East Africa’s largest private equity fund Catalyst Principal Partners reached its final close last week, at $125m.
It marks a growing pot of money chasing deals in the region whose nascent private equity industry has little record but is keen to make the most of a dearth of capital for a growth market of 200m people only just beginning to flex their increasing disposable income.
Chief executive Paul Kavuma, previously at Actis, admitted it took “a long slog” over three years to raise the money, three-quarters of which comes from development finance institutions (DFI) including the World Bank’s IFC, UK-government backed CDC and the European Investment Bank.
The fund has made only one investment to date, in Chemicotex, a consumer goods manufacturer in Tanzania that markets toothpaste throughout east and southern Africa, prompting concerns the company’s investments may not yet merit its 2 per cent annual management fee since its first close in 2010.
“Our deals need time,” says Kavuma, adding two deals derailed by the region’s interest rates and currency crisis last year are likely to go ahead by the end of this year.
He says fundraising was extended once the team realised it could outstrip its original $100m target, and to accommodate the impact of “bleeding” international markets during the global financial crisis and efforts to seek more regional private capital to complement the DFI money.
Some analysts are nevertheless concerned there is already too much money sloshing around a region where many family-owned businesses tend not to trust outside investors.
Already 19 funds focus on east Africa alone, with a further 40 broader-based funds that include investments in the region, according to researchers at Africa Assets.
“Development finance institutions put money into several funds at the same time and that may end up driving up the price as they compete for the same deals,” says Africa Assets director Andrea Bohnstedt.
Edward Burbidge, managing director of Kenya-based corporate advisory firm Burbidge Capital which advises private equity companies, says many private equity funds operate in different segments, however, from $100m deals down to small business investments, and it remains the best or only option for many regional companies seeking growth capital.
“There is a vast universe of east African companies who see private equity capital as an appealing option,” he says.
“At present the public equity capital markets are providing access to equity capital to only a small number of very large companies in east Africa, and interest rates have been very volatile. Plus there is only so much debt a company can take on.”
Private equity deals in Kenya only in recent months include investments in an insurance company, shopping mall, cement manufacturer, steak houses and a coffee chain. But analysts say investors must be more creative if the industry is to develop.
“A lot of folks are chasing the same deals,” says Kenya-based analyst Aly-Khan Satchu. “Private equity companies need to look harder and deeper because there are a lot of spaces which the private equity companies are not looking at, like digital.”