Kenya has been ranked the third most attractive African market for private equity (PE) funding, indicating the huge promise in East Africa’s largest economy despite multiple challenges arising from a recent pile-up of public debt.
Consultancy EY (Ernst & Young) says in a report that is expected to be published today (Monday) that Kenya’s fast-growing technology sector, nicknamed “Silicon Savannah”, drew the most foreign investor interest, supported by an improved business environment.
“FDI [foreign direct investment] projects in Kenya increased by 44 per cent compared with 2016,” says the Turning Tides, Africa Attractiveness October 2018 report.
The increase, the report says, was “largely because of a conducive environment, including a pool of well-resourced IT developers and a high smartphone penetration rate.”
South Africa and Morocco are ranked as Africa’s top hotspots for PE deals ahead of Kenya, which beat Nigeria, Ethiopia and Egypt – the number four, five and six respectively.
The report says Kenya’s top ranking has benefited from recent government’s action to make the country a viable and competitive technology hub through formulation of policies to drive the initiative.
The country's performance is described as significant given that 2017 was dominated by election-related investor jitters.
Kenya’s economy grew 4.9 per cent in 2017, its lowest rate in five years, under the weight of a prolonged electoral process and adverse weather.
Pace of growth
That pace of growth was far below the 5.9 per cent recorded in 2016, according to the Kenya National Bureau of Statistics (KNBS) data.
The last time Kenya’s growth stood at below five per cent was in 2012, also an election year, when the economy expanded by 4.5 per cent.
EY says British investors were particularly active in Kenya last year, having made 10 project commitments, followed by Dutch firms.
“The digital industry remains a key driver of the continent’s growth riding on high mobile and Internet penetration rates coupled with the establishment of technology parks across numerous countries including Cape Verde, Angola, Kenya, Senegal and Rwanda,” says the report. Kenya is expected to remain a hotspot for private equity whose attraction to global deal makers was mainly driven by improved business environment.
“Recent initiatives in Ethiopia, as well as gains by Kenya and Nigeria in the World Bank Ease of Doing Business scores, illustrate that more and more of Africa’s leaders are starting to prioritise reform,” it says.
“Along with that, recent leadership changes in Angola, Ethiopia, South Africa and Zimbabwe are also expected to stimulate policy change, as countries increasingly compete for foreign investment as a key driver for sustained growth.”
Recent studies have echoed similar projections while noting that the improvement in ease of doing business, high return potential across all sectors, a well-diversified economy and consolidation in sectors such as financial services has created an avenue for increased PE activity.
In the financial services several analysts have said they expect consolidation in the banking industry and innovations to be the main drivers of activity.
“We remain bullish on PE as an asset class given the abundance of global capital looking for opportunities in Africa, the attractive valuations in private markets compared to public markets and better economic growth in sub-Saharan Africa compared to global markets,” investment firm Cytonn said in an outlook earlier.
The Treasury has recently upgraded Kenya’s economic growth projection to six per cent from 5.8 per cent, a move that was seen as having been informed by renewed private investor confidence and increased agricultural output.
Heavy rains in the second quarter of the year and the March 9 truce between President Uhuru Kenyatta and opposition chief Raila Odinga — popularly known as the ‘handshake’— are likely to lift growth to a seven-year high, Treasury secretary Henry Rotich said earlier.
Kenya’s economy last expanded at the projected pace in 2011 when growth was 6.1 per cent.
Economic activities last year buckled under the weight of a biting drought in the first half, which hit farming activities hardest, and elevated political uncertainties following a bruising presidential election contest in the second half that put on hold a raft of investment decisions.
That, together with the debilitating effect of a sharp drop in loans to the private sector due to legal ceilings on loan charges starting September 2016, resulted in the slowest growth in national wealth in five years at 4.9 per cent.