Private Equity heralds new growth prospects for Uganda companies

East Africa is turning out to be a charming destination for Private Equity (PE) funds with interest free capital. To-date, the bloc has attracted the interest of about three new PE firms flashing a ray of hope to the region’s development as Walter Wafula writes

Access to cheap credit for investment remains one of the main challenges private companies operating in Uganda and the rest of East Africa face.

The barrier, coupled with perpetual corruption, is part of the problems that have made Uganda a difficult place to do business.

Local companies often accuse commercial banks of charging high interest on loans. The banks are reluctant to lend cheaply because of what they perceive as risky clients. And they have been slow to heed to calls for lower interest rates from the Bank of Uganda.

But this is set to change soon. East Africa is turning out to be a charming destination for Private Equity (PE) funds with interest free capital. To-date, the bloc has attracted the interest of new PEs such as; Citadel Capital in Egypt, Ardour Capital in New York, TLG Capital in London and Catalyst Principles in Nairobi.

Private Equity is a set of investors and funds that invests directly into private companies or conduct buyouts or public companies, according to Investopedia.com. PE funds including; the United Kingdom’s Commonwealth Development Corporation (CDC) and FMO, the entrepreneurial development bank of the Netherlands, have been operating in East Africa for a while. But the PE space has largely been dominated by these Western government investment arms. Minimal participation has come from private players from the west.

However, with the entry of more players, the ‘monopoly’ of the government corporations is fading as the East Africa Community (EAC) joins some of the world’s fastest economic growth zones like India and China.

Mr Nicholas Malaki, an investments manager at PineBridge Investments in Kampala, told Business Power that the bloc is at a point where sectors like; energy, infrastructure, oil and gas, real estate are in dire need of investment.

Mr Malaki explained that the region’s ambitious growth targets contain several “visions and opportunities” that present public-private partnerships that new PEs can exploit. While strategic partnerships may not mature as fast due to a cocktail of issues, there is light at the end of the tunnel for many companies.

Mr Malaki said domestic firms that are teaming up with the PEs are bound to experience “greater visibility and destination marketing globally”.

“Successful ventures will definitely raise the profile of the region and allow it to attract some other forms of portfolio flows or investments,” he said in an interview last week.

This year, the EAC has netted Citadel, which is Africa’s largest PE firm going by its $8.3 billion investments across 14 countries. Following its strategic entry into the bloc, the Fund announced that it plans to spend up to $400 million (Shs912 billion) by 2012, in sectors including; agriculture, transport, banking and financial services.

The most significant step so far has been the acquisition of a 51 per cent stake in the Rift Valley Railways (RVR) consortium. The firm made a strategic entry into RVR to exploit the logistics supply chain that Uganda’s oil and gas industry is expected to spark off by 2012. Uganda is on the verge of commercialising the 2.5 billion barrels of oil that firms including; Heritage Oil and Gas, Tullow Oil and Dominion Petroleum, have discovered.

Mid this year, TLG Capital picked up a 20 per cent stake in Uganda’s Vero Food Industries, an agri-food processing company coming on the back of its investment in pharmaceutical company Quality Chemicals in Kampala.

Other PE firms that plan to deploy large sums of money in the region include; New York-based Ardour Capital, which is arranging an equity line of $200 million (Shs456 billion). Nairobi-based Catalyst Principles plans to deploy up to $100 million (Shs228 billion) in the wholesale and retail segment, telecommunications and property.

Ordinary investors in East Africa’s capital markets also stand to benefit from the emergence of a PE industry in the region. He noted that PE firms usually have an exit strategy from firms, which can benefit local investors. For example, the sale of their company stake to strategic investors or general public through initial public offers.

“If there are public offers then they would serve to deepen and further development of the financial and capital markets,” Mr Malaki explained. Capital markets include; stock and bond markets like the Uganda Securities Exchange.

For the region’s unemployed and idle youth, PE partnerships are creating jobs as they provide expansion capital for firms. Regional government’s can expect to see their revenue bases expand, with the PE inflows.

Mr Peter Okoed, a senior investment manager at Dyer and Blair Uganda, said that PE’s are coming with rescue packages for companies with great potential but are bearing the brunt of heavy loads of bank debt.

More beneficiaries

Firms in Uganda’s agro-forestry industry could benefit from UK’s CDC, an old hand at the PE game. CDC has already set aside $50 million budget to spend on forestry investments in several African nations including Uganda. Yet, in 2009, CDC through its fund managers such as Actis, Aureos, Grofin and Helios invested about$540 million, with $330 million going into African businesses according to the East African newspaper.

“Private Equity Funds are able to give you money even if you don’t have security, as long as you are able to prove that you are able to produce good returns,” added Mr Joseph Lutwama, the senior research officer at Capital Markets Authority (CMA) notes.

Therefore PEs are providing a better alternative to the traditional and expensive bank capital in East Africa by offering interest free capital.

Furthermore, the organisations possess high level management skills, networks and experience that are desirable and transferable to transform local companies.

Citadel

A case in point is Citadel’s association with international firms. This has seen it contract Brazil’s América Latina Logística (ALL) to rehabilitate and upgrade the Uganda-Kenya railway. Citadel will spend at least $287 million to modernise the system within five years. ALL is the largest independent company of its kind in Latin America, where it operates railways and highways serving clients across multiple countries.

“Citadel Capital seeks out national companies with the potential to become regional champions, then deploys the human and monetary capital needed to make that transformation happen,” says Hisham El-Khazindar, the Citadel Capital managing director on the funds’ website.

It is worth noting that PEs business models are based on the “give and take” principle. Therefore, they expect high returns on their investments. Billions of cash are exchanged for company stakes. Analysts said firms that are ready for the swap are in for good deals.

But to get exposed and gain to the PEs, domestic companies must be ready to demonstrate that they are worth investing in according to Mr Okoed.

“PE firms mainly look out for firms with potential value for investment and have the ability to grow,” he explained in a separate interview on Tuesday. These firms must have manageable debt, proper governance structures in place, and clear records of accounts. More so, operate in sectors that are key drivers of growth in the economy.

Yet, most East African firms face a wide range of challenges could disqualify them from such opportunities if they stick to the traditional ways of doing business. A significant number of local firms tend not to maintain transparent financial records.

“It’s common to find a business that keeps one set of books for the tax man and another set for the auditors,” the analyst echoed. Yet, this is a critical aspect that PE firms consider when undertaking due diligence on the firm. “Clear practices will provide safe avenues for capital investment.”

Above all, domestic firms lack clear structures of governance, and traditional business ties may limit the exposure to access the desired finances for business growth.

It’s worth every effort partnering with PEs to do business, but it comes with some costs. For example, PEs tend to have lofty appetite for high returns.

“Profit motive may encourage ventures into unchartered waters,” Mr Malaki said. On the other hand, the long term nature of the investments increases horizon risk for the Funds. This is because many changes unfold in between their investment time and exit.

Mr Lutwama also observes that Uganda, unlike Kenya, does not have a very good regulation to oversee activities of PEs. The PE industry falls under the CMA in Uganda.

To improve the business environment for the operation of the PE industry in East Africa, Mr Malaki suggested that the region’s regulatory oversight needs to be reshaped or enhanced drawing from experiences elsewhere. Notwithstanding the gaps, the industry is taking off. So, it is only befitting that East African firms position themselves to tap into their capital and technical resources to flourish.