East Africa defies economic slump to attract private equity billions

In a year that has seen Sub-Saharan Africa suffer strong economic headwinds, East Africa has emerged largely unscathed while raking in billions of shillings in private equity investment.

An economic slowdown in China has meant reduced demand for Africa’s commodities. This coupled with falling international prices of crude oil, has meant that commodity exporters in West and Southern Africa have suffered large current account deficits, worsened by a depreciation of their local currencies.

And while countries like South Africa, Nigeria and Zambia continue to grapple with the effects of the year’s economic slump, global investors looking to make large returns on Africa’s nascent industries are looking more to East Africa.

EQUITY DEALS

Data compiled by I&M Burbidge Capital indicates that private equity deals in east Africa topped $472 million (Sh47.2billion) this year, with Kenya reported to have taken the lion’s share.

“The outlook for East Africa at the moment is quite favourable because countries in East Africa are not very dependent on commodities and this makes East Africa shine compared to the other regions in the continent,” explains Martha Osier, investment manager at Catalyst Principal Partners (CPP).

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CPP, a $125 million (Sh1.2 billion) East Africa-focused private equity fund, last week announced an exit from pharmaceutical retailer Goodlife Pharmacy in which it had bought a controlling stake two years ago.

Ms Osier says CPP opted to sell its stake after it realised its goal, reinforcing the country’s growing private equity market.

“We are happy that we have been able to make an exit in such a short period of time since we are able to demonstrate to investors that we can guarantee a return on their investment,” she explains.

Goodlife Pharmacy is the sixth investment that the fund has made. The retailer has since been rebranded and expanded its footprint from six to 19 stores and hired more staff.

CORPORATE TRANSFORMATION

“Being the majority shareholder, we provided the bulk of the capital that funded the expansion and we worked to establish a very strong management team who helped us conceptualise how the expanded stores should look like and be financed cost effectively,” says Ms Osier.

“We further set up a board that consisted of industry veterans that held quarterly meetings and the aim was to essentially transform what had been a small company and made it a corporate establishment.”

Despite the demonstrated success, private equity is yet to gain popularity particularly among public fund managers who could provide much-needed early stage capital for small Kenyan firms.

“Historically, the challenge has been legislative because fund managers had been prohibited from investing in private equity unless they met stiff conditions,” explains Ms Osier.

Public fund managers like the National Social Security Fund, however, still lag behind in their investment in private equity funds with less than 0.02 per cent of their portfolio currently invested in private equity.

The other challenge has been demonstrating that it is possible to make a viable exit.