Home

How to place your start-up in top place to attract private equity funds

It is time for SMEs to court private investors.
It is time for SMEs to court private investors. PHOTO | FILE 

Risks notwithstanding, sub-Saharan Africa has taken off economically.

Most countries have registered a growth rate of six per cent over the last five years. With the growth, more private equity funds are now expanding their portfolios by dedicating more capital to emerging and frontier markets.

What is a private equity? Private equity (PE) comprises investors and funds that make investments directly in private companies or buy out firms. Capital injected into the companies can be used to fund new projects, expansion of markets or making acquisitions.

Investors are often willing to commit large sums of money for an average of five to seven years. Thereafter, private equity funds exit the companies by either selling or going for an initial public offering (IPO), expecting a good return on investment.

According to a survey by Deloitte on East Africa private equity, PE funds invested three times as much in sub-Saharan Africa in 2013 as they did in 2012.

Recently, the Abraaj Group closed their third sub-Saharan Africa fund at $990 million (Sh94 billion). This signals the increasing confidence in private equities in Africa.

The high risks attributed to African economies are providing higher returns as a trade-off. But, the key question is, with all the money available who is reaching out for it? Are small and medium companies aware of the opportunities on hand?

In Kenya, the main sectors that attract private equity investors are healthcare, real estate, retail, agribusiness and education. But, this doesn’t entirely limit any small business owners from attracting funding.

PE funds seek to inject money into businesses with high a growth rate trajectory or distressed companies in the hope of selling them after turnaround.

Majority of PE funds will not invest in start-ups. Have you ever heard or watched Shark Tank? It’s a television show where individuals pitch ideas to investors in the hope of getting funding to expand their businesses.

You will note that individuals who come to the show at the very early stages are often declined based on “it’s too early to invest. I don’t see how and when I will make my money back”.

Hence, investors seek potential medium and small enterprises with attractive returns. On average, PE funds seek companies that have been in existence for a minimum of three years.

Small and medium enterprises (SMEs) are often skeptical of bringing on board investors, afraid of ceding control and ownership. However, they forget the added value of having an investor on board.

Again, why would one invest in a business and not have any influence over it? It gets down to the reasons why you need funding and how you structure your deal. Seek professional advice from your financial advisors, lawyers or accountants where you deem necessary.

One good example of how PE funding has changed a company is Nairobi Java House. In 2012, Emerging Capital Partners (ECP), a PE fund, invested an undisclosed amount of money in Java House.

Today, Java seems to be in every corner of town. ECP has since helped build Planet Yogurt, a group of frozen yogurt outlets. In 2014, Leapfrog Investments, a PE firm with focus on Africa and Asia, invested Sh1.68 billion to gain control of Kenya’s Resolution Insurance to tap into the growth of health coverage.

And, most recently, Fanisi Capital, a PE firm in Kenya, invested Sh195 million in a mid-sized food distribution and processing firm that sells pizzas, berries and fresh juice. These are just a few deals to enlighten SMEs on the impact of capital injection by bringing an investor on board.

Some of the challenges PE funds face are that a majority of SMEs are family owned and are often unwilling to relinquish control. Managers are unwilling to create room for newcomers. Most often you will find growth and good returns within these businesses.

In addition, when PE funds invest in your business they require an exit strategy after several years. Local partners are often unwilling to sell their business or go public and hence it becomes challenging for a PE to invest.

Today, the Growth Enterprise Market Segment at the Nairobi Securities Exchange that was launched in 2013 has listed a few companies. This will make it easier for PE funds to exit companies.

But small business owners or investors may argue, “why buy, build and then sell?” They would rather hold and continue to grow organically. There is no right or wrong answer to this question. It’s a matter of your objectives and goals as an investor or owner.

Are you an SME and ready to get your business to the next level? Private equity may be the solution. Remember, business opportunities are like buses - there’s always another coming.

Waweru is a financial advisor at Anchorage Limited.