Investment deal-making amid Corona

The East Africa Private Equity and Venture Capital Association (EAVCA) held a webinar today about the impact of Coronavirus, which appears to be a black swan event, on deal-making at private equity firms in the region.

It featured private equity (PE) and venture capital (VC) industry experts, Charles Omanga (Horizon Africa), Nigel Smith (KPMG), Paras Shah (Bowman’s Law) and Ananya Sengupta (PWC), with Kanini Mutooni (Toniic Institute) as the session moderator.

Excerpts from the session:

Coronavirus Impact:

  • Valuations A new challenge is convincing entrepreneurs that this is the value of the business because of Corona and when you come out of the pandemic how soon will it normalize – CO
  • “EBITDAC” (not EBITDA) will be a new measure of company performance and there will be discussions about measuring business valuations “before” and “after” Corona – NS
  • Businesses have had continuity plans, but none had foreseen such scenarios – shutdowns, closures of school, travel restrictions for extended periods etc – AS

Deal Pipelines:

  • The biggest request so far from investors is to scenario plan immediately on how long will Corona will take and what impact it will have on the businesses? Some deals will fall away – CO 
  • European and American investors are still sending enquiries for long term investments here – PS
  • People have not walked away from deals but provided 12-18 month periods for certain ratios to be attained – NS 
  • Deal negotiations are still ongoing, with signing delayed. In other cases, parties have come to an agreement but agreed not to sign, and that if the Corona impact is bad, they will walk away – PS

Banking Challenges and Bailouts:

  • Don’t expect reputable DFI’s to default, but they will enhance due diligence before releasing funds and decisions will take longer – CO
  • While CBK has given guidelines for lenders, the banking system is not awash with liquidity – NS
  • The Government of Kenya has been fast in coming up with measures such as taxes reductions, but in terms of financial support of SME’s business and workforce, it is unable to provide support like in other countries, where some governments have stepped forward to pay private-sector salaries – NS
  • Government has not had any talks with landlords – PS 
  • Funds may need to extend the period of resounding to cash calls beyond the current 10-14 days – NS

Opportunities:

  • Some local audit/consulting firms have seen an increase in the volume of work as PE firms are not able to come in and do their due diligence here. They are now asking local firms that can mobilize teams to digitize and upload data needed for transaction decisions – NS
  • Local manufacturers in pharmaceuticals and health will do well; also online education online entertainment and medical insurance – CO
  • Regulators have adopted technology to allow online filings and government agencies have been impressive – PS 
  • A good thing about crisis makes people think differently – and the judiciary is semi-open, with judges delivering rulings are online, but registries remain closed. This is an opportunity for Kenya to shine with its use of technology – PS
  • Tax cuts were offered by the Government, and if they stay that way, that will be positive  – PS 
  • Clean Funding: After days of shutdown, the world has come to realize the impact of clean technology is and how important it will be to invest in areas that clean the environment – AS

Advice for Businesses:

  • In a black swan event, Nicholas Taleb advises firms to exploit positive consequences and minimize negative ones – KM 
  • Force majeure clauses in Kenyan contracts, such as leases. are not common or robust, but there will be more of them going forward – PS 
  • Firms should engage with their banks, supplier and landlords – and fund managers should assist in arranging such discussions – PS
  • If a fund is already fundraising, proceed until you are not able to do more – AS
  • Some deal partners are DFI’s (e.g. IFC, DFID) that have emergency funding available for investees to draw down as loans or working capital. That happened during Ebola and now for Corona – AS

You can watch the webinar on YouTube.

One thought on “Investment deal-making amid Corona

Leave a Reply

Your email address will not be published. Required fields are marked *