What you need to know:
- These local private equity firms, along with other industry participants, are currently collaborating with the CMA, the country's regulator, to establish regulations that will allow the private equity firms to operate in the same business environment and incur the same operating expenses.
Private equity firms have identified Uganda as a potential investment hub, but in order to invest more resources in Ugandan firms, they are asking a regulation from the Capital Markets Authority (CMA).
Uganda is drawing in investors second only to Kenya, mostly in the financial services, and agriculture sectors, according to deal tracking data from the East Africa Venture Capital Association (EAVCA), the regional association for private equity firms.
The energy, healthcare, ICT and telecommunications sectors are some other industries that are growing in popularity.
Based on Uganda's position as a gateway to the recently admitted Democratic Republic of the Congo (DRC), and the commercialization of its oil deposits, EAVCA now projects increased activity in the oil and gas and logistics sectors in the medium term.
However, the industry is not kind to local private equity fund managers, who struggle to compete with companies based in tax havens despite the fact that these companies are merely middlemen for the wealthy investors.
These local private equity firms, along with other industry participants, are currently collaborating with the CMA, the country's regulator, to establish regulations that will allow the private equity firms to operate in the same business environment and incur the same operating expenses.
"CMA really needs to help this industry by putting up regulations that mandate these private equity firms to be domiciled from here [in Uganda] so that the same tax obligations are assented to," Ms Doris Odit Achenga, the EVCA's Country coordinator for the Uganda Chapter said to a gathering of investors and business owners on Kampala Impact Day, which was designed to assist numerous small and medium-sized businesses in filling in their cash flow gaps through deliberate investment.
Kampala Impact Day (KID) is an annual business networking event celebrating impactful social enterprises organized by Entrepreneurs for Entrepreneurs (OVO) and Einstein Rising to improve the visibility and garner the collaborative support of social entrepreneurs in Uganda.
When a private equity firm invests in Uganda but is domiciled in a country with less stringent tax laws, such as Mauritius, the Uganda Revenue Authority cannot tax the deal much more than one that is domiciled in the country.
This also makes it more difficult for the local private equity firm to secure significant funding from major investors than it would be for a firm based in a nation with laxer legal regulations.
Mr Terrence Tumwine, the senior research officer at CMA, agrees that this presents a challenge for local private equity firms and has an impact on their operations, but he points out that policymakers are in a process for regulations that embed this.
Private equity capital deals on a spree in the country. Data from the EAVCA indicates that private equity investments in Ugandan companies have nearly doubled, rising from Shs114 b in 21 deals in 2021 to Shs266 b in 32 deals in 2022.
“A lot of this money is being pumped into pharmaceuticals, hospitals, manufacturing – particularly in agro-processing, renewable energy and then a few other segments. And it’s been going to fairly established companies,” Ms Achenga says.
“Most of the investors in east Africa are investing in Kenya, but now they are seeing Uganda as part of their diversification strategy as they expand in east Africa. We are also seeing interest in the DRC and Rwanda. So we are all competing for the same capital in the same investors. So these investors will be looking for businesses that have scalable business models that have potential for growth,” she adds.
A typical private equity deal involves the investor taking a shareholding in your business; therefore, it is a long-term partnership, ranging from seven to ten years, according to firms that act as intermediaries in these deals, such as the Deal Flow Facility, which connects businesses and private equity investors.
And oftentimes those investors will have some involvement in a company’s management and operations to get into the next level. In essence, they join this company to gain equity for a firm that is not listed on the stock exchange as a shareholder in order to expand and share in the profits.
“But these deals take long to be agreed. A company before accessing this investment needs to prepare itself internally which means first understanding its business but also preparing its documentations so that the investor easily understands it,” Ms Norah Koigi, the director of Deal Flow Facility says.
As it is a long-term investment, she continues, the potential investor will conduct due diligence to learn about the company, identify any gaps in knowledge, and then decide whether or not to proceed.