Troubled firms shine spotlight on large investors’ analysis

The rising number of companies that falter after receiving billions in funding from local and foreign institutions has raised questions over the quality of the due diligence done by the seemingly reputable investors.

Kenyan firms have become a magnet for international financiers, who include development finance institutions and private equity funds, with the high returns coming from sectors such as financial services, healthcare, education and real estate over the years.

This week, it has emerged that Rift Valley Railways (RVR) major shareholder Qalaa holdings is looking to exit the business seven years after it took up a stake in the struggling railway firm, indicating the investment has not paid off as expected for the Egyptian firm.

The International Finance Corporation (IFC), the private sector lending arm of the World Bank, lent RVR $22 million (Sh2.3 billion) just two years ago to purchase locomotives.

Finance experts say that most of the due diligence carried out before investment study in detail the books of a firm, but can hardly tell whether the managers in the company act with integrity.

“They actually do undertake a thorough due diligence, but even this cannot tell you how the business will perform going forward or tell you anything about the integrity of the people involved at a personal level,”  said ABC Capital corporate finance manager Johnson Nderi.

“It comes down to integrity. No matter how watertight your due diligence is, you will lose money if the other people you are dealing with are dishonest…therefore it is always a good idea to put someone on the board where possible, even if you are just a creditor.”

READ: World Bank unearths massive fraud at RVR

In another recent example, Jamii Bora Bank raised issue with an information memorandum put out by troubled retailer Uchumi Supermarkets that informed the lender’s decision to invest Sh500 million in the retailer last year.

The lender contended that the information memorandum did not reflect the reality of Uchumi’s operational health. 

“There is a penalty as well for the local existing investors once a company invested in struggles,” said Mr Nderi.

Nairobi-based pan-African housing financier Shelter Afrique, which has received substantial financing from development financiers in recent years, was last November ruffled after leaked documents by the firm’s former finance director Godfrey Waweru alleged creative accounting and subprime lending by the firm’s top management, led by chief executive officer James Mugerwa.

The revelations came at a time when Shelter Afrique’s largest shareholder, the African Development Bank (AfDB), was preparing to disburse $8.2 million (Sh850 million) in equity financing to the firm, relying on information contained in the books of Shelter Afrique.

READ: Jamii Bora says Sh500m Uchumi buyout was a con

The AfDB was forced to hold back the investment — which had been in the pipeline since February until late last month — as it waited for an audit by consulting firm Deloitte to be done.

Other international institutions that have put money into Shelter Afrique recently include the European Investment Bank, which provided €15 million in 2013 to finance affordable housing projects, and, German development bank, KfW, which in 2014 provided €50 million 10-year loan for construction finance and on-lending to commercial banks and microfinance institutions.

Chase Bank, which collapsed last year — but has since reopened even though still under receivership — also counted among its major shareholders a number of international financiers such as German investment firm DEG, French private equity fund Amethis Finance and Swiss venture capital firm responsAbility that have pumped in money in recent years.

The Central Bank of Kenya hopes to sell off a majority stake in the lender by the end of this quarter, meaning that the existing shareholders will face dilution once the new investor comes in.