The growth of opportunities in Africa is increasingly evident. The past few years have seen vast improvement in macroeconomic stability, and a burgeoning and fast-growing trade and investment climate. The numbers prove this upward trend. In 2012, Africa was the only region to witness FDI growth (5.4%), and in 2013 Africa’s share in global FDI projects increased to reach an all-time high of 5.7%. KITE Invest interview the Executive Director of the East Africa Venture Capital Association (EAVCA), Nonnie Wanjihia, to get a better look at the dynamics of the industry
KITE Invest: Addressing Africa at large, what factors would you contribute to the continent’s year on year FDI growth?
Nonnie Wanjihia: Interest in Africa is continuing to grow backed by strong macro-economic fundamentals and economic growth, improved political stability and increasing infrastructure spending, discoveries of natural resources and of course the possibility of high returns and favourable entry prices. Furthermore, the rising middle class, rapid urbanization and youthful population also support the steady and continually increasing FDI inflows as investors seek to take advantage of this growth.
KITE: The Sub-Saharan Africa (SSA) growth story has caught the investor attention, with the SSA share of FDI accounting for 83% in 2013. Although FDI in SSA is rising, the East African region’s investment trend took place mostly between 2007-2011, while Southeast Africa and West Africa seems to be the current trends. What are the reasons for East Africa’s apparent competitive decline and what are the main sectors and industries that you foresee as the main drivers of growth in the short-term and long-term?
NW: According to published research from Burbidge Capital, we have seen a total number of 35 announced private equity deals take place in the East African region to date. Consumer-facing industries are indeed a key driver of this growth given the rising middle class and growing markets, burgeoning population and urbanization. In private equity, we’ve witnessed a number of consumer related deals, notably in the financial services, healthcare delivery, pharmaceuticals, and fast moving consumer goods (FMCG) sectors in the recent months. Interest in energy and natural resources remains high with further discoveries of both oil and gas continuously being announced. The investment into Delonex Energy by a subsidiary of Warburg Pincus presents a strong indication of the continuing attractiveness of the sector.
Other sectors of note with regard to investments and M&A activity include agribusiness, telecoms and of course the industrials and manufacturing industries, these being fuelled by international trade buyers and regional expansion acquisitions. Deals are becoming increasingly more international and the region has also witnessed a number of exits, via secondary buyout and trade sale, with a number of exits seen from Abraaj, Africinvest, and Leapfrog.
KITE: Can you highlight a specific country within the region that is presenting particularly great opportunities?
NW: The pace of private equity deal making has remained strong throughout 2014. This followed on from a sharp increase in investment activity in the second half of 2013, with interest slightly dampened earlier that year due to the elections held in Kenya. However since then, research has shown that Kenya continues to take the lion’s share of these deals, closely followed by Uganda, Tanzania and Rwanda. Ethiopia, a country with a population of 93 million, appears to be an emerging investment destination as evidenced by investments made by 8 Miles, Catalyst, KKR and Silk Invest in 2013 and 2014.
KITE: Although investment in Africa on the whole is rising, perception and image are crucial to investment. For instance, the elections and riots in Kenya or tensions between Sudan and South Sudan. Could you address the perception factor and highlight how the image overall is positively transforming? In the areas that have experienced strife what message would you like to deliver to foreign investors?
NW: Perception of Africa is still a long way from the reality on the ground so political risk and other associated risks are concerns for outside investors, particularly western LPs. I would also say the lack of on-the-ground knowledge as many of them are not based in Africa and do not know the landscape. Investors will continue to gain confidence as the industry begins to mature and fund managers develop their track record and start realizing value through exits.
KITE: A newcomer in the industry, the EAVCA was founded in 2013, and has become the voice of the private equity industry in East Africa and aims to raise awareness and engage in regional policy matters. What was the progression of industry that led to the reasons behind the formation of EAVCA in 2013?
NW: The East African Private Equity and Venture Capital Association (EAVCA) was founded in 2013 to represent the private equity industry in East Africa and provide a voice for industry players to raise awareness and engage on regional policy matters. The Association offers training with more localized content, networking opportunities for members and the wider investment community and captures industry data and statistics.
EAVCA is seeking to bridge the knowledge gap between the public and private sector on the importance of the asset class and the impact the nascent industry can have on growing enterprises and the development of our economies. Its founding members saw a need for specific initiatives, namely; advocacy, training, networking and intelligence and began the process of establishing the association.
KITE:To what extent has EAVCA been able to engage with governments, regulators, policy makers and the media over the last two years? On the whole, how do the member countries public and private sectors receive EAVCA and the industry?
NW: Given the nascent stage of the industry, entrepreneurs rarely seek out private equity as a source of capital. Institutional sources of local capital, such as pension funds and insurance companies, have not invested in the private equity asset class unlike their counterparts in more developed markets. Private equity players thus need to continuously educate stakeholders on the growing sector and its impact on developing economies like our own.
Building a voice for the industry in order to engage stakeholders was crucial. The quick uptake in membership numbers is testament to the need for the Association. Since June 2013, EAVCA has recruited 39 members of which over 50% are GPs. Within our advocacy initiative raising awareness of the asset class is our overall objective. To this end, media and networking are crucial, whether through direct press relations, stakeholder engagement and roundtables and so on. We have also held member only events that allow members to directly engage with public sector agencies such as the Retirements Benefits Authority here in Kenya as mobilizing local capital is another key objective.
KITE: Raising awareness about these countries and the investment opportunities is interwoven with on one side with ability and productivity and on the other with communication and marketing. Please shed light on the training that EAVCA hosts and the affect that brain drain has had on the region?
NW: Private equity is a skilled-based industry and the need for skilled and experienced people sharing knowledge with local experts will create a dynamic market for talented professionals. Talent remains one of the sector’s challenges. We saw that this could be easily solved due to the high contingent of returning Africans from the Diaspora, combined with expert global training standards and local expertise from on the ground talent.
As access to training is routinely identified as one of the sector’s challenges it became a priority for the association to address immediately. To date, EAVCA has trained almost 100 investment professionals over 8 modules, in subjects ranging from Valuations & Deal Structuring to Environment, Social & Governance. The Association will continue to facilitate skills building for industry players at all levels as well maintaining regional institutional knowledge.
KITE: What emphasis does EAVCA place on communications for itself, for its members, and the industry within the region?
NW:EAVCA’s aim is to be at the forefront of private equity activities in the region in line with its objectives and wider strategy of providing knowledge, intelligence, networking opportunities and professional development for East Africa-focused industry players. Our communication via newsletter, social media platforms and industry meeting with members and non-members ensures that we continuously raise awareness of the work that the Association is doing. Lastly participation at global events helps us to broaden our reach and promote the investment opportunities in East Africa.
KITE: Lastly, what final message would you like to communicate about the investment community in East Africa and to foreign investors?
NW: Investors appear keen to take a more pan-regional focus in their African investment approach, with Kenya serving as the financial hub and gateway to Uganda, Tanzania and Ethiopia. Furthermore, the members of the East African Community have partnered and aim to standardize and improve trade regulations, reduce or eliminate tariffs and encourage free movement of goods and labour and accordingly we expect to see continued levels of investment activity and further infrastructure development.