Ideas & Debate

How to keep investment interest in Kenya growing

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Two Rivers, a mall under construction on the Northern Bypass and Limuru Road in Nairobi. PHOTO | SALATON NJAU

Kenya has in the past few years seen a big increase in investment activity and deal interest, particularly from Europe, most notably the United Kingdom, and the United States.

There has also been an increase in investment activity from India and the Middle East in the manufacturing sector. South African firms are growing more aggressive in their expansion plans into the continent, using Kenya as a gateway to East Africa.  

Kenya, which is East Africa’s largest economy, has long been the preferred entry point for investors looking for deals in the region.

Kenya not only facilitates access to the common market that includes Burundi, Rwanda, Tanzania, and Uganda but also provides easier access to Ethiopia, the Democratic Republic of Congo and South Sudan.

Recently, Mauritius Union Assurance Group’s purchase of a controlling stake in Phoenix of East Africa Insurance Group was done through Kenya but resulted in an entry by Mauritius Union into other East African markets. 

With a growing middle class and the availability of skilled labour, the Kenyan market is seen to be mature with number of good opportunities available.

Companies in Kenya are well respected in terms of the scale of their businesses and ability to compete. The financial and telecommunications sectors are robust and very sophisticated.

Transport infrastructure and links to the main centres are fairly good and the country has a very stable and mature financial services sector. In addition, the ready availability of specialist advisers to guide the deal process is a major factor working in the country’s favour. 

Certain sectors are very active in Kenya in the private equity and mergers and acquisitions space at present, namely fast moving consumer goods (FMCG), financial services — especially banks, microfinance companies and insurance companies — and manufacturing. 

The real estate and energy sectors have also seen significant activity.

Old Mutual Property has, for instance, been advised on all legal aspects of their investment in the Two Rivers Mall, including due diligence, transaction structure, negotiations with the counterparties and regulatory matters by a local firm.

UK-based Old Mutual invested Sh6.4 billion in the holding company of Centum’s Two Rivers Mall, giving it an equivalent 50 per cent stake in the firm. 

The activity in the real estate sector is partly because Kenya’s rising middle class is expressing a clear preference for good quality commercial and retail property and also because the demand for quality commercial and retail property is being fuelled by the rising number of international companies setting up a presence in Kenya. 

The FMCG interest is also driven by the rise in Kenya’s middle class. According to the Standard Chartered Emerging Affluence Report issued in October 2015, 72 per cent of Kenyans expect to experience an increase in household disposable income in the next 12 months.

According to the report, the top three spending priorities are children’s education, household products and property. 

The reality, however, is that the real estate sector might experience a slight downturn because of oversupply in the market. In addition, the banking sector is probably going to experience some degree of turbulence.

With the recent financial market volatility and one major bank having been liquidated, tighter regulation and some fallout in this sector is to be expected.

The negative effect is likely to be felt by the smaller banks in particular and may result in some consolidation among them. 

While there is a limited amount of activity in the healthcare sector at present, there is also a notable increase in demand for private healthcare clinics and pharmaceutical products. This means that we are likely to see more deals in this sector in the months to come.  

Sectors showing a slowdown in mergers and acquisitions (M&A) activity include the natural resources sector, especially oil and gas, as well as mining infrastructure.

The serious slowdown in this sector is also affecting those involved in exploration, as well construction companies supporting these sectors. 

The regulation around competition law and the recent massive overhaul of Kenya’s legislative framework has deterred some investors. However, most of those chasing a good deal are willing to work around complex regulations in order to get the opportunities.

In late 2015, the Attorney- General began to bring into operation provisions of the new Companies Act. The law is heavily based on the principles of English company statute law and the common law, as handed down through judge-made decisions of the courts. The new Act preserves this heritage in the English system.

However, the sheer scale of the legislation will have the effect of making statutory provisions out of former common law doctrines such as directors’ common law and equitable duties, rights of shareholders to protections against unfair actions of directors and controlling shareholders, offences of fraudulent trading and many others. 

It is important to be assured that the new Act will not annul or invalidate the actions, rights and powers of existing companies incorporated in or already registered in Kenya.

There will not be an overnight need to re-register or re-write the rules.  We have yet to see a successful public private partnership (PPP) in the Kenyan market.

There have been hybrid deals but the government has not made its approach to PPP clear and may lack the technical capacity and financial resources needed to be a successful PPP partner.

The government announced a significant number PPP projects when it came to power three years ago, but we have not seen much activity at all in this regard since then.

Not all deals are successful and large M&A deals tend to fail because of macro shocks that can happen at any stage during a deal’s lifespan.

Fluctuations in Kenya’s exchange rate (albeit such fluctuation has been relatively mild compared to other African countries), for example, can make investors nervous. They also tend to shy away from corruption, which is a problem in this jurisdiction.

We also sometimes see high expectations in terms of the seller because there is so much interest in the country from an investment point of view, and this leads to unrealistic valuations. We are seeing changes here, however, as both buyers and sellers become more realistic.

M&A and private equity investors can mitigate their transaction risks by structuring their deals correctly; consulting local legal, tax and competition law advisers; having a policy in place to identify and swiftly deal with corruption; and planning their exits before they begin.

Mr Shah is a partner in Bowman Gilfillan Africa Group’s Coulson Harney Office in Nairobi.