Kenya becomes a magnet for private equity

February 28, 2008: In the last five years, private equity funds have been making a beeline for Kenya chasing the fast growing business sector especially small and medium enterprises (SMEs). Of the nine private equity funds currently operating in the market, five with a combined capital base of over $70 million (Sh4.9 billion) have targeted SMEs in East Africa.

They include Business Partners International Limited (BPI) launched in February last year, Grofin East Africa launched in mid-2005, Acumen Fund, InvesteQ Capital Limited and African Agricultural Capital that focuses on agriculture related businesses.

SMEs will get a further boost with the planned creation of the East African Development Bank (EADB) venture capital fund estimated to be around $40 million (Sh2.8 billion) that will also focus on SMEs. This is a far cry from the last decade in which SMEs came to be referred to as the ‘missing’ or ‘forgotten middle’ because they have great difficulty in accessing finance to expand their operations.

SMEs are considered too large to be classified as micro enterprises and yet too small to be large industry. They often have problems meeting the collateral requirements of commercial banks which ask for title deeds, log books and so on.

A World Bank report on SMEs noted that most face equity and debt financing problems and rely on the owner’s savings, family, friends and re-invested profit in order to grow.

But with the increased interest by equity funds on the Kenyan market this is slowly changing as SMEs without adequate collateral can get finance based on projected cash flows.

“We’ll take collateral if a person has it because it enhances their risk profile but the emphasis is on the viability of the business,” says Sally Gitonga, chief investment officer. Grofin uses a similar approach.

“Our finance solution includes business development, making us a “one-stop-shop” for clients with viable business ideas from start ups, through the phase of business growth, including established businesses that need up to one million dollars in finance,” says Fred Kiteng’e, investment manager at Grofin Kenya.

The company requires potential clients to demonstrate commitment to the business. Transactions such as outright purchases, acquisition of shareholding and management buy-outs can be supported; in addition to business start-up/expansion says Mr Kiteng’e.

“We consider the financial needs of a business in its entirety and such includes financing of assets as well as working capital. GroFin does not have a specific sector focus and will consider business opportunities in the service, commercial and manufacturing sectors, across all industries including franchises,” he says.

The Acumen Fund on the other hand has a more social focus. To be considered a business owner must be working to deliver goods and services to low income earners in four key areas - health, housing, water and sanitation. The Fund uses a range of investment vehicles including debt, guarantees and direct equity.

Its targeted clients include non-governmental organizations, small and medium for-profit companies in need of capital and larger multinationals.

“We believe that every investment is unique and are able to provide both patient and flexible capital combining different financial instruments to provide an appropriate investment package and efficient capital structure to meet the needs of each particular investment,” says Nthenya Mule, the Kenya manager for Acumen.

At the top end of the private equity market are funds like Actis and Aureos which are usually involved in large transactions involving investments in individual companies of two million dollars and above.

Actis has been in the market for decades with a billion dollar portfolio and investments strewn across Africa, Asian and Latin America. The Fund has invested in telecommunications, financial services, mining, agribusiness and infrastructure with blue chip companies as clients such as Mumias Sugar, Celtel, Homegrown, and Housing Finance among others.

Aureos primarily makes equity investments and frequently provides debt financing to support these investments.

“Aureos typically enhances a company’s financial structure, governance, systems and controls, and strategic development,” says Fred Murai, a manager at Aureos Kenya.