Where is the epicentre of East Africa’s PE and VC activity?

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Kenya accounted for the bulk of private equity (PE) and venture capital (VC) transactions by volume and value in East Africa in the last five years, and improvements to the business environment could see the country retain its lead going forward.

The “2018 Annual African Private Equity Data Tracker”, published by the Africa Private Equity and Venture Capital Association (AVCA) in March, showed that 110 of the region’s 194 PE and VC deals were conducted in Kenya in the 2013-18 period; the value of these transactions stood at $1.3bn from an East African total of $2.4bn.

See also: The Report – Kenya 2018

Twiga Foods raises $35m through VC

One of the start-ups that benefitted from the strong private transaction ecosystem in Kenya was Nariobi-based Twiga Foods, which has raised $35m in convertible notes and venture capital since it was founded in 2013.

The company uses an app-based platform to source fresh produce from 17,000 farmers, distributing it to 180,000 retailers every day in the capital. By creating a more efficient supply chain, the firm seeks to lower food prices for Kenyans.

Among Twiga’s other goals is to contribute to the modernisation of local farming practices and expand operations to other African countries. To finance this, the company plans to launch an investment round later this year, followed by another in 2020, according to co-founder Peter Njonjo, who spoke to international press in April about the financing plans.

Family businesses open to private investment

The 16th annual AVCA conference saw fund managers and investors from around the world gather in Nairobi at the beginning of April.

Those in attendance represented more than $1.5trn in collective assets under management. Peter Munya, the cabinet secretary of the Ministry of Industry, Trade and Cooperatives, used the opportunity to highlight Kenya’s investment potential in a speech at the conference. “The government has made significant progress in improving the ease of doing business, and we encourage the private sector to take the lead in the growth of the economy, notably in the Big Four priority areas,” he said.

The state’s Big Four development agenda was launched in 2017 and aims to boost investment in affordable housing, manufacturing, food security and universal health care.

Research conducted by PwC suggests a similar openness to PE investment among family businesses. According to the consultancy’s “Family Business Survey 2018”, 59% of Kenyan respondents said they would consider PE as a way to raise funds, compared to the global average of 39%.

Conversely, the appetite to go public among domestic businesses is small: the Nairobi Securities Exchange (NSE) has not seen any corporate entity list in more than 10 years, while the Growth Enterprise Market Segment – a trading platform for small and medium-sized enterprises – has only attracted five companies since opening in January 2013.

Kenya rises 19 places on ease of doing business index

Given this apparent reluctance to raise capital via the NSE, it is perhaps unsurprising that alternative investment activity in Kenya is relatively strong. However, government efforts in recent years have helped create a more attractive environment for investors to partake in private and public transactions.

Kenya recorded one of the largest improvements in the World Bank’s “Doing Business 2019” report, rising 19 places to 61st of 190 nations on ease of doing business.

The biggest driver of this gain was a 20-percentage-point increase in Kenya’s score for protecting minority investors – something particularly pertinent to venture capitalists. The country ranked 11th overall in that category.

An increase in financial disclosure requirements, greater corporate transparency, improved regulations and more robust shareholders’ rights all contributed to the improvements in Kenya’s score.

Regulatory changes improve the business environment

In 2015 the Capital Markets Authority (CMA) issued the Code of Corporate Governance Practices for Issuers of Securities to the Public, significantly reframing the business environment.

Effective March 2017, the code comprised several guidelines to ensure the equitable treatment of all holders of a given class of shares, including a stipulation that protects minority shareholders from “adverse actions by the controlling shareholders” and gives them an effective means of redress.

Building on this, in February the CMA published its first “Report on the State of Corporate Governance”, which evaluated the performance of 56 issuers of securities to the public in 2017/18.

An average score of 55% was achieved among those that took part. The principles that were rated as most successfully implemented related to good governance; accountability, risk management and internal control; and the rights of shareholders.

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