East Africa’s growing GDP, a stabilised political environment, the discovery of natural resources like oil and gas and intensified infrastructure development have placed the region in pole position for private equity investments.
Last year, Kenya benefited from 46 per cent of the total number of private equity deals in East Africa and 69 per cent of the total reported value, according to the Private Equity Confidence Survey by Deloitte & Touche.
One of the biggest private equity deals in Kenya was Norway’s Norfund and Africa Infrastructure Investment Manager’s investment of $60 million to build a wind power project worth $150 million, $90 million of which would be funded by debt from Standard Bank Group.
Recently, investment firm Britam lost a financial deal worth $224 million to new entrant Cytonn Investments Management Ltd, when its asset management company British American Asset Managers (BAAM) was overlooked by multibillion-shilling property development firm Acorn Group.
Edwin Dande, chief executive officer at Cytonn, said there is no shortage of capital in the region, as most investors are looking for sectors from which they can generate handsome returns.
“Investors have been pooling money from emerging and frontier markets as concern over slow global growth continues to hit the financial markets. Private equity is therefore an opportunity to get access to above-average returns for investors,” said Mr Dande.
Kenya has been seeking funds to boost its economy in a bid to catch up with major economies in Africa such as Nigeria, South Africa and Egypt.
Early this year, private equity fund Helios acquired a $40 million stake in Wananchi Group, the owners of pay TV provider Zuku. Helios is the single biggest shareholder of Equity Bank, controlling about a quarter of the lender’s shares, and it is also a significant shareholder in oil marketer Vivo Energy, which trades in Kenya as Shell.
Alexander van Schie, director of corporate finance services at Deloitte & Touche, attributed the appetite for investments in the Kenyan market to the widening gap left by financial institutions that have limited their lending to corporates to shield themselves from loan defaults associated with small businesses.
“That’s why most of these private equity firms are targeting small and medium enterprises,” he said.
In the 2014 Private Equity Confidence Survey, Deloitte said that deals in East Africa were concentrated in agribusiness, health care, real estate and financial services.
Rwanda recorded five deals through private equity investments valued at $41.3 million. These included Fusion Capital’s $34 million investment in a real estate development in Kigali, a $2 million investment in Rusororo, a stone extraction mining company and Fanisi Capital’s $2 million investment in Sophar Ltd, a pharmaceutical wholesaler.
Fanisi Capital also invested in ProDev Group Holdings in Rwanda in a deal worth $3 million. Kenya’s Chase Bank received $15.5 million from Catalyst Principal Partners and Swiss Investments, while Tanzania saw Agri Vae invest $4.9 million in Tanzania Foods Corporation.
Tanzania also took up $15 million in two large deals completed by Carlyle and Standard Chartered. Kenyan investment firm TransCentury also sold its entire stake in Tanzanian Chai Bora Ltd, a tea manufacturer, to Catalyst Principal Partners.
In Kenya, the preferred choices of investment products by pension schemes are equity, corporate bonds, Treasury bills and bonds and unit trusts. The majority of the pension schemes invest in government securities, quoted equities and immovable property which accounts for more than 78 per cent of the total investments on average.
But this year, the Kenya Power Pension Fund received approval from the Retirement Benefits Authority to invest $4 million in Ascent Capital, a new regional private equity fund that will back companies in Ethiopia, Uganda and Kenya.
More developed markets
Henry Kyanda, Kenya Power Pension Fund trust secretary, said that this was a significant first step by the RBA, as the scheme will make returns on investments.
“Investing in private equity funds is good. In more developed markets, pension funds have invested in private equity and made good returns,” Mr Kyanda said.
David Owino, a partner at Ascent, said that this was the first time in the region that a local pension fund has committed to investing in a private equity fund.
Experts say the focus on SMEs by East Africa’s private equity companies is partly the reason the region is attracting fewer investments, compared with the rest of sub-Saharan Africa.