Survey of the Kenyan Private Equity and Venture Capital

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Policy Research Working Paper 8598, This paper discusses the landscape for private equity and investors and public sector entities The paper provides an. venture capital financing in Kenya It provides an overview analysis of key market drivers and impediments as well. of the private equity and venture capital market in the coun as legal regulatory taxation drivers and impediments that. try describing key players including funds fund managers affect Kenya s private equity and venture capital industry. This paper is a product of the Finance Competitiveness and Innovation Global Practice It is part of a larger effort by the. World Bank to provide open access to its research and make a contribution to development policy discussions around the. world Policy Research Working Papers are also posted on the Web at http www worldbank org research The authors. may be contacted at sdivakaran worldbank org, The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development. issues An objective of the series is to get the findings out quickly even if the presentations are less than fully polished The papers carry the. names of the authors and should be cited accordingly The findings interpretations and conclusions expressed in this paper are entirely those. of the authors They do not necessarily represent the views of the International Bank for Reconstruction and Development World Bank and. its affiliated organizations or those of the Executive Directors of the World Bank or the governments they represent. Produced by the Research Support Team,Survey of the. Kenyan Private Equity and,Venture Capital Landscape1. Authors Shanthi Divakaran Patrick McGinnis Sam,JEL G24 G23.
Keywords Private Equity Venture Capital Kenya Industry. Assessment Legal Analysis, This World Bank report was completed in December 2017. Acknowledgements, This report was prepared by a team consisting of Shanthi Divakaran Team Leader and Senior Financial. Sector Specialist World Bank Patrick McGinnis Expert Consultant Sam Schneider Consultant. Anjarwalla Khanna law firm Kenya and Viva Africa Consulting LLP tax advisory firm Kenya Tania. Priscilla Begazo Gomez Senior Economist World Bank provided valuable input Elikia Nenkam. provided additional research assistance The report is a product of World Bank dialogue with the Kenyan. National Treasury on broader financial sector issues and access to finance led by Mehnaz Safavian Lead. Financial Sector Specialist and with the Ministry of Industry Trade and Cooperatives on private sector. development issues led by Maria Paulina Mogollon Senior Sector Economist This report was partially. funded by the Kenya Investment Climate Program II which was generously supported by DFID and the. Netherlands The team is thankful to WBG Peer Reviewers Kevin Njiraini Chief Investment Officer IFC. and Dipta Shah Investment Officer IFC for their valuable comments and input Toshiaki Ono Financial. Sector Specialist GST3 also provided very helpful comments on the report The team is also thankful to. all internal and external colleagues who were interviewed and provided input as part of this report An. interview list is provided in the annex, I Recent Evolution of the Private Equity and Venture Capital Industry. A Industry Overview Kenya in Context, Less than a decade ago the fledgling commercial private equity industry2 in Africa was largely confined to. and based out of Southern Africa From 2008 to 2010 nearly 60 percent of investment in Sub Saharan. Africa was destined for South Africa with regional hubs like Nigeria and Kenya trailing far behind in terms. of both market share and mind share Then aided by continent wide resilience in the aftermath of the 2008. global financial crisis the region s growth story attracted an influx of private equity investors to Africa. These new entrants looked beyond the increasingly crowded South African market to explore other sub. regions and countries on the continent Figure 1, Figure 1 Distribution of Sub Saharan Africa PE Investment by Value.
