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An East African perspective on private equity investment as a means of creating value

DLA Piper thought leadership

Africa’s economic outlook is on the up, with the African Development Bank in its 2019 African Economic Outlook report forecasting sustained rise in the average GDP (gross domestic profit) growth rate for the continent – from an estimated 3.5% in 2018 to 4% this year and 4.1% in 2020.

 Growth in investment is one of the major factors contributing to this, with private equity (PE) investors letting the money do the talking and PE funding for African businesses having increased from 2017 to 2018, by around U$300 million.

The East African Perspective

Over the course of the last six years, a total of more than 1 000 PE deals – worth in excess of US$25 billion – have been concluded in Africa and close to 200 those have taken place in the East Africa region.

We see increased PE activity in the region, across a diverse range of sectors, including agro-processing, capital investment, construction, energy, financial services, manufacturing, mining, tourism and telecommunications and countries such as Kenya and Ethiopia recording markedly higher than average GDP growth rates.

With a liberal and diverse economy, a growing middle class and a relatively stable political environment, business confidence in the former is at a high. Kenya recently went up 19 places, from 80th to 61st, in the World Bank Ease of Doing Business 2019 report; and has been identified by the African Private Equity and Venture Capital Association as the second most attractive African country - only after Nigeria - for PE investments in the coming years.

The second most populous country in Africa, Ethiopia boasts one of the fastest growing economies in the world with economic growth of 11% over last decade and 7.7 percent in 2018.  The significant growth of private enterprises with high demand for capital and local banks inability to meet the capital demand and entrepreneurial aspirations of local companies, makes Ethiopia an ideal destination for PE funds.  Also, the government have a strong desire to overhaul the agricultural sector and to build vibrant industrial sector. Given the inadequacy of traditional sources of investment, Ethiopia has an untapped potential to become a PE hub. PE companies can follow the footsteps of Schulze Global Ethiopia Growth and Transformation Fund, the major PE fund focusing on small and medium enterprises.  

A shift in focus

With more interest, though, comes more competition. In order to maintain their competitive edge, PE firms need a shift in focus – from lowering their costs to jettison their profits to the long-term viability of the companies in which they invest. They need to find new, innovative ways of creating real value for these companies and transforming them into sustainable businesses that will continue to prosper even after the firms funding them have stepped away.

The PE fund manager’s role has been extended beyond what his or her title suggests, to include more active engagement the businesses they invest in than that of the traditional fund managers, in. At the same time, the relationship with the founders and owners, must always remain front of mind.

The need for deep strategic expertise

In the East Africa region, PE firms need to bring their deep strategic expertise to the table to navigate the challenges around developing local human capital, cultivating local talent and allocating funds for training and development.

 They need to turn their attentions to developing operational management and transforming family-run businesses into mainstream, professional, modern businesses with the right management team; and to take advantage of market innovations as well as new structures, such as investment holding companies and evergreen funds, to overcome cost and time constraints.

The knock-on effects

In terms of their impact, PE investments cast a wide net. The businesses they back grow faster than other types of companies, largely because of the hands-on style of ownership that most PE investors display. But in addition to yielding profits for its investors, the industry also impacts on the broader socio-economic conditions in a country or region. PE investments increase the stability, strength and vibrancy of both local and regional economies in Africa, by injecting international capital into the continent.

The article was published in the Daily Nation on 20th August, 2019 and can be accessed here.