PE firms drooling over East Africa

Quality, not size
While the PE sector in East Africa was defined in 2013 by its number of deals, significant milestones began to happen as early as 2010 when the battle between Egypt’s Citadel Capital and Kenya’s Transcentury over Uganda-based transport company Rift Valley Railways (RVR) Consortium highlighted how lucrative private equity deals had become. At $287m, the investment was the largest in the region at the time. (In April 2014, Transcentury sold its 34% stake in RVR to Citadel’s subsidiary, Africa Railways.)

In 2012, Uganda attracted international attention when Blackstone Group made a $120m investment in the Bujagali dam.

A year later, global alternative asset manager Carlyle achieved a massive $591m first close for its maiden sub-Saharan Africa vehicle and invested in Tanzanian agro-logistics firm Export Trading Group, and Mozambique-based regional transport company J&J Africa. This was significant because it was the largest ever PE fund to enter the sub-Saharan African market.

And now the East African market is primed for the entrance of even larger PE funds. German development bank KfW Group (already investing in geothermal energy in East Africa), US-based private investment firm TPG Capital (with a fund of over $59bn) and Pantheon (which has secured an investment mandate from the $78.9bn German pension fund BVK) are rumoured to have begun fund-raising and are expected to enter the region in 2014 or 2015 with funds in excess of $1bn.

But while the size of funds that East Africa can attract carries a significant cachet, it is becoming clear that PE players are no longer measured by the size of their pockets but by the value they bring to the table, which speaks to the increasing sophistication of East African companies. However, the situation is becoming one in which a lot of money is chasing too few deals and while it is good for local companies, it isn’t necessarily so for PE funds. “When you’re a firm with $1bn and I am a firm with $100m and we’re going after the same deals, the companies we are buying are likely to be overpriced,” said Centum’s Kimani, explaining how multiples increase as funds are interested in the same company.