Kenyan firms bask in golden age of private equity funds in Africa

Recently, I was interviewing the manager of one of the top incubation hubs in Nairobi. His excitement was palpable as he talked about some of the brilliant software projects a small army of geeks across the room from us had developed.

His face, however, clouded when I asked him why we are yet to hear anything about these projects and whether the developers were just making apps to win competitions or were building scalable businesses that could employ people and turn a profit.

“Getting traction for most developers is slow, and one of the reasons is getting people to put serious money in technology is difficult,” he said.

“There is a lot of money in this economy, but most investors in Kenya would rather go for real estate or something where they have seen their peers make clean exits and big returns. We are, however, constantly pitching and sending out proposals to some of the big-money guys, letting them know what we have and the opportunities for returns.”

One of the big-money people he was referring to is Catalyst Principal Partners (CPP) a $125 million (Sh11.1 billion) private equity fund that last week signed a multi-million-dollar deal with Kenya’s high-end pharmacy chain, Mimosa.

CPP’s investment in Mimosa was strategic on two fronts. First, Mimosa is poised for expansion. Second, Kenya’s private healthcare business is growing and retail pharmaceuticals like Mimosa are some of the biggest beneficiaries.

Strategic investment

The fund’s managing director, Mr Biniam Yohannes, said in addition to helping bridge the gap between consumers’ healthcare needs and market supply, the deal with Mimosa would help standardise the pharmacy product mix, pricing and customer service.

“Our investments are geared towards high growth medium-sized enterprises in the region across all sectors of an economy, including consumer, manufacturing, financial services, healthcare and retail,” he said.

“We see the mid-market segment as a critical segment of the growth engine for the region, which we will continue to support.”

Analysts define East Africa’s private equity industry as “small but growing”, with Kenya — the largest economy in the block — taking the lead in the number and value of deals signed.

Data from the 2014 edition of the Private Equity Confidence Survey released by consulting firms Deloitte and Africa Assets, indicates that competition is growing in Kenya’s private equity industry and fund managers are looking towards small and medium-sized enterprises (SMEs) for new deals.

Last year, Kenya drew 12 deals valued at more than Sh9.6 billion, representing 46 per cent of the total number of deals in East Africa. Rwanda was a second, closing five deals with a reported value of Sh3.6 billion.

A total of 84 deals were completed in sub-Saharan Africa in 2013, with 46 of these reporting a total value of Sh328.1 billion. Overall, the value of deals invested tripled in 2013 compared to 2012.

A growing population of consumers and a vibrant SME sector have been identified as key drivers of future revenues, presenting lucrative funding opportunities for entrepreneurs, particularly in consumer-driven sectors like healthcare and agribusiness.

POTENTIAL SOLUTION

“Entrepreneurs are now generally more aware of private equity as a potential solution to their funding, management, transition or other needs, so there is more appreciation and openness to exploring partnerships with private equity funds now compared to five years ago,” said Yohannes.

“Among investors, given the strong growth prospects of the region and Africa in general, we see an ever-increasing interest.”

He added that Kenya’s strategic position as the economic, resource, management and logistics hub for the region is making local businesses attractive targets for private investors.

“To start with, we are investing in a region that is growing at 5-10 per cent per year, and we tend to focus on businesses that are growing faster than GDP, have ambitious growth plans and are best-in-class operators in their respective sectors,” Yohannes said.

However, getting multi-million-dollar investment opportunities does not come easy for the majority of Kenyan entrepreneurs.

A lot of business managers are yet to learn the basic tenets of getting investors interested in their ideas, such as developing clear proposals.

How to benefit

For entrepreneurs to benefit from the many opportunities that exist in the region in terms of seed or growth financing, investors should offer more than just money, Yohannes said.

“These businesses could also benefit from value beyond capital in terms of strategic support to enhance management and operational capabilities, enrich strategic thinking and improve governance structures.”

Local funds, such as pension funds and insurance companies, have also been encouraged to utilise their financial muscle by investing in enterprises with the potential for growth and good returns.

“Most of their capital is finding its way onto the listed markets, the bond markets and real estate, but not the SME sector and unlisted companies, which are some of the main engines of growth for the region,” Yohannes said.

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