Global dealmakers double investments, pump $475m into EA

Kenya gets highest number of deals, executives cite Uganda, Tanzania as next frontiers but Rwanda and Burundi miss out. TEA Graphic  Nation Media Group

By DAVID MUGWE The EastAfrican

In Summary

• The region emerged as a top destination for dealmakers attracted by an improved business environment and the discovery of commercially viable oil and gas deposits in Uganda, Kenya and Tanzania.
• Kenya secured the largest number of deals in East Africa for the year, with PE executives citing Tanzania and Ethiopia as the other two countries in the region they are most confident about.
• The greatest challenge in East Africa identified by firms is the lack of acceptance of PE as a source of finance and human capital deficiencies in portfolio companies, reducing investment opportunities for PE firms.

Inflows from private equity funds into East Africa doubled last year to hit $475 million, pushed by rising business confidence and consumer demand, new data shows. A sharp rise is projected in 2013, as perceptions of political risk soften.

The region emerged as a top destination for dealmakers attracted by an improved business environment and the discovery of commercially viable oil and gas deposits in Uganda, Kenya and Tanzania.

Data by consultancy firm Deloitte released on Friday showed PE funds invested $475 million in the wider East African region, more than doubling 2011’s inflows of $200 million. The figure was pushed up by three large deals in Tanzania and Ethiopia.

In Ethiopia, Duet Private Equity completed its first deal on the continent there, putting a hefty — by African PE standards — $90m into Dashen Breweries. Tanzania attracted two large investments in Export Trading Group (a multinational agricultural commodity supply chain manager from Carlyle’s new sub-Saharan Africa fund) and Standard Chartered PE.

The growth in appetite for the EAC market marks a huge shift in the attitudes of private equity dealmakers, who have historically focused on South Africa. Most funds went into manufacturing, agribusiness and financial services.

READ: Value of Africa’s PE deals increases

Kenya secured the largest number of deals in East Africa for the year, with PE executives citing Tanzania and Ethiopia as the other two countries in the region they are most confident about.

The data, however, shows a slight decrease in investment interest in Kenya and Tanzania, with interest in Tanzania dropping over the past three years as interest in Ethiopia and South Sudan rose. Uganda, however, seems to be on an upward trend.

The excitement about Uganda was however not reflected by the 2012 deal activity — perhaps because the main source of excitement, oil, is still a few years away from generating significant revenue.

The increased interest in the region is good news for small and medium-sized businesses in consumer-driven sectors, an area most of the PE funds (46 per cent) are targeting.

Interest in later stage companies in the region has increased to 36 per cent from 26 per cent last year, an indication that the region is attracting more attention with fund sizes growing as managers increasingly look for ways to reduce the costs associated with small-scale investing.

“There is an amazing amount of money to go around,” said Andrea Bohnstedt, director at Africa Assets, a private equity research firm.

“There is certainly a strong trend in investing in the middle class. For Kenya, there is hype around ICT but we are yet to see a lot of deals,” she added.

The executives polled highlighted the power, oil and gas sectors as those that will witness increased activity, partly attributed to the recent oil discoveries in Kenya as well as prospects in Sudan. Interest in the agricultural and healthcare sectors dropped in 2013 compared with 2012.

At least half of the investors are expecting the average size of transactions to increase this year, while in other regions like South, Central, North and West Africa, transaction sizes are expected to remain mostly unchanged.

READ: Growth prospects see private equity funds increase in EA

“I see the momentum of growth in Africa rising. There have been improvements in infrastructure in East Africa but the clincher for me is that in the rest of the world, everybody is getting older while Africa is getting younger,” said Sammy Onyango, chief executive officer of Deloitte East Africa. “This is driving the middle-income group, which is a boon for consumer companies,” he added.

READ: Africa’s consumer business is the sector to watch in coming years

More than half of the PE funds expect the economic environment in East Africa, including Ethiopia and South Sudan to improve.

In Kenya, the swearing-in of President Uhuru Kenyatta is likely to usher in more investments, with no major potential risks expected in the medium term.

“Investors are positive, not only because of the smooth political transition in Kenya, but also the positive message of continued and aggressive infrastructure investment from the new government,” said Wanjohi Ndagu, a partner at Pearl Capital Partners, a Kenyan PE firm focused on agriculture.

