East African stockmarkets are gearing up for stiff competition from private equity investments this year, with analysts saying it will make matters worse for the already struggling exchanges.

Fund managers at Sanlam Investments East Africa say investors are shifting their focus to private equity investments rather than listed firms amid falling corporate earnings, plummeting shareholder wealth and a surge in profit warnings.

This comes at a time when regional stock exchanges face a scarcity of initial public offerings, largely due to waning investor interest and the reluctance by family-owned businesses to open up their books for public inspection and subject them to stringent regulation.

According to Sanlam, PE investors are looking to put money into key sectors such as financial technology (fintech), energy, education, consumer products and services.

“Investor interest in PE suggests increasing appetite for private equity investments, considering the limited opportunity in listed equity markets,” the fund managers said in their 2019 investment outlook report for East Africa. “We expect the momentum of deal activity to increase in the region, backed by its economies’ resilience.”

Deals

Last week, private equity firms AfricInvest and Catalyst Principal Partners jointly acquired a significant minority stake in a second-tier Kenyan lender, Prime Bank, amid talk that another lender, Jamii Bora Bank, is up for acquisition by a strategic investor.

During the week, Fanisi Capital also signed an agreement to sell Kenya’s Hillcrest International Schools to Dubai-based GEMS Education for Ksh2.6 billion ($26 million).

Fanisi owns a 55 per cent stake in the school, with the remaining 45 per cent held by businessman Anthony Wahome.

In 2018, PE activity was spread across multiple sectors in the region, including education, where Fanisi Capital invested up to Ksh400 million ($4 million) in Kitengela International School.

In Tanzania’s health sector, LeapFrog Investments invested an undisclosed amount in Pyramid Group, a medical equipment and pharmaceutical distributor serving sub-Saharan Africa.

Kenya-based private equity firm Catalyst Principal Partners acquired the country’s top-tier mattress manufacturer, Superfoam.

It also bought Ugandan mattress maker Euroflex Ltd and Malawi’s Vitafoam for an undisclosed amount.

Private equity in East Africa provides growth capital for the rapidly expanding SME economy, investing in businesses with an annual turnover of less than $30 million and employing fewer than 150 employees.

According to Sanlam Investments, PE activity in the region increased in 2018 after a tough 2017, with the disclosed value of deals recorded almost doubling to $834.3 million, compared with $446.78 million in 2017.

“The increased deal activity is indicative of East Africa’s growing prominence as a private equity capital destination largely driven by the stability of the region’s economies,” said the report.

There were 47 private equity deals announced in 2018, up from 27 the previous year, with Kenya leading with 24 transactions, up from 18 in 2017.

According to the global advisory firm StratLink, East Africa’s private transactions space is dominated by small ticket deals (less than $1 million) while Kenya has a slightly larger proportion of relatively large deals (above $1 million) than its peers across the region.

According to StratLink’s market report for December 2018, a significant proportion of deals in the region occur within the smaller deal-size bracket, with over 60 per cent of them being worth under $5 million on average.

Kenya shows a slightly higher prevalence of higher deal sizes relative to Uganda, Tanzania and Rwanda while the latter three tend to see relatively more deals worth under $1 million.

Kenya takes the lion’s share of deal activity within the EAC, posting on average 48.6 more deals per annum between 2013 and 2017 than Rwanda, Tanzania and Uganda combined.

“Kenya is the hub of private transactions in East Africa both from a deal size and deal traffic perspective,” according to Stratlink.

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