Private equity billions flow into East African companies
For most entrepreneurs, their business is their most valued asset. They would prefer to run their it their own way without outside interference, after all, isn't that why most of them opted for self-employment.
Selling out part of the stake is out of the question, but it could be the only option to get the much needed capital in a market where financiers are few.
Global and local Private Equity firms have been lining up with billions of cash willing to invest in Kenya, and the trend is catching on.
About 53 funds are targeting East Africa this year and around 30 have already opened offices. Together they have raised approximately $633million (Sh52.54 billion) Kenya and the region has in the recent past experienced an influx of Private Equity, with large and relatively lower amounts.
Last week, Fusion Capital, announced it will be investing Sh6 billion in local SMEs this year alone in addition to $30million (Sh2.5 billion) put in various businesses last year.
“We have been quite happy with the quality and quantity of returns in the last year or so,” said Luke Kinoti, co-founder of Fusion Capital, which last year raised $150 million(Sh12.45 billion) to invest. Kinoti says the private equity concept has not fully caught on among their target SME businesses, but the progress is promising.
Just last month Progression Eastern Africah Microfinance, founded by a local professionals was launched. Its target is to put in $40 million(Sh3.4 billion) this year in the micro finance sector.
Mathias Katamba, a partner at Progression says 62 per cent of people in Kenya, as the most developed country of the region, still have no access to financial services.
Emerging Capital Partners, another Africa-focused firm last week announced from Johannesburg it is planning to deploy a unspecified "significant amount" of capital in East Africa, and is planning to use Kenya as its base.
A study released last month by Africa Assets and Deloitte, "The 2011 East Africa Private Equity Confidence Survey," showed East Africa is likely to see more private equity in the near future. New East Africa-focused funds will be targeting high-growth small and medium enterprises in consumer-driven sectors. In the past PE flows went largely to infrastructure, telecommunication healthcare.
Kinoti says Fusion will this year invest in real estate as the ever growing sector though in the past it has been into manufacturing and retail sectors.
A wide range of sectors have benefited from venture capitalists, probably why more are coming in.
Those who have been in the business a bit longer include Citadel Capital, which has put in significant amounts of money in revival of the Rift Valley Railways. Centum Investments which is listed in the Nairobi Securities Exchange, with investments in various companies across the region has seen its profits grow significantly over the last few years. With the many entrepreneurs coming up, the demand for capital is bound to be higher and PE will be a better option. “Our banking industry has a serious problem, you see we are in the restaurant business, but if we needed a loan, the banks will demand that we have a title deed, that we must own land for them to lend us money to buy plates,” says Phineas Kimathi, CEO of San Valencia Group which has allowed in in private-equity funds from Fusion Capital.
“That we have been in business for 20 years would not matter. Lending should be based on business credibility and also credit worthiness, a road that Fusion travels,”adds Kimathi.
The technology sector, cited as one of the more promising sectors, has seen the likes of Kaizen Venture Partners that has put significant input in the fibre optic cable. It currently has about $15m (Sh1.27billion) under management and is targeting deals in the range of $3m to US$10m (above Sh 850 million) in the EAC this year.
Last year, Helios Investment Partners, which owns 24.99 per cent of Equity Bank announced it had raised $900 million(Sh74.7 billion) from its investors geared towards investments in Kenya's telecommunications and outdoor advertising sectors.
European-based Aureos Capital has sights on the Kenyan healthcare sector. This year it has made $2.75 million (Sh228 million) investment in Revital Healthcare, a medical equipment manufacturer based in Mombasa. This is after injecting another $2.5 million (Sh206 million) in the Avenue Group and Sh200 million in Nairobi Women’s Hospital. In 2011, the firm had set aside Sh20 billion for Kenya alone.
Catalyst Private Equity, another incoming fund has pledged annual investments amounting to around $45 million(Sh3.74 billion) across the region .
But the entry of PE has not been without hitches. Market penetration has not been an easy job for some venturists, especially among the Micro, Small and Medium enterprises where the concept is not well understood.“At times the businesses are very skeptical about the source of the money and may not be willing to let in partners,” says Kinoti citing the rise in instances of crimes, piracy, fraud and terrorism. Fusion has been operating in Kenya since august last year and has managed to get stake in about 500 SMEs. There are also worries of rising interest rates and inflation that may see returns fall short of what they expected.
The Progression fund’s managers say they are mindful that central banks across the region are raising or considering raising capital requirements for commercial banks, and so lenders involved in microfinance may have to start scaling up their capital base soon. There is also the issue of companies accepting outside interference as most of the funds will want to see better systems, just to secure their investment.