PRIVATE EQUITY IN KENYA

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Private equity is a concept for investment where private equity firms ( in industry lingo referred to as General Partners) pool the finances of institutions such as insurance companies, pension funds and those of high net worth individuals (known as Limited partners) and invest these funds in high growth potential companies.

The aim and key strategy of Private Equity firms is to rapidly (over a period of three to seven years) and exponentially increase the value of the investee company and then exit, either by sale to strategic investors or by way of an IPO, in the process making a profit from the sale. The General partners (GP) who are charged with the mandate of investing the funds thereafter take their cut of the profits, typically about 20% (known as carried interest) while the Limited partners take the rest of the profit as return on their investment.

The private Equity landscape in Kenya is shaping up to be an industry to reckon with. According to the Delloitte 2012 Private Equity survey, 45% of all private equity deals in Africa were snuffed up by three countries; Kenya, Nigeria and South Africa. This is a clear indication of a rising industry in the country, one that deserves more focus.

The survey goes on to note that of the 13 Private Equity Deals closed in East Africa in 2012, 6 were in Kenya, a total deal value of $ 36.1 million. This figure, in my view, is set to rise even further in the future based on various factors. One important factor is that in 2012 alone, there were 4 new funds launched and dedicated solely to the East African region. Notable among this is Catalyst Principal Partners who launched a $125 million fund.

A second important factor informing my prediction of increased deal incidence and value is the problem of reduced returns in the more developed countries as compared to Africa whose potential for higher returns is more promising according to Bloomberg (as high as 30%).

Thirdly, and very prominently, the reputation of Kenya as an ideal destination in the region sets it apart as particularly ripe for Private Equity. According to a research conducted by the economic intelligence unit, Nairobi is ranked above Lagos in ranking of top investment hotspots. This fact is evidence by various multinationals setting up regional offices in Nairobi including Google, IBM, JP Morgan, BP group, General electric, Pepsi and Nestle.

Lastly, according to the survey, sector categorization of Private Equity most targeted investment are all in areas that Kenya performs particularly well at. Manufacturing and industrials in the region raked in total Private equity investment of $102 million, Agribusiness (which Kenya is known for) attracted P.E investments of $284 Million in the region, Financial services ( $57 million), tourism and Hospitality ($31 million) and Healthcare (2 Million).

There should therefore be a justified increased interest and appetite, not only by P.E investors in the country but also by P.E professionals and practitioners, to ensure the realization of the full potential of the industry in the country. This blog hopefully will be influential in this endeavor.

 

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