Total Investment 2008 10 Total Investment 2013 15,South Africa. South Africa,Nigeria 15 Kenya Nigeria,Source EMPEA. Within this context East Africa and particularly Kenya has become an increasingly important destination. for private equity investors Beyond offering relative regulatory stability Kenya has long been known for. its private sector led economy and for the sophistication of the business environment both in an absolute. sense but particularly relative to the other economies of East Africa In addition Kenya boasts a strong. entrepreneurial class and benefits from a good supply of human capital both local and international Thus. when private equity interest migrated from South Africa into the rest of the continent Kenya captured a. disproportionate share of the activity both in terms of deal flow and funds Although it is just the third. largest country in East Africa by population and the seventh largest economy in Africa by nominal GDP. Kenya s standing in the alternative investment industry in Africa is notable The country now ranks third. behind South Africa and Nigeria in terms of private equity transactions in SSA PE funds invested more. than US 750 million across nearly 50 deals based in Kenya from 2013 2015. Note for the purposes of this report private equity when referred to and discussed as an industry is inclusive of. venture capital as well, Table 1 Sub Saharan Africa Deal Flow by Country 2013 2015. 2013 2014 2015 Total Total,Capital Capital Capital Capital. of Deal Invested of Deals Invested of Deals Invested of Deals Invested. US M US M US M US M, South Africa 24 368 22 418 25 586 71 21 3 1 372 28 2.
Nigeria 14 176 17 614 20 159 51 15 3 949 19 5,Kenya 15 629 22 22 11 104 48 14 4 755 15 5. Ghana 7 25 15 179 8 6 30 9 0 210 4 3,Cote d Ivoire 7 14 4 38 2 N A 13 3 9 52 1 1. Other 43 715 45 631 33 187 121 36 2 1 533 31 5, Total 110 1 927 125 1 902 99 1 042 334 100 0 4 871 100 0. Source EMPEA, Kenya offers clear advantages for fund managers seeking to target East Africa The country s capital. Nairobi is viewed as the most attractive location in East Africa from which investors can establish offices. and cover the region This advantage makes the city the de facto alternative investment hub of East Africa. and places it alongside Johannesburg and Lagos as the investment capitals of SSA Investors who choose. to establish themselves in the city note that they have done so based on quality of life a solid foundation of. human capital efficient transportation links and a strong community of service providers such as. accountants lawyers and consultants For these reasons Nairobi is also home to the East Africa Venture. Capital Association EAVCA an organization that was set up in March 2013 to advocate on behalf of VC. and PE investors, Moreover Kenya serves as a launch pad for investors to execute cross border investments in companies.
that operate within the East African Community The EAC which comprises six partner states the. Republics of Burundi Kenya Rwanda South Sudan Tanzania and Uganda has pursued legal and trade. harmonization in an attempt to support regional commerce and cross border expansion by businesses in. these markets Given Kenya s membership in the East African Community basing an investment firm in. the country offers a fund manager the possibility of regionalizing local businesses and taking advantage. of the EAC s cross border regulations and commercial policies. Pursuing regional integration also makes commercial sense Although Kenya is the largest most advanced. economy in the region it is easier to reach scale and attract the interest of strategic acquirers by building. regional businesses that leverage the EAC market While Kenya has a population of 45 million and a GDP. of US 65 billion the population of the EAC is estimated at 150 million and its GDP is US 146 billion. Many firms include regional aspirations in their investment theses when investing in companies that are. already present in one part of the EAC region Leveraging the political and economic links forged by the. EAC to do so makes a regional approach even more compelling At the same time funds operating in Kenya. must take regional legal and regulatory factors into account in addition to navigating those in Kenya In. this sense Kenyan fund managers often operate within a regional legal and regulatory context. With a significant population of investment firms resident in the country Kenya sees more deal flow than. elsewhere in East Africa On a stand alone basis Kenya also benefits from secular trends rapid. urbanization a growing workforce ongoing technological evolution and sustained consumer and business. spending that also support a Kenya led private equity investment thesis Kenya consistently captures the. majority of deals in East Africa As shown below in Figure 2 Kenya dominates the East Africa sub region. in terms of deal volume, Figure 2 East Africa Deal Volume by Country 2013 2015. 2013 2014 2015,Rwanda Rwanda Uganda Rwanda,Uganda 6 Uganda 8 2. Tanzania Tanzania,Tanzania Kenya,Kenya 27 57 Kenya. Source KPMG EAVCA, As Kenya has taken a more prominent role in the African private equity landscape the size of transactions. has grown Prior to 2007 there were no reported private equity deals with a ticket above US 5 million. from 2010 to 2014 however there were 23 deals 29 percent in which the investment amount totaled. between US 5 million and US 10 million while seven deals exceeded US 10 million This increase in. transaction size reflects a maturation of the market the arrival of pan regional players such as ECP and. Helios that invest in much larger transactions and investor confidence that they can find and fund regional. champions that are based in Kenya, The entrance of well known regional or global players such as Emerging Capital Partners ECP and Helios.
