Increased inflows of private equity and venture capital funds across East Africa have afforded Ugandan businesses the option of cheaper, long-term capital, but differences in the expectations of foreign investors and local entrepreneurs have led to few transactions being concluded.

While private equity funds usually go to fast-growing businesses that need capital for expansion, venture capital funds are preferred for startup companies that require money to establish production facilities.

Many private equity funds come in for a 3-7 year investment period coupled with targeted returns of investment averaging 20-30 per cent — calculated in US dollar terms. Average funding amounts range from $1 million-$10 million per transaction, industry sources said.

In spite of this, foreign private equity funds have registered low penetration rates in Uganda, which is attributed to mismatched expectations.

Whereas most PE funds are focused on determining accurate financial valuations for businesses in order to reduce acquisition costs and boost returns on investment, local entrepreneurs seem more interested in strategic commercial benefits tied to equity transactions.

These include strengthening business supply chains, improving product quality certification standards, providing strong marketing systems and hiring talent.

As a result of these divergent goals, relatively few PE transactions have been recorded.

Less than seven PE deals are executed in Uganda every year while funds mobilised for investment lie idle for several months before being utilised, sources said. Most of the PE deals are in the financial services sector.

PE firms

Growing interest in Ugandan companies has been registered among PE firms based in Mauritius, South Africa and the United Kingdom, industry sources said.

“I am optimistic about larger volumes of private equity funds being mobilised over the next three years as political stability and economic integration deepens across the region,” said Richard Mugera, country director at Ascent Capital’s Uganda Office.

Despite emerging signs of election fever and traditional investor jitters experienced during the election cycle, the government is optimistic about strong growth in private equity and venture capital flows in 2016.

“We expect inflows of private equity and venture capital to slow down for some time as the election cycle takes its course.

“However, the aftermath of the General Election should witness stronger capital flows on account of a solid economic track record. So far, significant commercial interest has been noted among investors based in Turkey, the Nordic countries and the US,” said Frank Sebbowa, executive director at Uganda Investment Authority.

Some 79 private equity deals worth $822 million were recorded across the region between 2007 and 2014, research data from KPMG and the East African Venture Capital Association shows.