Capital Markets

PE firms bank on strategic investors for easier exit

Investment brokers at the Nairobi Securities Exchange. FILE PHOTO | NMG
Investment brokers at the Nairobi Securities Exchange. FILE PHOTO | NMG 

Private equity (PE) firms prefer selling stakes to competitors and strategic investors rather than through the Nairobi bourse to reap maximum returns and save on time and costs in closing deals.

Recent surveys show that none of PE funds in East Africa plan to offload their stakes via an initial public offering (IPO), dealing a blow to the long-held desire by the Capital Markets Authority (CMA) to see the funds exiting through the Nairobi Securities Exchange (NSE).

Newly released survey by consultancy Deloitte showed half of the 75 PE firms favoured strategic investors as an exit route with the remainder preferring secondary sales to rivals.

The regulator said last August the influx of PE funds, which grew their portfolio by 26 per cent to $430 million (Sh43.57 billion) in 2017, provided an opportunity to grow primary listing on the NSE.

Nairobi is a hotbed for new PE funds and venture capital on the continent largely because of higher returns and relatively small size of investment required in buying into small and medium-sized enterprises and start-ups.

“Kenya remains an attractive destination for private equity investments. On this strength, the Authority (CMA) is pursuing discussions with private equity firms with a view of encouraging them to realise their investments through exits on the Nairobi Securities Exchange,” the regulator said in the Capital Markets Soundness report for April-June 2017.

“This has dual benefits as the public is granted an opportunity to participate in the growth of Kenya’s financial markets through saving and investing in promising listed companies.”

Gladys Makumi, corporate finance leader at Deloitte, said secondary sales and strategic investors offer PEs an easier exit route and higher profit than investing public on the NSE.

“The problem with our capital markets is that there’s not much activity and sometimes the prices of the shares are not based on fundamentals. Because our markets are not that rich and deep, you find PEs tend to shy away from that as an exit route,” Ms Makumi said in an interview.

“You will find most of the times, if someone does not declare a dividend and say they are going to re-invest, retail investors are not happy and share price could drop.”

More than three quarters of PE funds invest a maximum of $10 million (Sh1.01 billion) – a small deal size that may also be deterrent for an IPO –  in firms for five to seven years after which they sell their stake.

Kenya, a regional investment hub, accounted for 89.5 per cent of the $480.4 million (Sh48.68 billion) deals inked in East Africa, a jump from 70.23 per cent of the $484.1 million (Sh49.05 billion) deal book in 2016.