PE funds oppose double gains tax

East Africa Venture Capital Association executive director Eva Warigia. FILE PHOTO | NMG 

By LYNET IGADWAH
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Summary

• The government through the Finance Bill 2019 has proposed to more than double the tax obligation of property sellers from the current five to 12.5 percent.
• The East Africa Venture Capital Association (EAVCA) told Parliament the law creates a regulatory risk that will have an impact on the growth of investment.

Private equity (PE) investors have warned that an increase in tax for property sellers will make the Kenyan market less attractive.

The government through the Finance Bill 2019 has proposed to more than double the tax obligation of property sellers from the current five to 12.5 percent.

The East Africa Venture Capital Association (EAVCA) told Parliament the law creates a regulatory risk that will have an impact on the growth of investment.

Currently, Kenya ranks second after South Africa on the continent in terms of PE activity, aided by good governance structures, support of ease of doing business and capital deployment in the country.

“Our submission to the House is that we keep the rate at five percent in order to maintain this good position,” EAVCA executive director Eva Warigia told the National Assembly’s Finance committee during public hearings on the Finance Bill.

She said the drastic increase will impact on the ability of PEs to grow and nurture small businesses in Kenya.

“Ours is capital that is international and we have to compete against other nations to deploy here,” she said.

PE investors provide business funding over the medium or long term. In exchange for the cash injection, they get stakes in the business.

There are various forms of PE investments, including venture capital, leveraged buyouts and mezzanine capital.

PE funds have become the preferred option for firms looking to raise money in recent years, given the relative ease of contracting an agreement compared to raising funds through a public offer via the capital markets.

Most take up a minority stake in the business they investing in, thus leaving the original owners with a degree of control.

When exiting, majority of the PE funds prefer to offload their stake to fellow funds, as opposed to selling them to the public through IPOs.

According to a recent report on East African asset classes by I&M Burbidge Capital and EAVCA, Kenya has accounted for 33 exits in the five-year-period, while Uganda and Tanzania had five and two respectively.

PEs have heavily invested in property developers in Kenya.