Private Equity firms in Eastern Africa posted an average of 19 per cent internal rate of return in 2016 and 2015 against a target of 22 per cent, a new report suggested yesterday.
A survey jointly conducted by consultancy KPMG and East Africa Venture Capital Association shows that the PE Funds, largely from the US and Europe, are optimistic of higher returns despite missing the target.
The Private Equity Sector Survey of East Africa report established that firms where PE Funds have bought stakes increased to 115 last year from 79 when the survey was last done in 2014.
The total value of private equity-backed deals in 2015 and 2016 was estimated at $600 million (Sh62.02 billion), according to the report.
Kenya had majority of the deals during the two-year period with 72 of the 115 deals established, Tanzania came in second with 19 deals followed by Uganda ( 12 ), Ethiopia (eight) and Rwanda (four).
“There is no doubt that Kenya still remains the top destination for investment by the private equity investors,” KPMG East Africa head of deal advisory Sheel Gill said during the launch of the report in Nairobi.
Gill said interest in the East African region has been on an upward trend mainly due to the rising middle class who are shaping commodity pricing and the currency devaluation across southern and western Africa regions. This is because of their spending power. The report shows that financial services attracted the most amounts in terms of deal volumes followed by manufacturing, Fast Moving Consumer Goods and renewable energy, respectively.
“There has been a big drive on off-grid power and this has led to the increased PE interest in renewable energy,” Gill said. “Technology is more attractive right now because of its convergence with financial services so we will see an increased amount of technology deals.”
Gill said that PE investment had seen increased participation of regional pension funds moving from the traditional funding from investors and pension funds in Europe and North America.
This she said had been driven by supportive legislation in the region which encourages direct direct investment by pension funds into private equity as a distinct asset class.
“In Kenya, the Retirements Benefits Authority allows for 10 per cent, while in Tanzania the regulation allows for five per cent investment,” Gill said.
The report shows that there have been 13 exits over the two years, with most of them relinquishing their stakes to strategic investors. Some of the shareholders was also sold to financial investors, while there were few share buybacks.
“Many of the PE funds operating in East Africa are young and they are the first funds,” Gill said.