is part of the ongoing growth in the number of private equity firms operating in Nairobi in the last five. years When the EAVCA was established in 2013 the group comprised just seven founding member firms. Today it boasts 60 members including service providers of which approximately two thirds have. operations in Kenya 3, B Industry Overview Private Equity Venture Capital and Impact Investment. The funds that constitute Kenya s VC PE industry can be divided into distinct groups First there are private. equity funds PE funds operating in Kenya may be classified based on their geographic targets global e g. The Carlyle Group Abraaj 4 Actis pan African e g Helios AfricInvest and ECP and East African e g. Phatisa Fanisi Kibo Second there are venture and seed capital funds such as Novastar and Safaricom. Spark Finally there are impact investment funds such as Grassroots Business Funds and Acumen Fund. The market for each of these investment types private equity venture capital and impact investing is. profiled below,Private Equity Funds, Private equity funds invest in businesses ranging from SMEs and family owned businesses through to large. This figure includes services providers such as lawyers and accountants. Following completion of this report the Abraaj Group and its fund management business entered a court. supervised liquidation process in the Cayman Islands in June 2018 The appointed liquidators and investors are in. discussions about the future of the Abraaj funds including the potential entry of replacement fund managers. pan regional businesses that operate in Kenya in East Africa or across the continent Global funds. operating in Kenya are those firms that have worldwide operations they are based in and operate in. geographies outside Africa but also have dedicated teams and funds for Africa Pan African managers. operate across SSA and may also have a presence in North Africa East African firms typically focus their. activities on member countries of the EAC Burundi Kenya Rwanda South Sudan Tanzania and Uganda. and often consider investments in Ethiopia as well At present there are no funds of note that operate solely. in Kenya 5, Table 2 Representative PE Fund Managers Active in Kenya. Private Equity Fund Managers,East Africa Pan Africa Global. Ascent Capital Partners Africinvest Abraaj Group, Catalyst Principal Partners Emerging Capital Partners Actis Capital.
Fanisi Venture Capital Helios Investment Partners The Carlyle Group. Centum Investment Kibo Capital Partners KKR,Transcentury Phatisa Fund Managers. BPI East Africa Progression Capital Africa,TBL Mirror Fund. Source Primary Research, In addition to geographic focus firms may also be classified in terms of the size of their typical investment. in a target company which in turn often correlates to the growth stage of the company that is receiving. investment The funds shown in Table 4 below target investments in the following ranges investments of. US 1 5 million TBL Mirror Fund Fanisi GroFin US 5 20 million e g Catalyst Ascent and 20 100. million e g Helios ECP Investments at the small end of the scale correspond to the lower end of the. SME spectrum while larger SMEs or mid market growth equity deals require investment tickets ranging. from US 5 million to US 20 million Investments above US 20 million correspond to large growth equity. opportunities regional roll ups buyouts or acquisitions of minority stakes in large and established. businesses, Acacia a locally registered Kenyan schilling denominated fund that was Kenya centric was established in 1996. I Recent Evolution of the Private Equity and Venture Capital Industry A Industry Overview Kenya in Context Less than a decade ago the fledgling commercial private equity industry2 in Africa was largely confined to and based out of Southern Africa From 2008 to 2010 nearly 60 percent of investment in Sub Saharan

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