Private equity firms hunting bargains in East Africa region

By Jackson Okoth

The race for a piece of a growing consumer market in East Africa promises to become intense. This is as private equity firms and venture capitalists swarm the region, each seeking to tap into opportunities offered by the growing middle class.

 “East Africa is dynamic and expanding and therefore needs a different kind of capital away from the traditional channels such as family funding or debt capital from commercial banks. There is need for risk capital to the capture sheer scale of this expanding regional market,” said Rajal Upadhyaya, Managing Director-Catalyst Principal Partners.

The idea is to secure lucrative deals and make high returns from this booming consumer space.

Catalyst has secured $125 million to invest in the East Africa region over the next five years.

The Mauritius-based private equity firm plans to invest into consumer goods, retail, technology, services, manufacturing and engineering, with investments of between $5 million and $20 million apiece. Catalyst is targeting investments in Kenya, Uganda, Tanzania, Ethiopia, Rwanda, Zambia and the Democratic Republic of Congo. “We shall not only be providing capital, but will also be involved in management and strategy as well as providing expertise,” said Upadhyaya.

The fund says it has a strong pipeline of deals that will be announced in the coming months.

“We have a team that has a world-class experience and therefore ability to deal with the global interface. We also understand the region and are based in Nairobi, which keeps us close to the companies we have invested in,” said Upadhyaya.

While Catalyst remains bullish about East Africa, the global financial crisis has presented significant challenges to its fund raising activities. For instance, most parts of Northern Europe have been on a decline as well as parts of the US.

“East Africa has five out of the seven fastest growing economies in the world. This is why we remain bullish and is taking a long term view of the region, 4-5 years- a period that is sufficient to mitigate the political risks present. The returns in this market is attractive and far outweigh the perceived political risks,” said Biniam Yohannes, also an MD at Catalyst Principal Partners.

 A recent peaceful political transition in Ethiopia following the demise of its former leader Meles Zenawi provides a glimpse of the reforms undertaken so far in many countries in the region. Kenya’s implementation of a new constitution is also expected to usher a new era in the region’s biggest economy when its citizens go to the polls in March 2013.

“The macroeconomic environment is attractive with a rising population and a growing middle class in most of the countries in East Africa,” said Upadhyaya.

Apart from Catalyst, there is a long list of big hitters in the private equity space with their sights trained on Africa. In recent months, many private equity firms have been swapping low-growth buyout deals in Europe and North America for a slice of booming consumer demand in Africa.

The attraction of Africa remains its youthful and booming population that could almost double to 2 billion by 2050, some of the fastest growing economies in the world and an emerging middle class which wants everything from banks and insurance to places to eat out.

Consumer boom is at the heart of Catalysts interest in East Africa.

“Uganda has one of the highest proportions of youth under 21 years old in the world. Although East Africa’s middle class is not growing at the scale of that in China or India, the dynamics, pace and opportunities offered are the same,” said Upadhyaya.

In Kenya, some of the large private equity firms include Emerging Capital Partners which has invested in Nairobi’s Java House, a dining restaurant. Helios is a big investor in Equity Group, one of the fastest growing retail banks in Kenya.

Private equity firms and their investors that long shied away from sub-Saharan Africa, worried about losing money on deals in countries in the grip of war or corruption, are changing their views on the risks as democracy takes hold.

And with portfolios focused on Europe and North America scarred by poor returns from deals that firms paid too much for and financed with too much cheap debt, they have been under pressure to find better deals.

But the uptake in Africa of private equity has been low. “The private equity industry in Africa is still nascent and only about 10 years old compared to 25 years of its existence globally. Entrepreneurs in East Africa still need education on how to handle risk capital,” said Upadhyaya.