Category Archives: EAVCA

Mauritius and the EU Blacklist

This week, the East Africa Venture Capital Association (EAVCA) organized a talk about Mauritius that’s facing a European Union financial transactions blacklist.  

Some excerpts:

  • Mauritius has set itself up as a financial hub that attracts and deploys investments across Africa. It has become the place of choice to operate through and 90% of investments into East Africa are done through Mauritius (60% are from the EU). The significance of this is that one panelist said that the Mauritius ban was worse than COVID.
  • Mauritius has complied with 35 of the 40 clauses (including the big 6 important ones), and 53 of the 58 recommended actions on Anti-Money Laundering (AML). There’s high-level commitment to correct the remaining ones, led by the Prime Minister, and the nation has a timetable to address the outstanding issues in 2021. 
  • The blacklist prohibits European investments in new funds in Mauritius, with the ban also affecting all European Investment Bank (EIB), funding, investments, lending and operations. The ban is not retroactive, so they have agreed on a grandfather period, till 31 December 2021, during which funds can continue to operate and by which time they hope the country will be removed from the list. But from October 1 2020, European funds can’t make new invests in funds structured in Mauritius. They have two options – focus on funds not established in Mauritius or invest through parallel structures (institutions that are set-up to co-invest along with funds in Mauritius) 
  •  No African country will benefit from Mauritius troubles as there are few alternatives to that country. Malta and Ghana have also been listed – so likely bases are now Dubai, or within the EU (Netherlands, Ireland, Luxembourg, France) itself.  
  • Kenya and Mauritius have been working on a taxation treaty for 8 years. Kenya has signed 14 tax treaties (including with Canada, France, Germany, India, Norway, UK, Zambia and South Africa), most before 1987, but none had raised as much attention as the proposed Mauritius DTA, as it is which is a low-tax country. Uganda and Rwanda already have Mauritius DTA’s. Kenya’s Parliament opened public participation on a new Kenya-Mauritius treaty for the avoidance of double-taxation in terms of cross-border transactions (property, profits, royalties, dividends, technical fees etc.) and the deadline for comments is October 5 202. But the treaty does not apply to most Kenyan investment firms as a 2014 KRA law change requires 50% of ownership to be in another state to qualify.  

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.

Private Equity investment guide for East Africa

This week in Nairobi saw the launch by  EAVCA, FSD Africa and IFC Africa of a new private equity (PE) investment guide for East Africa.

The PE investing guide is a tool to enable pension funds across East Africa to assess and invest in private equity assets by raising knowledge among pension fund managers who are primarily invested in stocks and bonds.

It is a simple guide that can be read in just thirty minutes to gain an understanding of private equity assets. It has a checklist of useful information to look for before investing in PE, and after to manage portfolios, and roles for general and limited partners.

Also, EAVCA released a market report on the current status of private equity investments in the region following a survey of pension schemes and PE general partners. It found that, while five Eastern African countries have generous provisions for pension funds to invest in private equity, led by Rwanda at 20%, Uganda at 15% and Kenya at 10%, the uptake has been low with Uganda attaining 2.2% investments in PE funds followed by Kenya at 0.08%.

Nzomo Mutuku of Kenya’s Retirement Benefits Authority (RBA), who officiated the launch,  said that while pushed for pension schemes to diversify and explore alternative investments to grow returns for members, many still had huge investments in one company (i.e Safaricom) and stocks and bonds of banks in which they held their deposit funds. (Later it came up the concentration in a few NSE stocks is not unusual among sub-Saharan markets- Nigeria’s largest firm commands 35% of the market while in Ghana, the top three firms have an 80% share).

Other Insights from the Q & A after the launch:

• Excluding South Africa, there is about $100 billion of funds held by pension and insurance funds and collective investment schemes (CIS). Of that East Africa, has about $30 billion with  Kenya at $20 billion.

• The IFC has been in private equity for over 20 years and is invested in 300 funds globally, with 50 of them active in this region.

• One pension manager cited their investments in I&M bank before it listed at the NSE, UAP, and invested in an energy IPP that gave attractive returns of 13% on a Euro investment.

• Another mentioned that they had participated in 40 bonds offers in 17 African countries with decent returns and no defaults.

• Speakers cautioned about Kenya’s move to raise the capital gains tax on private equity from 5% to 12%, a move that the country’s parliament has since set aside thanks to concerted lobbying.

The teams will next move to market the assets class to trustees in Botswana and Nigeria.

