Increased Interest in Financial Services Sector Attracts More PE Investments

During the month, Abraaj Group announced the first close of its 2nd North African Fund (Abraaj North Africa Fund II) at USD 375.0 mn. Cumulatively, Abraaj has raised USD 1.4 bn for the African continent this year, a record for any PE firm investing in Africa, having raised USD 990.0 mn for its 3rd Sub Saharan Africa Fund.

This fund is designed to target mid-sized businesses in Algeria, Egypt, Morocco and Tunisia that have displayed a strong growth potential and focuses on sectors such as healthcare, education, FCMG and logistics. Currently the fund has made 6 investments across its target markets with its initial investment in the North Africa Hospital Group, a healthcare company with assets in Egypt, Morocco and Tunisia. Global private equity players such as Abraaj are attracted to the African continent due to a number of factors:

1. Positive demographics driven by rapid urbanisation and the growing middle class across the African continent;
2. Improved governance and transparency in the business environment;
3. Willingness of business owners on the continent to accept private capital and management expertise, increasing the number of acquirable businesses and providing a quality deal flow;
4. Under provision of basic services such as housing, healthcare and infrastructure by local governments, and;
5. Increased ability to exit, which is key for PE investors.

On the East African front, there continues to be increased interest in the financial services sector which is attracting more private equity investments as evidenced by several deals during the month. For instance, Mauritian fund manager, Axis, acquired ApexAfrica Capital, a Kenyan stockbroker, for Kshs 470 mn, making it one of the highest valued acquisitions of a market intermediary in East Africa. Premfin Capital, a Mauritius-based financial services firm owned by a group of Kenyan investors, acquired two microfinance companies, Gatsby Microfinance in Uganda and Fanikiwa Microfinance in Tanzania. The acquisitions sought to broaden Premfin’s investment portfolio and accelerate the company’s growth.

During the month we also saw the National Social Security Fund (NSSF) buy 5.5% stake in Equity bank from Helios Investment Partners in a deal estimated at Kshs 9.7 bn. This highlighted the fund’s increasing interest in Kenya’s banking sector, having earlier invested in National Bank, Kenya Commercial Bank and Housing Finance for stakes of 48.1%, 6.1% and 2.2%, respectively. The emergence of financial sector as a target for PE investors in East Africa is driven by:

1. A rapidly growing, and entrepreneurial, population seeking access to credit to finance growing ventures;
2. Low financial services inclusion in the region with Kenya leading at 77% while Uganda and Tanzania, are at 43% and 35%, respectively;
3. Increasing ease of exit in the financial services sector, most recently witnessed by Helios’ full exit of Equity Bank.

Given

• the abundance of global capital looking for opportunities in Africa,

• the attractive valuations in private markets compared to public markets, and

• better economic growth in Sub Saharan Africa as compared to global markets, we remain bullish on PE activity in financial services, retail and FMCG, services, and manufacturing sectors.

An excerpt of the monthly Cytonn Report