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Private Equity in East Africa: Confident Outlook, SME Focus |
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Thursday, 13 January 2011 |
Deloitte’s first East Africa Private Equity Confidence Survey reflects the industry’s optimism about the regional prospects and Kenya’s role as an investment hub.
Regional Attraction
Kenya is a good starting point for private equity firms: Paul Kavuma from Catalyst Principal Partners thinks that many Kenyan corporate leaders have ambitions beyond their domestic market, and private equity can provide the financing to build a regional footprint . The East African Community provides interesting opportunities in sub-Saharan Africa’s private equity industry: its regional integration is progressing, albeit with hiccups, and it has withstood the global financial crisis relatively well, partly because of its vibrant intra-regional trade and strong demand from post-conflict border regions in southern Sudan and eastern DRC. Private equity and some venture capital firms are aware of this and seek a foothold in the EAC, often using Nairobi as their base.
State of Play
In recognition of the investment industry’s growth in the EAC, consulting firm Deloitte carried out the first East Africa Private Equity Confidence Survey in October 2010 to gain a more systematic understanding of what motivates fund managers with respect to the region, and where they see the potential:
- Countries: Investors primarily focus on Kenya, Uganda and Tanzania, although Rwanda is beginning to look like an interesting runner up, and are confident that the East African economic climate will continue to improve. In Uganda, they expect the nascent oil industry to offer more investment opportunities in the supporting industries. Other countries beyond the EAC are mentioned, too, reflecting the fact that Nairobi also acts as a hub for the private equity industry.
- New investments are the primary focus for PE practitioners, with limited exit expectations for the next 12 to 18 months. Activities indicate a shift from fundraising to investing.
- Numerically, more opportunities are available in the SME sector. Large transactions are more limited, although privatisations and infrastructure deals may offer some larger deals.
- Fund sizes also show this: One third have a fund size of up to USD20m, and another third of the respondents manage funds between USD20m to USD50m. Only 7% are above USD200m.
- Deal size: Again reflecting the opportunities in the East African Community, 53% of investments are expected to remain below USD6m. This also limits the involvement of global private equity players.
- In line with their overall positive market outlook, respondents anticipate increased private equity market activity combined with increasing size of transactions and also expect increased access to debt finance available for transactions.
- Sectors: Private equity firms pursue a broad range of sectors and industries, with a slight lead in tangible activities in fast-moving consumer goods (FMCG) and agribusiness, followed by services, financial and support.
- Exits are still a concern in sub-Saharan Africa’s private equity industry. Although Kenya has one of the oldest and largest stock exchanges on the continent, 42%of respondents anticipate the dominant exit route to be a sale to a strategic investor in the next 18 months. Only 16% foresee IPOs, whereas 21% do not expect any exists. 16% are looking towards a secondary to private equity – as Deloitte point out, these have been uncommon in East Africa.
- Challenges: Industry members cite human capital deficiencies, governance concerns and lack of sophistication, and limited understanding and acceptance of private equity as the major challenges. Specifically regarding governance, their major concern was the lack of distinction between managers and owners: Often PE firms target family businesses seeking to expand and mature, and the existing corporate culture might find the transition to governance mechanisms as demanded by private equity investors difficult.
Perspectives
Private equity is generally showing more interest in sub-Saharan Africa and, at the same time, the public sector is paying more attention to it as a possible vehicle for development interventions. As a consequence, much of the funds flowing into the continent are still not purely commercial, but often mixed with soft funds from development finance institutions and foundations that pursue an ‘entrepreneurial philanthropy’.
The private equity industry is not new to Kenya: Centum (formerly ICDCI) and also Trans Century, the latter having grown out of a private investment club, are well established firms. Centum is listed on the Nairobi Stock Exchange (NSE). The more recent change in Kenya – as elsewhere – is the entry of specifically SME-focused funds, supported by soft capital.
Deloitte anticipate that the range of deal sizes may change: ‘as these investee companies grow, so may the size of transactions over time.’ Several planned infrastructure projects could also attract interest from larger players – Egyptian Citadel Capital were a recent entrant with their investment in the Rift Valley Railways consortium.
SME funds have been relatively unaffected by the global financial crisis (Kenya: SME Private Equity Undeterred by Global Crisis), but even in the SME market, competition is still uneven: Eline Blaauboer from TBL Mirror Fund notes that the majority of funds focuses on the ‘non-risky deals between USD2m and USD5m. The only ones that are looking at deals below this bracket and in riskier, earlier stages are Fanisi and us, and we are both turning away deals because they are too many.’
For more information on the survey, contact Alexander van Schie, Director/Corporate Finance Leader at Deloitte East Africa .
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