Kenya’s new capitalists go big on private equity

Young executives leave the corner office to
Young executives leave the corner office to venture in the world of investment 

Until early this year, Mr Tony Wainaina was one of the young and savvy CEOs who managed key corporate players in a bullish economy whose growth peaked at 7.1 per cent in 2007.

When the economic boom began in 2004, Mr Wainaina was the chief executive of ICDC-I, a private equity firm that last year changed its name to Centum Investment.

He then spent some time in the UK before coming home to head one of Kenya’s most prestigious investment clubs, TransCentury that grew under his watch from a club of friends worth less than Sh30 million in 1997 to a private equity firm valued at more than Sh8 billion.

Then came February 2008 and Mr Wainaina announced he was leaving TransCentury to pursue personal interests— a revelation that drew curiosity in corporate Kenya.

Little did it occur to many that in quitting his job at TransCentury, Mr Wainaina was following in the footsteps of his peers who have recently left their executive suites to set up own private equity funds.


That list includes Mugo Kibati, who quit as managing director of East African Cables to establish Miliki Ventures and Paul Kavuma, who until December last year was the head of private equity at Actis East Africa.

These new firms have raised the number of private equity firms in Kenya from 12 to 20 in the past 12 months at a time when private equity has come under immense pressure from the global financial crisis.

This growth in the private equity is increasingly being seen as the product of a widening of the gap in financial markets left by commercial banks who have limited their lending to shield themselves from loan defaults in a turbulent business environment.

Kenyan firms are also finding it difficult to access credit from offshore financiers where the traditional lenders have come under immense pressure from market collapse that came with the crisis.

Though some analysts see the growth of private equity firms as directly linked to the freeze in commercial bank lending, others see it as playing a complementary role to bank lending.

“Private equity firms strengthen company balance sheets giving bankers the confidence to lend to these companies,” said George Odo, East Africa’s managing director of Afric Invest Capital partners that is set to commence operations Kenya at the beginning of next month.

Private equity firms are also seen to play a critical resource allocation role by raising money from high-net worth retail investors or institutional investors and investing in the most promising sectors of the economy.

With official figures indicating that the economy is expected to grow at a maximum rate of 3 per cent this year compared to 7.1 in 2007, companies are preparing for slower profit growth but the new private equity capitalists are only seeing opportunity.

“Economic downturns force companies to think about how to make their operations more efficient and more robust,” says Phillip Muema, who is in charge of private equity at consulting firm KPMG.

Mr Wainaina reckons that there are more investment opportunities this year because company valuations are lower. He is looking for deals with a minimum threshold of $100,000 (about Sh8 million), which effectively means that his net is cast further and wider among the SME segment of the economy.

The firm, Mr Wainaina says will be scouting for deals in the fast growing ICT sector as well as the agro processing industry.

The ICT sector is one that is likely to be the eye of the jewel of private equity funds after the landing of two undersea cables — TEAMs and Seacom — by the end of this month which is expected to usher a period of cheaper and faster internet connectivity.

Tightening grip
Already, the big telecommunication companies like Telkom Kenya and Safaricom are tightening their grip in the ICT sector by borrowing funds to bolster their operations and also acquiring smaller firms.

Telkom Kenya has this year raised Sh8 billion from local banks to broaden it services for a one stop shop in the ICT that will include fixed and mobile telephony, broadband and television services.

In addition to plans of borrowing from the local market, Safaricom last year acquired a $2.6 million (Sh180 million) buyout of a majority stake in data services provider, One Communication Limited to increase its presence in the home user internet market.

Faced with cut throat competition from the bigger players smes in the ICT sector are likely to turn to the private equity firms for capital injection and also management expertise in a survival war.

Industry players say that despite the credit crunch, the more established private equity firms still have access to finances from development finance institutions (DFI’s) set up by governments in the developed world.

Most private firms also back up these sources of capital with money borrowed from the financial markets through bond issues and from commercial banks.

Because of their long term investment outlook, private equity firms buy stakes in companies and hold on to it for at least seven years before they harvest their profits and move on to the next line of investment.

To investors, private equity offers a chance to diversify the basket of investments away from publicly traded shares and government securities.

Besides, they also offer capital as well as management expertise to companies in which they invest strengthening their chances of survival in the long term.

“The funds are value investors. They enter into a business at an attractive entry point and exit at a price that gives them a superior return,” said Mr Muema.

Kenya is among the countries that is showing potential of superior return on investment this year despite the global downturn. Of the 156 investors interviewed by the Emerging Markets Private Equity Association (EMPEA), 120 said they expected a net return of 16 per cent over the next three to five years.

Competing markets include countries like China, Brazil, India, Sub-Saharan Africa, Eastern Europe and Russia.

The optimism in the emerging markets is based on the fact that they are seen to bear the potential of rebounding faster than the developed economies that were the epicentre of the financial crisis.

However, as the private equity firms flock into the local market there are concerns as to whether companies have an understanding of the agreement that they are entering into.