Africa special: The tailwinds behind Kenya’s PE growth

The handshake in March between Kenya’s president Uhuru Kenyatta and opposition rival Raila Odinga marked a turning point for East Africa’s largest market. It brought to a close a period of heightened political tension and violence that followed Kenya’s disputed general elections last year.

“Business sentiment improved markedly after the handshake,” says Paul Kavuma, chief executive of Nairobi-based Catalyst Principal Partners, which seeks opportunities across East Africa. “It was symbolic and had substance. It reduced business uncertainty.”

“People are very chipper,” says Karim Anjarwalla, managing partner at Nairobi-based law firm Anjarwalla & Khanna. “Our M&A team has never been busier.”

Kenya’s underlying economic fundamentals bolster the mood. The World Bank forecasts the economy will grow by 5.5 percent this year, up from 4.9 percent in 2017. “This creates a tailwind for top-line growth,” says Takudzwa Mutasa, principal at pan-African investor Development Partners International, which is actively looking for deals in Kenya.

The market presents other advantages such as sizeable businesses with the scope for regional growth; a deep pool of human capital; and a sophisticated financial services sector, says Kavuma, who notes the weight of his firm’s investments “naturally” falls in Kenya.

It is also an open market thanks to an absence of capital controls and foreign investment caps – bar certain sectors like insurance where a third of shares must be Kenyan-owned, says Anjarwalla. And the stability of the shilling means in terms of currency risk, over the past few years, Kenya has compared favourably to commodity-dependent economies, where currencies have been volatile.

“We are seeing an increase in dealflow for transactions of $20 million-$100 million,” says Mutasa. “There are a lot of family businesses looking for capital. They are starting to see the value of private equity to the capital structure and to expanding beyond Kenya,” he says, adding sellers are a mix of founders cashing out and those wishing to take on a new partner.

Big four

Sectors drawing GP interest include healthcare, which is a pillar of the government’s Big Four development agenda (alongside manufacturing, affordable housing and food security). Per capita expenditure on healthcare is rising and pharmaceutical retail chains and clinics are emerging, says Mutasa.

Fast-moving consumer goods is where “we’ll continue to see strong growth”, Mutasa adds. “The Kenyan consumer is becoming wealthier. Established brands will do well.” Within financial services, Anjarwalla highlights insurance as a particular area of opportunity, seeing deals such as the $55 million investment in May in listed financial group Britam Holdings by a consortium of pan-African manager AfricInvest alongside German, Dutch and French development finance institutions.

Technology-enabled businesses reliant on broadband connectivity such as payment solutions and internet-based video also have potential supported by the country’s growth in internet penetration, adds Mutasa.

However, valuations are high relative to neighbouring markets, buoyed by the growing availability of alternative sources of capital, such as bank debt, says Anjarwalla.

But the market is not overvalued, says Kavuma. The rise in prices has occurred in tandem with improved corporate performance, scalability and liquidity. “The quality of businesses has improved, the capital markets have deepened and investor interest has risen.”