Thursday, November 18, 2010

East Africa: Region now target for equity funds destined for the continent

November 16, 2010 - (All Africa) - East Africa, which recorded an over 70 per cent rise in the amount of investments made last year, is increasingly attracting private equity funds destined for sub-Saharan Africa.

In what a new report by the Emerging Markets Private Equity Association (EMPEA), an industry association, partly attributes to advancement of the East African Community as a trading bloc, the interest has seen investments being made not only in natural resources, but also in technological initiatives.

A significant portion of these investments in recent years have gone towards the media and telecommunications sector.

An example is the $94 million invested by Harith Fund Managers in Essar Telecom Kenya in June 2009, and the undisclosed investment made by Kaizen Venture Partners in Kenya's Bandwidth and Cloud Services Group in July this year.

Other sectors that have received private equity funds this year include agribusiness, where African Agricultural Capital put $2 million in FICA Seeds Uganda in May and Ciel Capital Ltd, which acquired a 20 per cent equity stake in CF Union Bank of Tanzania in February.

The business reforms in Rwanda and the position of Kenya as a regional business hub are other factors that have sustained investor appetite for East Africa.

And like the rest of Africa, the fast growing consumer base due to the rising middle class, the rich endowment in natural resources and positive growth prospects have also enticed investors.

The much talked about resilience of the continent in light of shocks, as exemplified during the global financial crisis in which it surprised observers by its rapid recovery, has also contributed to changing the long held perceptions of high risk.

It is a mix of these factors that has made East Africa an important alternative as players in sub-Saharan Africa private equity market move beyond South Africa, that is regarded as the most mature in the region, and leading fundraising hub and investment destination.

The EMPEA report states that capital deployed to South Africa between January 2009 and July 2010, accounted for a significant drop from the 70 per cent of investment it captured in 2008.

"This suggests that opportunities to invest beyond South Africa are now a reality," it concludes, adding that many South Africa-based fund managers are increasingly targeting potential investments with regional scale, while a growing number of General Partners (GPs) are building operations outside South Africa.

The report quotes Ralph Keitel, Senior Investment Officer in the Private Equity and Investment Funds Department of the International Finance Corporation, attributing this continental diffusion to a shift in the industry with fund managers showing an interest in the rest of Africa.

Besides, South Africa has become crowded and fund managers are now turning to opportunities abroad. Also, they are increasingly recognising that in order to maintain growth, every South African company should have a broader African story to it.

Now, the report says, this is not only seeing South Africa-focused funds expanding outwards, but also the rise of a new crop of GPs focusing exclusively on budding markets such as Nigeria and Kenya, as well as less penetrated or frontier economies, including Angola and Zimbabwe.

"Furthermore, pan-African fund managers are successfully raising funds with multi-country strategies," it adds.

This is why East Africa is emerging as an alternative investment destination on the continent. And with clear signs of rising investor appetite in sub-Saharan Africa this year, with $1.5 billion raised as at July, surpassing the 2009 full year fundraising totals that stood at $933 million, a rosier outlook for the region is forecasted this year.

Even though the industry association report talks of modest investments that were made over the first half of this year, at less than $150 million, this is expected to pick up towards the end of the year.

"Given the large increase in recent fundraising, deal activity is expected to pick up in the short-term, which will help compensate for a weak start to the year," it states in part.

Besides, if the trend in the private equity scene in sub-Saharan Africa in recent years, where there has been significantly more private equity funds being invested than those that were raised in a given year is anything to go by, then much more activity awaits the region towards the end of the year.

In 2007, $3.4 billion was invested against $1.5 billion that was raised, according to figures from EMPEA; while in 2008, $3 billion was invested with $2.6 billion raised.

Last year, $1.3 billion was invested, though only $0.9 billion was raised.However, there still remain obstacles to Africa literally taking off in private equity as projected by analysts, to be at par with other parts of the world.

Results of the 2010 EMPEA/Coller Capital Emerging Markets Private Equity Survey indicates that a shortage of experienced GPs, political risk and a weak exit environment are primary factors discouraging institutional investors from investing in Africa.

Others are fragmented markets, poor infrastructure and health concerns, including high rates of HIV infections.

A section of the players, however, insist that some of these concerns are present everywhere else across the globe.

Nonetheless, the report notes that in spite of these deterrents, a number of private equity firms have been active in sub-Saharan Africa over the past decade and have developed strong track records.

"In fact, many of these have successfully raised sizable funds dedicated to the sub-continent in the first seven months of this year.

Additionally, fund managers continue to crop up all over the continent, offering investors diversification across a variety of markets and sectors; many of which are finding initial financial support from the development finance institutions, which will enable them to demonstrate their skill sets to the market," it adds.

It argues that on the political front, sub-Saharan Africa is overall a much more peaceful place to invest than it was a decade ago.