Ascent Capital Africa is a private equity firm with investments in Kenya, Uganda and Ethiopia, through its Africa Rift Valley Fund I. In an interview with How we made it in Africa’s Betsy Henderson, David Owino, founding partner of Ascent, discusses investment opportunities in East Africa and highlights the sectors he would stay away from.
Discuss the sectors in East Africa that offer the most attractive investment opportunities for Ascent Capital Africa.
We invest across a range of sectors and tend to focus on businesses that are champions in their field or geography, those with some level of competitive advantage. A good example is Kisumu Concrete, which manufactures building products such as ready-mix concrete and concrete blocks. It is the largest player in western Kenya and enjoys little competition given the difficulty and cost of shipping building blocks from Nairobi or other locations.
Overall, we’re keen on the manufacturing sector, both business-to-business (B2B) and business-to-consumer (B2C) manufacturing. In light of the pandemic, we see countries realising the need to become more self-reliant when it comes to certain categories of goods and services that can withstand global supply chain disruptions and this will lead to increased opportunities in sectors such as manufacturing in East Africa.
Another example is our investment in Metro Plastics in Kenya, which produces PVC and PPR pipes as well as gutters and wastewater removal products. These are not products that are going to make the front page news but they are essential if you’re going to construct a building or collect rainwater, which is very important in this part of the world. These types of businesses that serve consistent local demand and are considered somewhat ‘safe’ from potential threats of imports are generally attractive to us. For example, it’s not cost-effective to ship pipes from China to Nairobi – they are light but take up a lot of space.
As much as possible, we try to look for businesses located outside of the capital cities. We do currently have an investment based in Nairobi but if we can get investment into the other cities like Kisumu or Mombasa in Kenya or Hawassa in Ethiopia – or any other city outside of Addis Ababa –we would be contributing even more to that country’s economic growth.
In terms of sectors, we’re also interested in agro-processing that allows for value addition and hard-currency-earning opportunities. In addition, we think there is a big dividend to be made in the healthcare space, not only in terms of returns, but also in increasing access of quality healthcare services to a larger cross-section of the population in East Africa.
Logistics is another sector where we see great potential, both to make distribution chains more efficient and to facilitate greater value creation outside of major cities. We’ve invested in a consumer product distributor in Uganda as we found that if you work with good manufacturers or brand owners and have a solid distribution platform, it can make a huge difference in overcoming last-mile distribution costs and challenges. There are even cross-border advantages to this model; for instance, our Ugandan business has partnered with several Kenyan FMCG manufacturers that use its existing distribution platform and footprint to avail their products in the Ugandan market. This symbiotic partnership saves them from having to set up their own downstream supply chain platforms, which would be quite expensive.
Fintech is another area of interest to us but not one where we currently invest. One challenge is that most fintech companies are either start-ups or early stage and we don’t invest in such companies. We’ve found if you’re not going to be participating in the start-up space, then there’s potentially no place to play in the current fintech arena because once those companies have taken off, they will rarely need equity funding. Nevertheless, we feel there’s great growth potential in fintech and continue to track opportunities in this space.
Lastly, the education sector is appealing. Given Africa’s huge young population, the need for quality education – both at basic and tertiary level – will be sustained for some time and this provides a fantastic prospect not only for providing education in the traditional set-up that we know, but also through innovative means. In Ethiopia, for example, 40% of the 110 million population is below the age of 14. Foreign investment is not currently allowed in the education sector in Ethiopia but if that ever changes, it could present a huge market opportunity.
Are there any sectors you don’t invest in?
We don’t do real estate, primary agriculture or infrastructure.
We tend to avoid real estate for two reasons: our firm doesn’t have much experience in this sector and we feel the sector is mature. In our view, a lot of local capital has been catalysed to invest in real estate and there’s little value we could add there. That said, we will invest in companies that supply part of the value chain for real estate, such as Kisumu Concrete Products and Metro Plastics. Some aspects of such industries or businesses are restricted to only locals in Ethiopia; however, in Kenya and Uganda, they are fairly open for us to invest in.
In Kenya, we’ve seen a lot of high-rise apartments and office space developments that cater for the upper-middle-class and upper-class population, but there is a shortage of housing for the lower-middle-class which makes up the majority of people moving into the cities. The government is implementing policies to encourage investment in that particular space, so there’s definitely an opportunity there but it’s not the right fit for us.
We tend to steer away from primary agriculture or commodity crops – such as maize, tea and coffee – due to strong government influence in this sector. But we will invest in agribusinesses that provide value addition or inputs for farmers, such as crop storage. For example, we’ve been looking at a business that is building storage silos; this is interesting to us because you can add value to farmers by giving them the ability to choose when to sell their crops. If farmers get a bumper harvest, they could store their cereals and sell them when the market is right. In Africa, farmers lose about 40% of their harvest due to inadequate storage space.
We also don’t invest in mining, infrastructure, toll roads, or producing energy and selling it back to the governments. In general, we prefer to deal with the African consumer directly and avoid sectors where the government is the main supplier or customer, or heavily influences supply chains.