When Citadel Capital, an Egyptian private equity firm, acquired the shares of the struggling initial leader of Sheltham, the Rift Valley Railways consortium, it went head to head with Kenya’s Trans-Century, one of the country’s largest private equity firms.
Both parties have since come to an agreement about dividing the company but the Egyptian’s willingness to muscle in is an indication of how attractive the investment is. RVR connects Kenya’s Mombasa seaport to Uganda’s capital Kampala and the fight for control highlights the consequences of years of mismanagement and underinvestment, as well as the vibrant business in the region and the importance of the discovery of commercial quantities of oil in Uganda. All this means there is strong pressure to modernise the railway.
Infrastructure is as much a disincentive as it is a business and investment opportunity, but it is one of many sectors private equity funds are considering.
Among emerging markets, sub-Saharan Africa is fairly new in attracting such interest, but Kenya is home to several private equity firms. Some, such as Trans-Century, grew out of private investment clubs. Now the country is being used as a beachhead for investment firms, says Milton Lore, chief executive of the Africa Venture Capital Association (AVCA).
The East African Community withstood the global financial crisis remarkably well. With the exception of Kenya, which struggled with the fall-out of the violent post-election crisis in 2008, member countries generally maintained gross domestic product growth rates of 5 per cent and above in 2009. Driving this resilience was intra-regional trade that also benefited from strong demand in post-conflict border regions such as eastern Democratic Republic of
Congo and southern Sudan.
Kenya may have attracted less inward foreign direct investment than its neighbours in 2009, but its companies are the most active regional investors, expanding in financial services, hotels, airlines and agro-processing. This has changed the situation for private equity, says Paul Kavuma, chief executive of Catalyst Principal Partners. Kenya’s aggressive firms offer exciting private equity opportunities. “The ambitions of local entrepreneurs have grown with
regional integration. They no longer just want to be number one in one economy, but have broader ambitions,” he says.
“The more forward-looking entrepreneurs want regional scale. This translates into a deeper need for capital that bank financing can’t meet. We are looking for trailblazers.”
Mr Kavuma and his colleagues are raising $100m for investments in consumer goods, retail, financial and business services, industrials, manufacturing and value-added processing, technology, telecommunications and infrastructure. Tamer Makary, executive director of Arqaam Capital, a Dubai-based investment bank, says Kenya will be an entry point for Middle Eastern capital seeking new directions. After the financial crisis many family groups pulled out of private equity funds to manage and invest their own funds.
“Africa is the new frontier,” Mr Makary says. Arqaam Capital holds several mandates to find acquisition targets in logistics, agriculture and healthcare.
Kenya has attracted funds focusing on small and medium enterprises. TBL Mirror Fund is backed by Dutch private investors who lend their expertise to acquired companies. It has invested in software, market research, call centres and healthcare. Several SME funds are backed by soft money – cash not invested solely to give a profit – from development finance institutions or social investors such as the Shell Foundation, which see SMEs as crucial for more equitable growth. AVCA also tries to engage African pension funds to consider private equity as an asset class. Providing capital to local firms helps nurture the domestic economy while broadening the subscriber base. Institutional investors are often concerned about exiting investments, but AVCA’s Mr Lore says Nairobi’s Stock Exchange is one of the oldest and largest on the continent and provides such an exit route through public offers.
Though still small in volume terms, venture capitalists have begun to look at Kenya’s new economy: a relatively high mobile penetration rate, a mobile money service and improved connectivity through several fibre-optic cables have laid a foundation for digital, e-commerce and mobile ventures.
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