Exit strategies: one of many thorns in East Africa’s P.E. side

 

Overall the deal value of Private Equity transactions in 2012 in Sub Saharan Africa moved southwards of the 2011 performance by 62.6 per cent, to USD 1.1 bn. The number of deals was also 12.1 per cent below those of 2011, where 66 deals were done.

East Africa defied the trend, mainly buoyed by deal value that increased by 152.4 per cent, amounting to USD 474.6 m, up from USD 188.0 in 2011 though the deals done reduced from 20 to 13, a 35.0 per cent decline.

While Kenya continues to lead the P.E. sector in the region, its dominance is reducing with the emergence of new markets like Ethiopia, which registered 3 deals in 2012. Meanwhile, Kenya’s total percentage of deals done reduced from 60.0 per cent in 2011 to 46.2 per cent the subsequent year.

The deal value in the region has the potential to grow more than threefold along with the number of deals done if some of the bottlenecks are addressed.

There is limited education of the business community; many business owners only know about mainstream debt from banks as a source of financing, while others cannot stand the thought of having an investor as a part of their business. More education about the advantages of P.E., like company restructuring, value creation, technical expertise provided along with financing could grow the P.E. sector in the region.

The Capital Markets Authorities in the region have not educated owners on or publicised the Growth and Enterprise Market Segment (GEMS) that provide an alternative exit route for the smaller P.E. investments, in addition to the main stock exchanges in the region. It is no wonder therefore that more vibrant markets like South Africa, Nigeria and Kenya register more deals than most East African markets. Testament to this is the fact that those three countries accounted for 61.0 per cent, in 2011, and 45.0 per cent, in 2012, of the P.E. deals done in Sub Saharan Africa.

Poorly structured businesses, management teams, for example, are often largely entrepreneurial but not professional, explains challenges like bad record keeping and poor accountability. These make the due diligence process almost impossible for potential investors, leading to investors losing interest.

Unlike the more developed markets, there are only a small number of private equity professionals and no P.E. and Venture Capital governing bodies to regulate the sector, despite its enormous growth potential.

Bottlenecks notwithstanding, there are very attractive returns on investment, a large demand for capital, with a wave of infrastructure investment in the region expected to continue well into 2040. Growth and ability to consume in the region could also increase significantly when oil production starts. Paying attention to some of these issues could enable East Africa to move ahead of the pack in the Private Equity sector in the continent.

Further reading

7 Key Hurdles to take when Investing in East Africa http://vc4africa.biz/blog/2013/06/26/7-key-hurdles-to-take-when-investing-in-east-africa/

Investing in (East) Africa? 9 key solutions to make equity deals work http://vc4africa.biz/blog/2013/07/03/investing-in-east-africa-9-key-solutions-to-make-equity-deals-work/

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