“In 2013, we are expecting to close an additional three deals in Kenya worth about Ksh700 million ($8.3 million),” he added.

Indeed, Kenya is hoping to attract at least $330 million in foreign direct investments in the next three months, according to latest projections by the Kenya Investment Authority.

PE firms defied the heightened political risks associated with Kenya the whole of last year ahead of the March 4 elections. Most Kenyan businesses were holding cash while others suspended expansion plans.

Company data showed firms that had reported their 2012 full year results by the end of last month held a combined Ksh130 billion ($1.52 billion) compared with Ksh110 billion ($1.29 billion) in 2011.

READ: Kenyan firms hold $1.5bn amid election

In Tanzania, the law requiring equity investments to be registered with the Federal Competition Commission is a deterrent, as it makes PE ventures costly and time consuming, executives polled by Deloitte said.

Economic climate

In South Sudan the expectation of an improved economic climate dropped to 55 per cent this year compared with 61 per cent last year.

“But, there is increased activity across infrastructure, real estate, health care, agribusiness and green energy with new interest in later stage companies” said Alexander van Schie, director of corporate finance services at Deloitte East Africa.

Other sectors being targeted by the PE funds are manufacturing and industry, power, oil, gas and utilities, financial services, travel and hospitality, healthcare and pharmaceuticals and technology, media and communications.

“In East Africa, the financial services sector is still the most popular, followed by support services and real estate and construction,” said Mr van Schie.

Around the region, deal size increased significantly compared with 2011, thanks to several large deals. In 2011, only two deals were reported above $20 million in the sub-region. In 2012, there were five.

Deloitte said funds dedicated solely to East Africa raised $82 million in 2012. At least $866 million was raised by pan-African funds that may invest in East Africa.

Business executives and investors are exuding confidence and optimism across various regions and sectors.

“In East Africa, most investors are focusing their investments in Kenya, the regional economic hub. Investors are also excited about the infrastructure development in Ethiopia,” said Deloitte in the 2013 PE confidence survey.

However, the greatest challenge in East Africa identified by firms is the lack of acceptance of PE as a source of finance and human capital deficiencies in portfolio companies, reducing investment opportunities for PE firms.

Among the major private equity deals that marked last year were loans that can be converted into equity amounting to $20 million by Aureos Capital, €19 million ($24 million) by AfricInvest and $10 million by Swedfund to UAP Holdings Ltd during the firm’s initial IPO last year.

In October last year, London-based private equity fund Actis raised $278 million for real estate projects in sub-Saharan Africa, of which $30 million to $40 million is to be used on Garden City, a development outside Nairobi, which is expected to cost about $145 million over a five-year period.

Carlyle and Standard Chartered PE invested $210 million in Export Trading Group, an agribusiness company in Tanzania, while Duet Africa PE invested $90 million in Dashen Brewery in Ethiopia.

Aureos Capital also invested $2.75 million in Revital Healthcare, a medical equipment manufacturer and in 2011 it invested $2.35 million in Nairobi Women’s Hospital.

The World Bank’s lending arm, the International Finance Corporation (IFC), participated in last year’s rights issues of Kenya Airways and Diamond Trust Bank and also bought 45.22 million shares or a 2.78 per cent stake in Uganda’s power distributor Umeme.

Last month, IFC disclosed that it will make a $5 million equity investment in Gulf African Bank for a 15 per cent stake.

READ: IFC posts $4bn profit in Africa, to expand investment in region

Pearl Capital Partners (PCP) early this year announced that it had approved a $2.35 million investment through debt and equity for a 16 per cent stake in Midlands, a Kenyan food processing firm. PCP also said that it had sold its 36 per cent stake in Africert, a Kenyan agricultural firm, to a local investment company.

“There is greater optimism for the region in 2013. Kenya, its hub, is expected to experience increased activity, as investors who had adopted a wait-and-see approach pending the outcome of Kenya’s election, kick-start their investment efforts. Kenya will continue to be a key driver of East African investments,” said Deloitte East Africa.

According to the survey, a majority of the PE funds or 44 per cent said they will be focusing on new investments over the next one to one-and-a-half years, followed by 33 per cent who said that they will focus on managing their existing portfolio, while 21 per cent said that they will focus on raising new funds.

Competition for new investment opportunities in East Africa is expected to jump, according to 86 per cent of the PE funds, compared with only 43 per cent last year.