State of Play in East African Private Equity
Monday, 12 March 2012
The Africa Assets/Deloitte East Africa Private Equity Confidence Survey 2012 maps out investment trends in 2011 and the industry’s expectations for the region. In this article, we publish some of the highlights.  

Capital for Africa
Prospects for East Africa as a PE destination are promising. The continent experienced a significant influx of private equity interest in 2011. According to our data, private equity funds completed 66 deals across sub-Saharan Africa worth USD3.02bn in 2011. Private equity funds signed 20 deals in East Africa, representing a total investment of USD188m. The largest amount of capital deployed in East Africa in 2011 went through two investment rounds to Citadel Capital’s Rift Valley Railways (RVR), which operates the railway concession from Kenya’s Mombasa seaport to Uganda.

Target Sectors
The Rift Valley Railway investments put infrastructure at the top of the list of sectors attracting private equity capital, but funds also focused on telecommunications, financial services and health care: all sectors that have shown strong performance across East Africa, driven by the region’s growing consumer class.

New East Africa-focused funds are targeting high-growth small and medium enterprises in consumer-driven sectors. General partners with wider African mandates are also moving into the sub-region. These funds are active across infrastructure, real estate, health care, agribusiness and green energy, in addition to consumer-driven sectors. Venture capital (VC) funding is still scarce, but with the help of incubators, Kenya has begun to stand out as an ICT hub, which will help to attract more interest from local and international VC firms.

Country Focus
Most of the investments made in 2011, i.e. 15 out of 20, were in the form of growth capital, and many of these deals were regional growth plays driven by growing middle class demand. And the bulk of East Africa investments, 12 out of 20, still went to Kenya, the region’s most mature and diversified economy.

Transaction Sizes
Small transactions dominated deal making in 2011, and the majority of the new funds launched in the region target small and medium enterprises. It is therefore not surprising to see that 89% of respondents focus on transactions of less than USD20m, and that half expect transaction size to remain the same.

More Deals

Nearly 80% of GPs who took part in the survey expect private equity activity to increase in East Africa over the coming year. Many new funds have moved into East Africa in recent years, reflected by the shift towards spending time on new investments in 2012. We anticipate seeing more activity in the market in the coming 12 to 18 months. Will there be a sufficient number of qualified assets for the increasing competition between funds?

Many investors see East Africa’s strong growth trajectory as a driver of better investment performance than in South Africa: This is a huge shift in private equity attitudes toward Africa, which have been historically focused on South Africa. This will also make fundraising easier: More and more investors are looking for exposure to Africa’s growth story. Just under half of survey respondents expect East Africa’s fundraising environment to improve. The industry is also keen to see more involvement from local institutional investors.

Who Invests?

A look at all 53 GPs that invest in the region, whether through East Africa-focused funds or funds that include East Africa as part of a larger mandate, reveals a relatively diverse landscape: Larger GPs such as Citadel Capital and Actis manage infrastructure and real estate projects. Kaizen Venture Partners targets distressed turnaround assets. The recently closed USD105m Aureos Africa Health Fund has made three out of its first four investments in Kenya. Several agribusiness funds are also active in the region, and green energy has emerged as a new trend in sector-focused funds.

While some GPs such as Actis and Aureos have been active in East Africa for many years, much of the region’s recent activity has focused on raising new funds and investments. This explains to some extent why we saw very few exits completed in 2011. Many investors have also held off on sales and public listings due to high inflation, exchange control risks and a bear run at the Nairobi Securities Exchange (NSE). But nearly 65% of respondents expect East Africa’s exit environment to improve over the next 18 months.

And the Challenges?

Private equity parties do not seem worried about deal flow or available funding, but are more concerned with macro factors, human capital deficiencies and lack of sophistication amongst portfolio companies. Transparency and corporate governance are also clearly marked as areas in need of more attention going forward.

For the full survey, follow this link:

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