Private equity investment in Sub Saharan Africa continues to improve, as evidenced by the increase in the number of deals and deal volumes into the region, and the closing of various fund raising activities by funds focused on investing in Africa. With investors eager to derive returns from the high GDP growth in the region, firms are opting to invest both in private and listed companies.
However, we do not have a lot of listed stocks in the market, though we have seen this grow over time. We have seen major stock exchanges across Africa register negative returns in 2015, and a good alternative to quoted equities would be investments in private companies, where the returns are more attractive and stable. Kenya in particular continues to attract PE investments supported by a number of factors including
- positive demographics driven by rapid urbanization and the growing middle class,
- entrepreneurial spirit of Kenyans leading to increased number of businesses and a quality deal flow,
- stretched valuations in public equity markets,
- improving security measures in the country undertaken by the Government, and
- ability to exit, which is key for PE investors.
With any huge opportunity there must be challenges that comes with it; the challenges facing PE investments in the region include
- poor transparency in the market which may lead to mispricing of deals,
- lack of many qualified and experienced alternative investment managers in the region to extract value from private companies,
- the unwillingness of entrepreneurs in the region to cede equity in their companies,
- expensive debt which reduces the leveraging power to the investor, and
- lack of investor knowledge to make informed decisions while negotiating deals.
We expect Kenya to continue to be an attractive destination for PE investment given the positive sentiments in the country, especially with the hosting of the Global Entrepreneurship Summit.
Excerpt from the Cytonn Weekly Report