A graphic showing investing preferences. GRAPHICS | FELIX MIRINGU
East Africa is set to benefit from a new investment model being
adopted by private equity funds, which are shifting from traditional
avenues such as shareholding in private firms.
PE
funds plan to issue more long-term private debt to East African firms
that operate in a market whose foreign direct investment flows remained
largely stagnant at $9 billion in 2018, according to the latest World Investment Report.
Private
debt allows investors to benefit from more bond-like returns although
they cannot claim ownership of the companies. It is argued that
globally, investor interest in private debt is increasing because of the
low yields available from government bonds, with the major players
being pension funds and insurance companies.
FINANCING
The
total volume of institutional assets under management allocated to
private debt is estimated at $638 billion globally. In 2017, private
debt funds worldwide raised some $106 billion of new capital. Of this,
$67 billion was raised by funds in the US, $33 billion by those in
Europe, and $6 billion by funds in Asia.
Data
from the East African Private Equity and Venture Capital Association
(EAVCA) shows that PE funds are making inroads into the private debt
market to boost their efforts in securing a presence in East Africa, a
bloc with a market size of more than 170 million people.
EAVCA’s
executive director Eva Warigia said that although most foreign
investments in the region are still largely in the form of private
equity, the increased demand for financing by firms to support their
growth plans is pushing them towards private debt.
“Private
debt has a long-term equity structure, with a fairly reasonable
interest rate, which is making it easier for companies to venture into
the East African region,” she said.
In
2018, for example, Co-operative Bank of Kenya received $150 million in
private debt from the International Finance Corporation, the lending arm
of the World Bank, for onward lending to small and medium-sized
enterprises. And early this year, regional lender Equity Bank secured a
$100 million long-term loan from the IFC to strengthen the capital of
its Kenyan subsidiary and lend to SMEs.
“The
participation of pension funds in private equity investments is
improving access to capital for small businesses while enabling the
funds to tap into new sectors for their portfolio diversification,” said
Ms Warigia.
TAX
According
to the African Private Equity and Venture Capital Association, Africa’s
PE market will continue growing, presenting a unique asset class for
the continent while allowing companies to expand, create employment and
improve lives.
Last year, Kenya was
the favourite investment destination for PE funds in the region,
attributed to its relative low capital gains tax that was initially set
at five per cent. It has now been increased to 12.5 per cent in the
2019/2020 budget. A diversified economy, a fast growing middle class and
a stable political environment also helped to attract foreign investors
to Kenya.
Outside the EAC, Ethiopia was the other destination for funds.
Rwanda
introduced a capital gains tax of five per cent through the Income Tax
Act (2018) while Burundi charges 15 per cent. Uganda charges 30 per cent
capital gains tax, but the rate for mining firms varies from 25 per
cent to 45 per cent, based on the profitability. Tanzania’s capital
gains tax is 20 per cent for foreigners and 10 per cent for locals.
Between
2017 and 2018, PE funds invested $1.4 billion in the region, of which
$1.2 billion went to Kenya, mainly in agribusiness, financial and fast
moving consumer goods (FMCG).
The
companies that benefited include Vodafone Kenya Ltd, Kipeto Energy,
Avenue Hospitals, Asante Capital EPZ, Haco Industries Kenya Ltd, Branch
International, Malindi Solar Group, Iberafrica Power EA Ltd and Britam
Holdings. Recently, French investment firm Creadev injected $5 million
into Kenya’s Twiga Foods to help the firm grow its fresh-produce
business.
COMPANIES THAT BENEFITTED
In
Tanzania, deals were recorded in the transport and healthcare sectors,
with the highest value in...
2018 — $206 million — attributed to the $130
million Swala Oil and Gas transaction. Other companies that benefited
from PE funds were PAE PanAfrican Energy, Zhongyuan Nengkuang
Development (Tanzania), Pyramid Group, Proparco’s Tanzanian unit, Helio
Resource, Kibo Mining Plc, Brookside Dairy Tanzania Ltd, Sadolin Paints
(T) Ltd, Sunshine Mining Ltd and DSM Corridor Group.
Rwanda
recorded deals in agribusiness, FMCG and financial services.
Beneficiary firms include Umubano Hotel, Metafoam, I&M Bank Rwanda,
Rwanda Energy Group Ltd, Crane Bank Rwanda, Millicom International
Cellular, New Stream Group and Sarura Commodities.
In
Uganda, Qatar Investment Authority’s acquisition of Airtel Africa
accounted for 96 per cent of the reported total deal value in the first
half of this year. From 2017 to H1 2019, agribusiness, energy and
natural resources and manufacturing have accounted for 56 per cent of
the 32 reported deals.
Companies
that benefited include Uganda Exploration Areas, Sadolin Paints (U) Ltd,
Lirtix SA and Rondatel SA, Uganda Telecom, Cipla Quality Chemicals
Industries Ltd and Lion Assurance Company Ltd.
According
to EAVCA, the entry of the Ethiopian-focused PE funds has helped grow
the investment profile of the country as a PE destination, coming in
third place behind Kenya and Uganda on the number of deals closed in
that period. Manufacturing and the FMCG sectors recorded the biggest
deals, followed by agribusiness and mining.
The
deals involved National Tobacco Enterprise Share Company, Repi Soap and
Detergent Share Company, Tulu Kapi Gold Mines Company Ltd, Ethio-Asia
plc, Ethiopian Airlines and Greenpath Ethiopia.
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