Revamping private equity markets for economic growth

In recent years, Kenya has witnessed significant growth of Private Equity (PE) markets. PE funds have become the new kings of corporate deal making. East Africa Venture Capital Association, PE industry lobby, estimates PE funds deals in East Africa for year 2016 to be over Sh15.7 billion ($152 million).

The Kenyan market has been attractive to the global PE funds due to reported high returns by PE firms in the country.

Equally, a policy of low interest rates by United States Federal Reserve has led to investors rechannelling their savings to emerging markets, ensuring PE firms have mountains of funds to invest.

PE firms have risen from rubble to reclaim legitimacy. Bain & Company, a consulting firm, reports exits from PE buyouts by 2014 exceeded $450 billion, indicating the PE’s huge potential.

The trick to PE firms’ success is their strategy. The intensity of pre-investment due diligence they conduct on targets ensures they make decision with perfect information. They then pump in money through various gradations of equity capital or debt.

They bring in expertise and transactional dexterity in operations, nurture expansion and cut costs. They root out incompetent managers whom shareholders may have been unable or reluctant to sack.

These actions increase the value of their target. After a specified period, five years mostly, they exit the investment to explore other ventures, and in their wake profit from capital gains.

Kenya has made laudable steps. The National Treasury recently allowed pension funds to invest up to 10 per cent of their funds in private equity and venture capital. This is a good move that will drive portions of pension funds into private equity sector.

Equally, the Companies Act enacted in 2015 revamped corporate law, permitting issues such as shares re-purchase programmes and financial assistance by company to acquire its own shares, opening up exit options for PE firms.

Still, more reforms are needed. The leading PE funds operating in Kenya are foreign, indicating lack of awareness on mechanics of PE among the local investors. Tax laws need to offer incentives.

Currently, only registered venture capital funds have benefit of having gains and dividends paid to their members being exempt from income tax. Perhaps, incentive of lower capital gains tax rate should be granted to PE firms on exit.

PE activity in Kenya has majorly been directed towards large enterprises, with small and medium sized enterprises given a wide berth.

As PE industry grow, accountability and transparency of the sector need to be enhanced. A PE transparency code, such as the Walker Guidelines in England, need to be enacted.

Capital markets laws need to be reformed to promote PE activity by allowing innovative fundraising methods such as crowdfunding to take root.

Lastly, PE funds have been exiting from their investment majorly through trade sale. Little preference has been given to initial public offering due to illiquid capital markets and winding bureaucracy of the process.

These reforms will help the march of the PE firms and enhance their scope.