June 15 2018

Venture Capital woes slowing down investments in East Africa – EAVCA

Source: Asoko Insight

East Africa economies are well placed to reap from the growing interest on investments in Venture Capital and Private Equity Funds, the East Africa Private Equity and Venture Capital Association (EAVCA) has affirmed.

The region, according to EAVCA is likely to benefit from having an already established base for growth focused investment.

This will help address the current gap in financing start-up companies which are still facing challenges, EAVCA chairman Ayisi Makatiani said, during the fourth Private Equity in East Africa Conference in Nairobi on June 14.

According to Makatiani, East Africa is considered a hotspot for venture capital opportunities, reinforced by the fast paced adaption of technology, along with the enterprise mindset in the region.

However, there still exist difficulties faced by Capital Ventures and Private Equity funds, which slows their investment activities.

“As EAVCA, we want to position East Africa as the destination for venture capital. We have as an Association noted the gap in financing early stage businesses and startup companies and will be working to navigate some of the complexities encountered by Venture Capital in this region to allow them to increase their capital deployment and support of our younger businesses,” Makatiani said.

Key challenges faces by VC’s include raising new funds, winning deals, valuation, legal framework and exits as per targets.

He noted trends at the global level indicate an increased focus on growth funds, including venture capital, calling on East Africa states and their respective private sectors to create a conducive infrastructural and regulatory environment to attract more capital inflows.

“In this day of globalization with increasing competition for fund allocation, we as a region must guard our position as an investment destination and protect our markets from disruptive changes that may create uncertainty, if we are to maintain our position as a hub for capital inflows,” Makatiani said.

“Regulation and policies are some of the measures that contribute to risk profiling and we need to ensure consistency in our policy frameworks to ensure market stability for investment to prevail,” he added.

East Africa has been a growth capital market, supporting small and medium sized businesses.

In 2017, the region registered 29 Private Equity disclosed deals compared to 44 in 2016. The value of deals was however higher last year totaling US$5.2 billion, compared to US$1.7 billion in 2016.

“The value of last year’s deals was boosted by the Vodacom-Vodafone deal and the Lake Albert Oil Project. These were major deals the markets witnessed in the year boosting the value despite a lower number of deals,” said Robert Waruiru, Associate Director, KPMG Advisory Services Limited.

The value of the Vodacom-Vodafone deal totaled US$2.6 billion, while in the Lake Albert oil project in Uganda, Total signed an agreement to acquire an additional 21.57 per cent interest from Tullow for US$900 million.

Meanwhile, pundits have predicted a brighter future for Private Equity funds in the region owing to its political stability and governments efforts to improve ease of doing business, which is attracting investors.

“We however have to be keep on looking at solutions to challenges in Private Equity in the region,” AfricInvest Investment Director Faisal Jiwa cautioned.

He noted that a country like Ethiopia, which is opening up for investments under the ongoing political transition, requires a lot of public awareness on PE’s.

“A lot of education is needed. Private Equity investors need to educate the markets,” Jiwa noted.

Meanwhile, entrepreneurs have been challenged to improve their business modules to attract more funding.

“Most local entrepreneurs don’t know the best way to package their businesses for funds. This has seen them miss out on opportunities,” said Peace Osangir, Chief Operating Officer-Kopo Kopo Inc.

Private Equity funds and Venture Capital have proved crucial in bridging the financing gap in the markets where most startups and SMEs have been struggling to finance their businesses.

The capping of interest rates in Kenya dealt a further blow to SMEs who majority have found it difficult to secure loans from banks due to their “High Risk” profiling.

“It has been a challenge to get funds which was worsened by the rate cap but with these alternative funds, SMEs can get convertible debt from Venture Capital without necessarily having collateral,” said Winnie Odhiambo, Associate Partner-I-Dev International.

EAVCA has lauded governments in the region for continued improvements in regulatory frameworks, which are becoming more accommodative of private equity as an asset, making doing deals easier.

“East Africa’s private capital landscape mirrors much of what we see in global markets: funds raised have been growing and new funds are on the rise, investor mix is getting more diversified, deals are getting more advanced and risk is reducing, as the players now appreciate the nuances of the market,” Makatiani noted.

Kenya’s Transport, Infrastructure ,Housing and Urban Development PS Charles Mwaura called for Private-Public-Partnership to drive the growth agenda in Kenya where the government is implementing its Big Four plan, which covers manufacturing, health, food security and affordable housing.

The EAVCA fourth annual conference held at the Radisson Blue Hotel brought together over 250 delegate and experts from pension funds, commercial banks, private equity and venture capital funds, impact investors, high net worth investors, business owners, industry associations, government officials and regulators.