By JAMES ANYANZWA

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East Africa is set to benefit from a new investment model being adopted by private equity funds, which are shifting from traditional avenues such as shareholding in private firms.

PE funds plan to issue more long-term private debt to East African firms that operate in a market whose foreign direct investment flows remained largely stagnant at $9 billion in 2018, according to the latest World Investment Report.

Private debt allows investors to benefit from more bond-like returns although they cannot claim ownership of the companies. It is argued that globally, investor interest in private debt is increasing because of the low yields available from government bonds, with the major players being pension funds and insurance companies.

FINANCING

The total volume of institutional assets under management allocated to private debt is estimated at $638 billion globally. In 2017, private debt funds worldwide raised some $106 billion of new capital. Of this, $67 billion was raised by funds in the US, $33 billion by those in Europe, and $6 billion by funds in Asia.

Data from the East African Private Equity and Venture Capital Association (EAVCA) shows that PE funds are making inroads into the private debt market to boost their efforts in securing a presence in East Africa, a bloc with a market size of more than 170 million people.

A graphic showing private equity funds raised globally, in Africa and in East Africa. GRAPHICS | FELIX MIRINGU

EAVCA’s executive director Eva Warigia said that although most foreign investments in the region are still largely in the form of private equity, the increased demand for financing by firms to support their growth plans is pushing them towards private debt.

“Private debt has a long-term equity structure, with a fairly reasonable interest rate, which is making it easier for companies to venture into the East African region,” she said.

In 2018, for example, Co-operative Bank of Kenya received $150 million in private debt from the International Finance Corporation, the lending arm of the World Bank, for onward lending to small and medium-sized enterprises. And early this year, regional lender Equity Bank secured a $100 million long-term loan from the IFC to strengthen the capital of its Kenyan subsidiary and lend to SMEs.

“The participation of pension funds in private equity investments is improving access to capital for small businesses while enabling the funds to tap into new sectors for their portfolio diversification,” said Ms Warigia.

TAX

According to the African Private Equity and Venture Capital Association, Africa’s PE market will continue growing, presenting a unique asset class for the continent while allowing companies to expand, create employment and improve lives.

Last year, Kenya was the favourite investment destination for PE funds in the region, attributed to its relative low capital gains tax that was initially set at five per cent. It has now been increased to 12.5 per cent in the 2019/2020 budget. A diversified economy, a fast growing middle class and a stable political environment also helped to attract foreign investors to Kenya.

Outside the EAC, Ethiopia was the other destination for funds.

Rwanda introduced a capital gains tax of five per cent through the Income Tax Act (2018) while Burundi charges 15 per cent. Uganda charges 30 per cent capital gains tax, but the rate for mining firms varies from 25 per cent to 45 per cent, based on the profitability. Tanzania’s capital gains tax is 20 per cent for foreigners and 10 per cent for locals.

Between 2017 and 2018, PE funds invested $1.4 billion in the region, of which $1.2 billion went to Kenya, mainly in agribusiness, financial and fast moving consumer goods (FMCG).

The companies that benefited include Vodafone Kenya Ltd, Kipeto Energy, Avenue Hospitals, Asante Capital EPZ, Haco Industries Kenya Ltd, Branch International, Malindi Solar Group, Iberafrica Power EA Ltd and Britam Holdings. Recently, French investment firm Creadev injected $5 million into Kenya’s Twiga Foods to help the firm grow its fresh-produce business.

Workers at Kenyan-based Twiga Foods Ltd. The company recently received $5 million from French investment firm Creadev. PHOTO | FILE | NATION MEDIA GROUP

COMPANIES THAT BENEFITTED

In Tanzania, deals were recorded in the transport and healthcare sectors, with the highest value in 2018 — $206 million — attributed to the $130 million Swala Oil and Gas transaction. Other companies that benefited from PE funds were PAE PanAfrican Energy, Zhongyuan Nengkuang Development (Tanzania), Pyramid Group, Proparco’s Tanzanian unit, Helio Resource, Kibo Mining Plc, Brookside Dairy Tanzania Ltd, Sadolin Paints (T) Ltd, Sunshine Mining Ltd and DSM Corridor Group.

Rwanda recorded deals in agribusiness, FMCG and financial services. Beneficiary firms include Umubano Hotel, Metafoam, I&M Bank Rwanda, Rwanda Energy Group Ltd, Crane Bank Rwanda, Millicom International Cellular, New Stream Group and Sarura Commodities.

In Uganda, Qatar Investment Authority’s acquisition of Airtel Africa accounted for 96 per cent of the reported total deal value in the first half of this year. From 2017 to H1 2019, agribusiness, energy and natural resources and manufacturing have accounted for 56 per cent of the 32 reported deals.

Companies that benefited include Uganda Exploration Areas, Sadolin Paints (U) Ltd, Lirtix SA and Rondatel SA, Uganda Telecom, Cipla Quality Chemicals Industries Ltd and Lion Assurance Company Ltd.

According to EAVCA, the entry of the Ethiopian-focused PE funds has helped grow the investment profile of the country as a PE destination, coming in third place behind Kenya and Uganda on the number of deals closed in that period. Manufacturing and the FMCG sectors recorded the biggest deals, followed by agribusiness and mining.

The deals involved National Tobacco Enterprise Share Company, Repi Soap and Detergent Share Company, Tulu Kapi Gold Mines Company Ltd, Ethio-Asia plc, Ethiopian Airlines and Greenpath Ethiopia.