Ratio Blog: New Kid on the (Private Equity) Block

Wednesday, 20 January 2010

Citadel Capital’s first deal in East Africa, a stake in one of the RVR consortium partners, set them on a collision course with Kenya’s best-connected private equity firm – a smart move? Andrea’s weekly column for the (Nairobi) Star. It was certainly an interesting entrance: My colleague Rachel likened it to the new kid on the block throwing a quick glance across the playground to figure out who the leader is  -and then walking up to him to punch him on the nose in a quick pre-emptive strike. Rather than host a polite cocktail, Citadel Capital marked their arrival in the East African market rather more controversially by picking up a 48% share in Sheltham, who in turn hold 35% of the Rift Valley Railways (RVR) consortium. This apparently came at the same time as Transcentury, already a consortium member, were negotiating with Sheltham to increase their stake in the venture. Feeling snubbed, the Kenyans had no intention of backing down quietly, and even less of welcoming their Egyptian brothers to East Africa with open arms. Instead, they played the patriotic card that the RVR ownership should stay in Kenyan hands. The governments of Kenya and Uganda set up a new vehicle, the Kenya Uganda Railway Holdings Limited (KURH), and have now given both parties a fortnight to settle their differences – and the shareholding in the new entity will apparently depend on each shareholder’s financial contribution. Citadel Capital have already announced that they are ready to invest USD150m in the cash-strapped venture: a crucial input, as the inability to fulfill their financial commitments was amongst the reasons that forced Sheltham to reduce their stake significantly. And because shareholder financing had, so far, fallen short of what had been agreed when the concession had first been signed, development financiers also withheld their promised contribution. No wonder that Uganda – with no attachments to Transcentury – appears to be backing Citadel. Implications? For starters, I’m generally all for competition, but I doubt that a new and prolonged boardroom fight is what RVR needs at the moment. Ever since the concession was signed in 2006, progress has been excruciatingly slow for a whole host of reasons, and squabbles between the shareholders won’t improve this situation. It is a striking contrast between how urgently a functional railway line through Kenya and into its landlocked neighbours is needed – and how badly this has been handled so far. Beyond the much needed rehabilitation of the railway, I had also been curious about Citadel Capital’s strategy in Kenya: Transcentury are, of course, not just any other player in the private equity industry Many Kenyans look up to this former investment group that grew into one of Kenya’s key players and has attracted international funds to manage. A contributing factor in that successful trajectory were Transcentury’s excellent political connections. So it’s intriguing to see that Citadel Capital chose to make their debut in East Africa by ticking off an incredibly well connected competitor, and on top of that in a venture that has the government as a counterpart. In the press releases that followed this little spat, Citadel Capital, who describe themselves as ‘Africa’s largest private equity firm’, spoke of immediate plans to invest USD200-400m in East Africa. In some ways, Citadel’s entry was reminiscent of Renaissance Capital who, Russian-funded, approached the sub-Saharan African market with similar bravado. However, despite the illustrious names on their advisory board, Renaissance Capital have not quite lived up to the initial hype (and, ironically, lost a number of professionals to Equity Bank, in which Transcentury holds a stake). I’m curious to see how Citadel Capital makes that jump from the northern African and Arabic sphere to sub-Saharan Africa. They were a key sponsor in the recent Africa Venture Capital Association (AVCA) conference in their home country, Egypt, in November 2009, and were certainly emphatic about their ‘African’ identity in interviews. Obviously, it shouldn’t really matter where they come from– but at least in Sudan, where they say they have invested USD900m already, their heavy engagement in the north may limit their prospects in the south, given the longstanding animosities between both parts of the country. But irrespective of how Citadel Capital’s engagement in East Africa works out, the private equity industry in Africa is buzzing, and that’s useful for everyone involved. There is vibrant interest in infrastructure investments, an area where GE and Toyota Tshusho Corporation (TTC) are considering opportunities. But investors are also looking beyond infrastructure and extractive industries: Satya Capital, a company founded by former Celtel owner Mo Ibrahim, is finalising an investment in Nakumatt, a now regional supermarket chain. Alongside the rapidly growing opportunities in ICT, this will put the services sector, so far dominated by banking, on the map, and shows that African economies are diversifying and maturing. Watch this space! Republished with kind permission from the (Nairobi) Star.  Share this article with others: