Kenya leads Africa in private equity firms’ investments

Java House in Nairobi. The coffee house has been sold to Emerging Capital Partners. FILE 

By George Ngigi

In Summary

• PE firms prefer Kenya to other African countries owing to its prospects of growth and open market policies, says new survey.

Kenya is the most preferred market for private equity firms in Africa, according to the findings of a new survey, boosting the country’s ambition of being a financial hub.

The survey by Deloitte and Touche and research firm Africa Assets found that PE firms prefer Kenya to other African countries owing to its prospects of growth and open market policies with a high inclination to the financial sector.

Seventy-four per cent of 39 PE funds that were reviewed by Deloitte released last week preferred Nairobi ahead of other sub-Sahara African nations like Uganda (70 per cent), Tanzania (67 per cent), Zambia (48 per cent), Ethiopia(41 per cent) and South Africa (37 per cent).

Kenya has been seeking to attract funds to boost its economy in a bid to catch up with major economies in Africa such as South Africa, Egypt and Nigeria.

“It is attributable to Kenya coming from a lower base than the South African market. Its growth prospects are also high,” said Alexander Van Schie, director of corporate finance services at Deloitte and Touche.

Ethiopia though having a faster growth than Kenya was relegated due to a highly regulated environment by a government that seeks to protect domestic companies through policies that lock out foreign investors.

Data from Emerging Markets Private Equity Association (EMPEA) shows that PE firms raised Sh123 billion last year for investments in sub-Saharan Africa.

(Read: PE firms raise Sh120bn for local investments)

Some of the latest entrants in the Kenyan market are Amethis Finance with a Sh890 million ($10.5 million) in Chase Bank last month and last year’s 90 per cent sale of coffee house Java to Emerging Capital Partners (ECP) (see article here).

Research firm, Africa Assets, reported that the number of exits executed last year by private equity funds went up, underlining Kenya’s maturity as an investment destination.

Exiting has in the past been a concern of most PE firms whose pool of capital, sourced from willing investors, usually has a 10- year maturity period.

Some of the exits last year include that by JP Morgan linked Pearl Capital Partners (PCP), when it sold its 36 per cent stake in agricultural firm Africert. Their investment had grown over threefold since their entry in the firm in 2006.

“Exit valuations were not reported -this is something that fund managers are always quite secretive about,” said Andrea Bohnstedt of Africa Asset.

Many exit sales are alsos completed privately making it difficult to collate complete data on PE firms activity in the market. She noted that the number of exits in the country were expected to go up as the industry matures with sale to strategic investors being the dominant exit route.

Eline Blaauboer a partner at TBL Mirror Fund pointed out that they intend to exit two firms this year and they were considering listing one of them in the capital markets through the growth enterprise market segment (GEMS) which is being set up.
 

The research also found that most equity firms intended to exit after two to five years unlike in other markets where it averages five years.

“It indicates that they expect growth to be fast enough to allow sale in that period,” said Mr Schie.

Early this year London based private equity firm, Helios EB, made a u-turn over its pledge to exit Equity Bank in a period of between three and seven years from 2007 when it paid Sh11 billion to acquire a 24.9 per cent stake in the bank.

The stake is now worth Sh30 billion and Helios has earned Sh3.4 billion in dividends since 2008, meaning its investment has grown threefold.

East African markets have generated high returns for PE firms a fact attributed to the fast growth in a time when global markets have been lagging.

DFIs Norfund, FMO and Africinvest, for instance, earned a 66 per cent return last year when they sold their 22.4 per cent stake in Family Bank acquired in 2010 for Sh916 million.

A research by audit firm Ernst & Young also released last week however ranked finding the right opportunities as the key problem facing PEs in African markets with many of them opting to hold minority stakes so as to ensure they partner with existing management teams to improve business.