Private equity firm Catalyst Principal Partners has just announced its second investment in a Kenyan firm — a stake in Jamii Bora Bank. The deal comes soon after Catalyst invested in drugs retail chain Mimosa Pharmacy. Mr Paul Kavuma, the Catalyst chief executive officer, spoke to the Business Daily on the PE landscape in East Africa and his firm’s investment plans.
The past 10 years have seen a steady growth of PE interest in East Africa. What is making the region, and Kenya in particular, so attractive?
East Africa is the fastest growing economic bloc in Africa and Kenya is the largest economy in the bloc. Growth rates are strong at over five per cent, and the expectation is that this will get even higher once Kenya is through with the implementation of constitutional changes and infrastructure development projects. East Africa has a sophisticated economy with a strong financial services sector, strong education and depth of management that is unparalleled in Africa. In Kenya, you also have a very developed entrepreneurial class that covers everything from SMEs to large corporations. These are ingredients that are going to make the region attractive to private equity despite any worries over security.
Many PEs have found it challenging to raise funds from the local market. Why?
In other markets around the world, the PE industry is predominantly financed by pension funds. In East Africa though, gestation period for PEs has been financed through international capital coming in and seeding the initial PE funds. Besides, in some cases, the regulatory environment has made it difficult to raise funds locally. Fund managers don’t have the full discretion to deploy capital into just any asset class they see fit. If they wish to deploy capital to PE, they have to come back to the trustees and seek their endorsement. The trustees often have to seek the Retirement Benefits Authority’s approval making the process a lot more complicated. Streamlining that process could see local fund managers deploy a lot more capital into PEs.
What can be done then to encourage local institutions to invest in the PE industry?
We are developing the asset class and demonstrating that we can create exceptional businesses and support their development across different sectors. The more we do this the more people are going to take an interest. One way to bring in pension funds is to encourage regulatory reforms that allow asset managers more discretion to choose asset classes they want to invest in. The trustees also need to become more familiar with the industry. If PEs were captured in the same framework as the other investment classes, we would see a lot more capital coming in, because the fund managers can already see the returns that they can get for their clients.
With six investments under its belt, where should we expect to see Catalyst in 2015 and onwards?
You will certainly see more investment in Kenya. We expect to deploy a substantial part of our capital in this market, even as we continue to invest in Uganda, Rwanda, Tanzania, DRC, Ethiopia and Zambia. We will continue to look at the industrial sector, education, technology and financial services, with broad focus on consumer goods, retail, healthcare, food and beverage, and personal care products, among others. We are also looking at logistics, distribution and inputs or heavy equipment provision to industry, because we expect the extractive industry to continue growing and local players need to take advantage of service provision to get into these new and emerging sectors.
What is your criterion for picking a company to invest in?
We should correct one thing, that although the business was established in 2009, we really only established the fund in early 2011. The nature of our investments demands that we don’t make a lot of investments. Catalyst can only really do an average of two investments a year, and with this fund we will probably make only 10 to 12 investments in total. That speaks to our selection process. It takes time because we like to understand the industry in depth, understand the capacity of a business, management, skills, experience, strategy and how we can help the business to achieve its strategic aspirations.
You will soon exhaust the $125 million fund you are currently using to invest. What are your plans in terms of raising new funds?
We will fundraise as soon as we reach the private equity cycle that allows us five to six years to invest a fund, and another three to four years to exit the fund. This means we will raise funds in the fifth or sixth year when the first fund is fully deployed.
How do you treat the capital you get back after exiting a business?
When we exit our investments, we return the capital to the people who invested in our fund, together with their returns. If they think we have done a good job in terms of investment and in the returns we bring in, they will then be encouraged to deploy additional capital in the new fund. We however also expect to see more capital coming in from new investors.
There is big money going into infrastructure and energy in Kenya at the moment, especially through public-private partnerships. Where does Catalyst fit in this equation?
There are PEs that are focused on these projects and are participating. Our fund has had a look at infrastructure but the challenge remains the time it takes to bring these projects to fruition – that is the process of negotiating and executing things like power purchase agreements.
PPP agreements take a lot of time. Only big funds with a lot of resources have room to offer more support in such areas. There is however an opportunity to try and streamline those processes to fit the realities of smaller funds. Our allocation for infrastructure is still relatively small, but we do have people within our group who have gained the experience of doing very large PPP projects across emerging markets and so the capacity is available.
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