGP in 4Q when demand for FX typically picks up ahead of the new year and when foreign investors look to repatriate profits,” he noted. He said the appreciation in the past couple of months was backed by low demand for FX rather than foreign inflows into debt. Have we hit peak EGP? HC’s Sara Saada thinks the EGP's rise has peaked at both the carry trade and remittance levels. The EGP should stabilize for a while before it begins to gradually depreciate by the end of the year — “especially if there is an easing in interest rates that would spark profit-taking by investors.” How far could the pound fall later this year? Barring a dramatic pick-up in external headwinds, FX volatility should remain low and any EGP depreciation will occur at a gradual rate. Pharos’ Head of Research Radwa Elswaify told us that we can expect the EGP/USD rate to hover between 16.50 and 17.50 through the end of 2019 depending on inflows and appetite for Egyptian debt. Could we go back down to EGP 18 per USD? Capital Economics has predicted that the EGP will fall by around 7% to EGP 18 by the end of 2019. Higher-than-expected inflation in some of Egypt’s key trading partners will increase the likelihood of a devaluation to maintain the currency’s competitiveness. This was not so far off from what analysts were saying a few months ago: EFG Hermes said in March that the EGP would hover between 17.45 and 18.00 to the greenback throughout the year, taking into consideration that the attractiveness of the EGP carry trade will diminish if the currency appreciates by more than 4-5%. The firm had predicted that the currency would stabilize at 17.10 in the short term with increased volatility in 2H19 when investors are more likely to repatriate profits. Shuaa Securities Egypt, meanwhile, said last month that the currency could slide back to the high EGP 17 range after the government makes further cuts to fuel and electricity subsidies next month. Why has the EGP been appreciating? Some analysts have cited increased inflows from portfolio investors as the main reason for the appreciation in addition to a reduced imports bill and increased tourism receipts. Shuaa points to many of the same factors. Unnamed bankers speaking to Reuters earlier this year speculated about whether the CBE was manipulating the currency.

Shuaa Securities Egypt is expanding its research and analytics task force to provide its clients with “more in-depth analysis of market intelligence and trends,” according to an emailed statement (pdf). “Shuaa Securities - Egypt and Shuaa Capital psc will be publishing a series of company- and sector- specific research during 2019, aimed at offering our discerning clientele a 360-degree approach to investments. Indeed, expanding research coverage is key to Shuaa’s brokerage business to complement its offerings in the MENA region,” the firm said.

EARNINGS WATCH- AMOC earnings tank in 2Q2018-19: Alexandria Mineral Oils Company’s (AMOC) net profits fell 93% y-o-y to EGP 25 mn during 2Q2018-19, making it the company’s worst quarter in a decade, according to Shuaa Securities (pdf), which noted that the state company’s profits fell 90% below expectation. Company revenues were up 35% y-o-y to EGP 3.7 bn.What now for the IPO? While Shuaa offers no comment on the impact this would have on AMOC’s planned listing of a 20% stake as part of the state privatization program,AMOC shareholders decided earlier this month to hold off on the float until the company returns to profitability. The government is currently deliberating whether to offer AMOC during the second wave of companies or withdraw it from the privatization program completely.

CI Capital and Shuaa Securities Egypt want to become market makers: CI Capital Securities Brokerage and Shuaa Securities Egypt are in talks with the Egyptian Exchange to become market makers, according to local press reports. Brokerage firms are standing in line for the market maker license after the EGX issued its regulations earlier this month. Under the regulations, brokerages are required to receive approval from the Financial Regulatory Authority (FRA) to act as market makers, after which they must register with the EGX before carrying out any transactions.