Category Archives: EAVCA

EAVCA: Fintrek explores Fintech opportunities in East Africa

This week, the East Africa Venture Capital Association (EAVCA) with Intellecap Advisory Services released the Fintrek – which explores fintech opportunities in East Africa, new frontiers in fintech (defined as firms using technology to deliver financial products/services or capabilities to customers or others firms) and fintech investments in East Africa.

Asia Pacific and Africa have been harbingers of mobile payments and that is transitioning into fintech now. The Fintrek report notes three underlying factors driving fintech uptake as:

  • (i) the use of alternative data to generate credit takings of the unbanked (and deliver services to them cheaply e.g no need for bank branches),
  • (ii) peer to peer networks (decentralized collaboration, payments across borders, unregulated) and
  • (iii) the emergence of nontraditional players (telcos, wallets like Google Pay & Apple Pay, e-retailers like Amazon)

smartphones offer fintech opportunities.

Regionally, Kenya is seen as a leader in the region owing to its levels of deposit penetration, deep financial sector penetration, and smartphone ownership (at 44% compared to less than 10% for Tanzania Uganda Rwanda and Ethiopia). Kenya is where most fintechs are setting up, and Kenya-based fintechs have raised $204 million between 2000 and 2017 which is 98% of the funding to the region.

Funding: In terms of funding, fintechs are still in early stages as seen in the small deal sizes: seed funding provided 47 deals (averaging $447,000) and 60% of all funding was to impact areas renewable energy/off grid lighting and health care (microinsurance). Five companies M-KOPA, Off-Grid Electric, SunFunder, Angaza, Azuri) have raised $345 million (through debt and equity) accounting for 55% of the funding between 2010 and 2017. Another finding was that while 53% of all funding between 2010 and 2017 was from venture capital funds, their average deal size  ($6 million – e.g. from Apis, Madison Dearborn)  is lower than those of corporates ($15 million – e.g. from Stanbic, Commercial Bank of Africa) and foundations ($10 million – e.g. from Calvert, Emerson, Omidyar Network) deals.

Fintechs needs a balance of debt and equity investments to grow, but they are struggling to get debt financing (mainly bank loans). Fintechs in East Africa had debt-equity ratios of 1:1 compared to 3:1 globally, indicating they have capacity to absorb more debt but are not doing it. The EAVCA report cites one of the funding challenges as investors want proof of traction while fintechs need working capital to demonstrate proof of concept, lack of funder knowledge about local markets, East Africa fintechs don’t look like what foreign investors expect, currency fluctuations make it had to raise debt and there is a lack of fundraising skill among local fintechs who can’t afford the teams that will enable them to raise money.

The Fintrek report identified 11 fintech opportunities models and 47 sub-models and identified 4 sub-models that have flourished in East Africa:

Payments and Savings: digital wallets (M-Pesa, Alipay, Tigo pesa – which pays 7-9% interest and now attract high-end users), payment intermediaries (Cellulant, Direct Pay, Jambopay) and digital currencies (Bitpesa, Coinbase, Belfrics – a crypto-currency platform).

Lending: direct lending (Branch, Tala – with 1.8M customers in Kenya, Kreditech, Umati capital), P2P lending (Lendable, Pezesha – has 6,000 borrowers & 200 lenders), and lending aggregators (lakompare). Also, there is telco-based nano lending (M-Shwari, KCB-M-Pesa, Equitel – which issued $57 billion worth of loans – and telco-bank lenders in Kenya account for over 76% of total loan accounts, but only 4% of the loan values)

Financial Management: Insuretech (Bimaspace, BimaAfya, Microensure), Investech (Abacus, Xeno) and personal finance management – (Chamasoft, Caytree).

FS Enablers: (Jumo – credit underwriting for 5 million customers and 20 million loans), Arifu, FirstAccess, NetGuardian – fraud identifier), FarmDrive, Sasa solutions, Lendddo).

Some recent fintech deals in East Africa include Farmdrive (from the Safaricom Spark Fund), Pezesha (DFS lab), Pula (DFS lab, CGAP), M-Kopa ($80M – Stanbic, CDC, FMO, Norfund), Tala ($30M – IVP), Jumo ($24M – Finnfund), Mobisol ($12M – FinnFund), Angaza ($10.5M – Emerson), Flutterwave ($10M – Greycroft), Netguardian ($8.5M – Freemont), Trine ($8M – Gullspang), Lendable ($6M – Kawisafi, Omidyar, Fenway), Direct Pay ($5M – Apis), Azuri ($5M – Standard Chartered), Bitpesa ($4.25M – Greycroft), Branch ($2M – from high-networth Kenyans and funds – arranged by Nabo Capital)

Production of the Fintrek report was supported by Financial Sector Deepening (FSD) Africa and Netherlands Development Finance Company (FMO).

See more of the EAVCA Fintrek report and other fintech opportunities at the 5th Sankalp Africa Summit on March 1-2, 2018 in Nairobi and see their private equity snapshot report.

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Local Private Equity Funding For Indigenous Entrepreneurs

Not the first time, there was some discussion this week about  the lack of local capital, local private equity funding, and the disconnect between local entrepreneurs and venture capital.

This happened at the 3rd Annual East Africa Venture Capital Association (EAVCA) Private Equity Conference in East Africa in Nairobi this week.

