“The macro story in East Africa echoes that of Africa, but more so and that makes it a relatively more attractive region,” says Catalyst Principal Partners managing director Rajal Upadhyaya.
Catalyst is a private equity fund manager that invests in medium-sized businesses in Kenya, Tanzania, Rwanda, the Democratic Republic of Congo (DRC), Ethiopia, Uganda and Zambia. Its US$125m fund focuses on sectors such as financial services, retail, manufacturing, telecommunications and technology.
“We are backing the eastern Africa growth story [and] consumers. We are not backing businesses or services that are for the European markets or the North American markets.”
Catalyst has bought a majority stake in a Tanzanian heavy equipment rental and logistics business, marking its third investment in the country and the fund’s fourth deal. Catalyst is also invested in Ethiopian food and drink maker Yes Brands Food & Beverages, Tanzanian-based manufacturing conglomerate ChemiCotex Industries and Chai Bora, a leading Tanzanian tea manufacturer.
“We view Tanzania right now as being a very attractive destination for our capital,” says Upadhyaya. “It is a fast growing market. It is less competitive than a market like Kenya is [and] has lower penetration thus far. For instance, tea consumption in Tanzania on a per capita basis is probably about a quarter of what it is in Kenya. There is potential to double, treble the market. So from a dollar investor perspective we see attractive opportunities in Tanzania.”
Catalyst offers financial and advisory support to its investees and helps them expand. The fund invests $5m-$20m for strategic minority or control transactions.
Upadhyaya says Catalyst’s investments in Ethiopia and Tanzania are doing “quite well”. Fast moving consumer goods company ChemiCotex is undertaking “aggressive expansion in Kenya, Uganda and Rwanda”, particularly with its Whitedent oral care brand.
“In Ethiopia our water business is doing very well. We have just invested in new capacity in that business and we will continue to make investments there,” he says. “[However, it is] unlikely that Yes Brands will expand from Ethiopia into Kenya. The water sector here is fairly saturated and competitive whereas in Ethiopia there is lot of growth headroom. I think if it expands beyond its borders it will be more within the region that is less penetrated like South Sudan and Somalia. Those are more attractive markets I suspect than going south to Kenya.”
“Before you had businesses that were set up alongside national boundaries and almost by definition then were limiting their target market… whereas once you get rid of the borders you open the boundaries [and] you are now looking at a market of 150 to 200 to 300 million people. Automatically you are creating so much headroom for yourself.”
Upadhyaya describes Ethiopia as “an exciting market” with immense potential owing to its 90m strong population and fast economic growth.
“I think 70%-80% of what is consumed locally is imported into the market. So any business that undertakes local manufacturing or local servicing there has a lot of growth potential.”
However, Ethiopia has a young private sector compared to other countries in the region and is “relatively less sophisticated” in terms of the banking sector and access to good law firms, business advisors and reliable infrastructure.
“It requires a bit more heavy lifting [but] the growth potential in my view is very attractive,” says Upadhyaya. “You have to be able to navigate the market in order to be successful.”
Private equity and risk
Although Africa is viewed as a frontier for private equity and more funds are setting up here, the fundraising environment is still challenging.
“When you look at investors who want to invest in private equity funds there is a bit of a dichotomy between people who are familiar with Africa and those who are not familiar with Africa,” Upadhyaya says, adding that many people need to be educated on “what it means to invest in Africa”.
“This difference between the perceived risk of operating in Africa and the actual risk of operating in Africa is something you need to educate some investors on.”
After setting up, a more pertinent issue in the nascent industry is raising awareness about private equity funds in markets such as Zambia, the DRC, and Ethiopia which have less exposure to private equity.
“It is a very relationship driven market. There is very little intermediation in this market. So you need to spend a lot of time building relationships, making sure there that there is a good level of trust from which to base any future partnerships and that takes time. It’s a real effort.”
Private equity firms also have to do “a lot of homework” to understand the markets and sectors because there is limited access to crucial information.
“If I wanted to find out about the tea market in the UK I could buy half a dozen reports done by very capable consultancy firms. You can’t do that in this part of the world. There is no secondary research available at that same level as it is in western markets.
“In a nutshell, I think doing deals, undertaking transactions in this part of the world, is harder to do than in many other markets for these reasons. But the flipside is, once you do them, your value add is also more attractive. You can make significant differences particularly in the middle of the market by getting your core strategies right.”