East Africa is experiencing a wave of private equity flows as investor confidence in the region increases. The number of private equity deals carried out in 2013 in the region doubled to 26 compared to the previous year, according to a recent survey by professional services firm Deloitte.
Eline Blaauboer, managing partner at TBL Mirror Fund, says the Dutch-based fund chose to invest in East Africa because “all the ingredients of private equity” are present in the region.
Established in 2007, TBL Mirror Fund invests between US$250,000 and $4m in small and medium enterprises (SMEs) in East Africa and Nigeria with a focus on high growth sectors. Blaauboer says East Africa’s large SME sector, expanding middle class, good talent pool and fast growing economies make for an attractive destination for private equity.
“We came here because there were hardly any funds around at the time. We saw a lot of opportunities for investing equity in SMEs. Since then competition has really increased but I think it’s only good because it is confirmation of our assumptions.”
She adds that the presence of good advisors in hubs such as Nairobi, coupled with its “developed stock market and increasing number of companies” coming into the region offer exit possibilities for funds.
Blaauboer, who worked in venture capital in the Netherlands for five years, shifted her focus to Africa as there were not many challenges back home.
“I was looking for new challenges. I wanted to be in a place where there was more need for capital. I had always been interested in Africa and I felt an entrepreneurial vibe whereas there was just hardly any equity at the time.”
Blaauboer quit her job in 2003 and for the next two years studied the African private equity market looking at mistakes made by other funds, risks and challenges in the market and ways to mitigate them.
TBL has since made several investments in “fast growing industries driven by growth in consumption” such as ICT, healthcare and consumer goods. Its portfolio includes Highlands Mineral Water Company, Meridian Medical Centre, International Medical Group, Research Solutions and technology companies Cellulant, Software Technologies and KenCall.
Blaauboer argues that there is huge potential in sectors driven by the growing middle class, citing its recent acquisition of a minority stake in Neo Amadiva, a high-end Nairobi salon chain.
“If you look at the growing middle class here one of the things they are spending their money on is beauty. It is an interesting industry and we see lots of opportunity for a strong hair salon brand. In the future we hope to eventually grow [Neo Amadiva] through franchising. Usually stylists are creative people so if you take away a bit of the headache of administration it could be interesting.”
Risks to doing business
Blaauboer notes that there are risks to doing business in Africa but many are not different from what an investor would encounter in other markets.
She notes that one typical risk private equity funds face is that of making huge losses in the event that an investee collapses, where it then has to make the returns from another investee more than doubling in value.