The EAVCA conference had several panels such as on fintech and another on getting local pensions to fund private equity and on to entrepreneurs. Elsewhere, there have been separate citations that  whenever high numbers of African companies funded are mentioned, the list is topped by companies operating here but which have American or European founders

Some responses related to this from the summit:

  • Europe and North America continue to lead as sources of funds raised for P/E investing in East Africa – EAVCA Survey (PDF)
  • Kenyan pension funds investment into private equity grows from 0.02 to 0.15% following ‪@FanisiCapital‬ recent raise – EAVCA
  • US founders in Kenya have broader foreign networks and that makes it easier to more access to capital
  • Funders look for governance structures in local companies. Have that, and the chances of getting funding are better.
  • Local funding is better: foreign firms are very indecisive, and getting more local investors would help local companies grow faster. 
  • Kenyan entrepreneurs raise capital but are quiet about it. That’s why Lions Den has a  challenge finding entrepreneurs for their television show.
  • Global uncertainty sees capital movement to domestic markets in this case money will flow back to Europe and another America.
  • Kenya has published an amnesty for people to declare offshore wealth and repatriate this – and KRA expects $3 billion in the extra collections next year (It currently collects tax of about $14 billion) and this funding could be competition for local private equity funds
  • It takes a longer time to put together local P/E funds. Many approvals steps, talks to many potential partners and in the time they were raising capital, the laws changed. Also, it takes longer to raise a $10 million fund, and that will not really make a big impact, as the costs of running it are heavy. So there is an opportunity for umbrella funds.
  • Pension funds work by consensus – and one if one trustee decides he/she doesn’t like an asset class / or doesn’t understand risk, it’s a tough sell. That said, the Kenya Power Pension Fund has invested in private equity. 
  • Private equity sounds like a pyramid to some. Pension trustees are there for three-year terms and may not be able to assets P/E funds that have 10-year investment windows. 
  • Do fund managers talk badly about P/E funds, as they do not earn commissions from that asset class? The commissions go to P/E managers. 
  • There are East African high net worth individuals (HNWI) who can invest in P/E firms. But they want a controlling position, and, as they are focused on real/estate property, they want to see VC P/E returns that are comparable to real estate. Also, they may give you 5% of their investment, and they become the biggest problem.

EAVCA: East Africa Private Equity Snapshot

Ahead of the 3rd Annual Private Equity in East Africa Conference, (taking place on June 15 in Nairobi) the East Africa Private Equity & Venture Capital Association (EAVCA) and KPMG East Africa released their second private equity survey showing increased funding and activity, and with a lot more opportunity for deals to be done.

They estimated that of the $4.8 trillion raised between by P/E funds globally between 2007 and 2016, about $28 billion was raised by Africa-focused funds and $2.7 (including $1.1 billion in 2015-2016) had been earmarked for investment activity in East Africa.

This private equity had funded over 115 deals in the period that were included in the survey. Out of these  the 115 deals, 23 were agri-business, 20 were financial services, 13 manufacturing, and 12 FMGC representing 59% of deal volume. The average deal size had also grown to the $10-15 million range, while in the initial survey it was below $5 million.

East Africa Private Equity Survey

Of the 115 deals, Kenya had 72 deals (63% of the total), Tanzania 19, Ethiopia 8, Uganda 12, and Rwanda at 4. Some of the large deals in the survey, by country, include:

Rwanda: Cimerwa – PPC ($69M), Cogebanque ($41M), BPR-Atlas Mara ($20M), Pfunda Tea ($20M)
Uganda: topped by oil deals CNOOC and Total SA (both $1,467 million), Tullow $1,350M, Total $900M, CSquared-Mitsui $100M, Sadolin-Kansai $88M
Ethiopia: National Tobacco – Japan ($510M), Meta Abo-Johnnie Walker ($255M), Dashen-Duet ($90M), Bedele-Heineken ($85M) and Harar-Heineken ($78M), Tullow-Marathon ($50M)
Tanzania: Africa Barrick Gold ($4,781 million), Tanzania – Pavilion ($1,250M), Vodacom ($243M), Export Trading Co ($210M), Millicom-SREI ($86M), Zanzibar Telecom-Millicom ($74M)
Kenya: Safaricom-Vodacom ($2,600 million), Africa Oil-Maersk ($845M), I&M-City Trust ($335M), Ardan-Africa Oil ($329M), Kenya Breweries-EABL $224M, UAP-Old Mutual ($155M), ARM Cement-CDC ($140M), Wananchi ($130M), CMC-AlFuttaim ($127M), Essar ($120M)

P/E operations: There are about 72 funds operating/focused in East Africa (up from 36 in the first survey) with over 300 employees. 89% of the survey respondents have a local presence in East Africa.

Some of the fund companies that responded to the survey include Acumen, Abraaj, AfricInvest, AHL, Ascent, , Catalyst, Centum, CrossBoundary, Grofin, Emerging Capital Partners, Kuramo, Metier, Mkoba, NorFund, Novastar, Phatisa, Pearl Proparco, Swedfund, and TBL Mirror

Returns:  Of  the deals done, survey responders had an average IRR target was 22% while the actual IRR achieved was 19%.  There were 34 exits between 2007 and 2016, with increased recent activity; 2014 (had 7), 2015 (7) and 2016 (6). The preferred mode of exit is sale to a strategic investors (preferred by 78% while this mode accounts for 38% of exits) followed by share buy backs (32%), then sales to another P/E (21%).

Many of the funds in the region are still in early stages, and 54% have made nil returns to their investors. They surveyors estimate there are more opportunities for Africa private equity in health, education, retail, and manufacturing sectors.