Deal-Making: Unpacking Private Equity Activity in East Africa
East Africa’s share of private equity transactions on the continent has been rising steadily over the past few years. A growing number of private equity funds are opening offices and looking to invest in high growth SMEs. Competition for deals is heating up, with a mix of locally-based and foreign funds, as well as strategic investors, such as multinationals, all looking for investment opportunities.
“The market is very competitive [because] you have three different groups looking at the same target companies,” says Sheel Gill, head of transactions and restructuring at KPMG Kenya. “There are a lot of opportunities, but it is taking very long to close deals.
A lot of times you start talking to the target company and you try to prepare them for a transaction – and that typically tends to take close to about a year to 18 months. I genuinely feel that it’s taking too long to close deals.”
Between 2007 and 2014 some 79 deals with a value of approximately US$822m were reported in the region, according to a new KPMG report. “Since 2011, the market began picking up [and] now there is a lot more focus on the region,” says Gill.
The report, prepared in partnership with the East Africa Private Equity and Venture Capital Association (EAVCA), is the first focused on funds investing in the region.
“The majority of the private equity houses only very recently started investing. So there actually isn’t that much data in general for East African focused funds,” says Nonnie Wanjihia, executive director of EAVCA.
The findings show Kenya dominated private equity activity taking the lion’s share of 63% of deals recorded. The most popular sectors were agriculture, financial services, fast-moving consumer goods, ICT and healthcare.
“We are seeing an increasing appetite for larger deals… I expect deal values to go up because of the competition that we are facing, a skew in the valuation expectations and to some extent an elongated time to closing deals,” Gill explains.
But even with the rising interest, the region still accounts for only a fraction of total global private equity activity. East Africa focused funds raised $1.6bn between 2007 and 2014, a paltry 0.04% of the estimated $3.7tr raised globally. Private equity fundraising channelled to East Africa mostly came from Europe and North America.
“This shows local, regional, Middle Eastern and Asian investors are yet to be captured by fundraisers. I guess a couple of success stories would shift that mindset,” explains Gill. “Currently there are not enough success stories of private equity funds here. I think if you have got a private equity fund that has been able to flip around some of its assets two to three times and made huge gains, then the Asian investors will also start investing through private equity funds…”
Growing number of exits
Private equity funds typically look to exit their investments by putting their shares in a company up for sale on a stock market, or by selling them on to other organisations.
Contrary to perceptions, exits are increasing in the region, particularly in financial services. The total number of reported exits over the seven year period were 21 at a value of $260m.
“I was pleasantly surprised. [It is] clear that the number of exits have been increasing since 2011. I think this is really positive for the industry,” says Gill.
However, there were no exits in some sectors. “[These include] mining, real estate, renewable energy, education [and] retail which had no reported exits over the seven year period – yet there have been investments in these sectors.”
Bigger fund sizes
The most popular fund sizes in the region are between $11m to $50m and between $101m to $1bn.
“I think that shows the nascency of private equity houses here,” says Gill. “I was talking to a very seasoned private equity professional in the UK and he said for East Africa he felt a fund less than $500m is not an economic operating model.
“He feels this region needs [bigger fund sizes]. I agree with him. If you look at the cost of running a private equity fund, it is quite expensive – so in order to get these economies of scale every private equity fund would like to have a bigger fund size.”
The article was published on HOW WE MADE IT IN AFRICA and the author of the article is Dinfin Mulupi