Private equity inflows will account for ‘half of FDI into East Africa in five years’

  

Private equity (PE) inflows are expected to rise in East Africa over the next five years riding on macro-economic stability, the improved investment climate and increased consumer spending and consumption in the region. This is according to Sheel Gill, head of transaction and restructuring at KPMG East Africa.

Sheel Gill, head of transaction and restructuring at KPMG East Africa

Sheel Gill, head of transaction and restructuring at KPMG East Africa

Gill said PE inflows will account for half of foreign direct investment (FDI) in the region. She noted that PE accounted for a mere 13% of the US$50bn FDI in East Africa in 2012.

“We are expecting that [over] the next three to five years, the FDI flows coming into East Africa, 50% of that will be by way of financial investments like the private equity funds.”

She said East Africa is an attractive destination for various reasons, including a high number of investment-ready businesses. The increasing transparency in the “tax regulatory environment and more speed around competition clearance” has also helped to attract investment.

“What East Africa offers especially is very well established businesses which are ready to be taken to the next level of growth. This is the level of growth where we will see a lot of East African businesses actually going across the continent, so the pan-African migration if you like, and then eventually European maybe in the next maybe 15-20 years. This will require a significant level of technical know-how and capital.”

The energy sector, on which all East African governments are focusing, is one of the “hot sectors” targeted by PE funds.

“The hot sectors if you like are the fast moving consumer goods (FCMG) because of increasing consumer spending, the IT sector because, of course, we’ve got the Konza [Techno] City (Kenya) coming up and a lot of activity of laying out of cable around the region, and financial services [because] of the super profits the banks and insurance companies have enjoyed in our region and the lack of penetration provides a huge scope for investment in the sector.”

Recent deals in these sectors include Kenyan PE fund Catalyst Principal Partners buying a 50% stake in Ethiopian food company Yes Brands, while London-based PE fund Actis sold 38% of Uganda-based energy distribution company Umeme on the Uganda Securities Exchange for $66.73m. Earlier in the year, Paris-based investment firm Amethis Finance invested $10.5m in Kenya’s Chase Bank, a fast growing mid-tier bank.

“We have lots of examples of high levels of investment across these sectors and so we feel PE is a very big growth area for our region,” said Gill. “You do have the spanner in the works every now and then [in the tax and regulatory environment regionally]… but you sort of just have to learn to deal with them as you go along.”

Register in Mauritius

Gill reckoned that most PE funds in the region are registering in Mauritius – which is a tax haven – because of regulations and flexibility in the free flow of funds.

“You don’t want to set up a holding company in a country where there are restrictions about transferring funds out. You want to set up your fund, especially if you are private equity, in a place where you have got easy flow of funds. You don’t want to be governed by a country where suddenly they tighten it one day and they loosen it five years later… You need to have the flexibility… that’s the attraction,” said Gill. “I don’t see anything wrong with them being set up in Mauritius.”

“The key thing… is where is the money actually going to, and not so much about the establishment of funds because Mauritius has created [itself] that way to be such a centre, but the opportunities for investment actually lie within East Africa, West Africa and North Africa. That’s where the capital is going,” said Kiriga Kunyiha, associate director of Aureos Capital fund manager, which is part of The Abraaj Group.

Exit options

Kunyiha noted that there are increasing exit options for PE funds in the region ranging from initial public offering (IPO), secondary players (other PE funds) and companies expanding in the region.

“We had an investment in Uganda called the Uganda Microfinance Limited and our exit was to Equity Bank here in Kenya. We are seeing more and more local investors who are willing to take up stakes within the investments. So, more and more, you are finding regional or African champions that are looking for expansion into different countries or acquiring assets for strategic purposes. So, the exit options are there.”

Nonnie Wanjihia, executive director of the East Africa Venture Capital Association (EAVCA), said PE as an asset class presents high risk but also offers “high returns”.

Human resource is one of the industry’s biggest challenges in the region.

“Because the industry is at its infancy, attracting really good talent is quite difficult,” said Wanjihia, adding that the lack of a network is also a challenge for foreign investors moving to East Africa.

The newly established EAVCA is hoping to fill some of these gaps by offering training and networking opportunities, as well as by addressing the knowledge gap between the private and public sector on the effect of PE on growing enterprises and releasing reports and research material about East Africa’s PE sector.



Related articles:
  • The bulk of East Africa’s investment opportunities are in private equity, says Centum CEO
  • African private equity funds outperformed US venture capital over last decade
  • Why South Africa could be an attractive base for foreign private equity funds