A Java coffee shop in Nairobi. Java sold 90 per cent of its stake to Emerging Capital Partners in a deal estimated by industry players at millions of dollars. Photo/Fredrick Onyango
What you need to know:
More than 10 private equity (PE) funds targeting Kenya and the East African region have been formed in the past two years, in a period which development finance institutions (DFIs) have also stepped up their activities.
This has raised the competition for acquisition targets, a move that has seen valuations of local firms rise faster than the rest of the East African region with founders pocketing large profits when they sell their stakes.
Banks, ICT firms, manufacturers, and businesses in the consumer goods market lead in terms of higher asking prices riding on their fast growth.
Kenya’s small and medium-sized companies are lately reaping billions from increased interest by foreign investors seeking a regional toehold, raising fears that pricing may shut out inflows.
More than 10 private equity (PE) funds targeting Kenya and the East African region have been formed in the past two years, in a period which development finance institutions (DFIs) have also stepped up their activities.
This has raised the competition for acquisition targets, a move that has seen valuations of local firms rise faster than the rest of the East African region with founders pocketing large profits when they sell their stakes.
Banks, ICT firms, manufacturers, and businesses in the consumer goods market lead in terms of higher asking prices riding on their fast growth.
“Valuations in Kenya are much higher compared to Uganda, Rwanda, Ethiopia, and Tanzania,” said Eline Blaauboer, a partner at TBL MirrorFund.
“The higher prices have been enabled by the rising number of funds seeking growth in Kenya’s relatively stronger economy in the region.”
Some of the companies that have sold their stakes this year include Nairobi Java House, and Reltex Tarpaulins (Africa) EPZ Ltd which manufactures tents and tarpaulins for emergency shelters.
Java has 13 outlets and ECP says it bought the firm with a view to expanding into the regional market, targeting middle class consumers.
Belgian fund BIO bought an undisclosed stake in Reltex for $1.3 million (Sh109 million) alongside Dutch venture capital InReturn East Africa Fund I which invested a similar amount in the firm.
Following the Java deal, ECP announced plans to set up an office in Kenya, signalling the rising interest of PE funds in the country.
Some of the new East Africa-focused PE funds that have been established in the past two years include Batian Fund, Fusion African Access, Rift Valley SME Fund 1, and Catalyst Principal Partners.
CDC, a UK development finance institution, has announced a new Sh840 million fund dubbed Progression Eastern African Microfinance Equity Fund that will invest in microfinance institutions in Kenya, Tanzania, Rwanda, Zambia, and Uganda.
CDC, which has resumed direct investments after years of using intermediary PE funds, is expected to raise competition in the banking sector which is ranked as one of the most expensive.
“As capital requirements are raised, Kenyan banks may look for suitors —but there is less pressure, and many investors find Kenyan financial institutions expensive,” Deloitte, a business advisory firm, noted in a recent report on PE funds in East Africa.
Analysts say some PE funds and other types of investors are willing to pay higher prices if they see an opportunity to grow the business rapidly.
“When higher prices are paid, the buyer is usually looking at aggressively expanding its market share to be the market leader,” said Mr George Odo, the East Africa managing director of AfricInvest.
He said that investors seeking to buy majority stakes will pay the highest premium, adding that the expensive valuations are based on a misunderstanding of the role of PE firms.
He said that most SME owners see PE firms only as bringing in money, failing to recognise non-monetary input like technical and strategic contribution that can help grow the business.
Players say that in some cases they are able to negotiate for more reasonable prices after benchmarking the valuations to those offered by similar SMEs in the developed markets.
The rising quotations may, however, lead to capital flight in favour of cheaper targets in the East African region.
“Most PE firms intend to make more acquisitions, but most of the new deals will go to the neighbouring countries,” Ms Blaauboer said.
Expensive buy-ins also mean that investors will ask for much higher prices when they want to exit, a move that may lock up capital for extended periods and slow down new investments.