AVCA 2019 private equity and venture capital conference in Nairobi

The 16th annual conference of African Private Equity and Venture Capital Association (AVCA) was held from 1st -3rd April 2019 at the Radisson Blu Hotel in Nairobi. A guest post by Marcela Sinda.

This flagship conference event for the African continent had a fantastic kick-off and turnout, bringing together private equity and venture capital investors who handle a portfolio of over $1.5 trillion in assets. This was according to Kenya’s Cabinet Secretary for Trade, Peter Munya who officially opened the conference on behalf of President Uhuru Kenyatta. The goal of this kind of conference, he said, is to expose investors to the diverse prospective investment markets across the Africa as the continent was now being looked at as any other region, with the focus being around checking due diligence, ethics, looking at best practices and asking the same questions around deal sourcing.

 

DFI’s Role: Kenya is an increasingly attractive investment destination and according to AVCA data, it is the 2nd most attractive country for private equity investments in Africa over the next three years and hence an obvious choice to gather the industry players for this conference. The African PE sector has been shaped for decades by DFIs, and at AVCA 2019, there was some discussion about new DFI strategies for investment across Africa. Maria Hakansson, the CEO of Swedfund, noted that, as a community, DFIs could do so much more when it comes to anti-corruption, e-waste management, customer protection principles etc. and that Africa’s portfolio is constantly outperforming in terms of impact compared to other regions portfolio.

Djalal Khimdjee, Deputy CEO of Proparco said SMEs in Africa are essential towards job creation and achieving the sustainable development goals (SDG’s) and that 60% of the 1.5 million jobs that have been created in Africa every month come from SMEs and venture capital firms. He said that PROPARCO and French development agencies had committed £2.5 billion by 2022 to support African MSMEs, including £1 billion through private equity investments. 

Mathew Hunt, Principal at South Suez Capital shared that one of the reasons why investors are in Africa and especially now is because of the tech-driven growth that’s been on the rise in recent years. Venture capital investments are new in Africa and only a handful of funds have grown successfully.  The role of African Development Bank, said Robert Zegers, their Chief Investment Officer, was to now help support the industry and act as anchor investors in these funds as a lot of development agendas can be achieved by generating value through VC’s and great businesses.

The narrative throughout the discussion panels was around the real opportunities Africa presents for investment with building blocks in place such as improved policies, the rise in middle-income earners, the Africa Continental Free Trade Area, and enablers such energy, improved infrastructure and technology as pathways that cater for development needs. The most attractive areas for P/E investment were perceived to be consumer-driven sectors (financials, FMCG, agribusiness, healthcare and technology).

Deals Galore: VCs are willing and able to take risks and are looking to invest much more than they did previously. According to the  AVCA report 2018, VCs invested $725.6 Million in 458 deals a 300% leap in the total funding amount and over 127% increase in the number of deals as compared to 2017.  VC fund managers, therefore, need to have great entrepreneurial skills to identify numerous opportunities and create great pipelines for growth and expansion. This is the first generation of PE owners and from the lessons learnt, a good company always attracts a buyer and a great way for VCs to approach funding private companies is to ask; ‘if everything works out, how big can this be?’. But investors ought to be cautious not to misconstrue Africa as a single country with regard to investments, rather, and instead start by breaking down the micro trends in each jurisdiction and analyse the different risks.

Investments, not Aid: Charles Mwebeiha of Sango Capital urged investors to look at Africa while investing, like any other region in the world noting that many times, investing in Africa is made to sound like some sort of assistance. He offered that the issue should be whether returns can be made and reiterated that with good strategies, there is money to be made in Africa.

Women: It was also highlighted that having a gender-sensitive lens when investing is an imperative for an inclusive and fair investment strategy and that, especially in Africa, the number of female entrepreneurs supported is a key metric. There is an even split between male and female entrepreneurs on the continent but less than 2% of those women are getting formal funding as they are often working in hidden, informal sectors.

Exits: A major area of discussion was around exits. Carlos Reyes of the IFC,  pointed out that; “to prepare companies for exits, we try to improve reporting standards, corporate governance and we look at the bench – so if the entrepreneur leaves, who can come in? The succession process is quite important.” Exits are not the easiest but they are not deal-breakers and good exits can be achieved. At Leapfrog Investments, they evaluate exits right at the beginning, by sitting down with the owners to try to understand their dreams for the future so as to align funding with their plans for exiting.

Predictions: And finally, taking a forward look at the sector five years into the future, George Odo, Managing Director of AfricInvest Capital Partners observed that there would be more capital raised from African economies, more policy changes required to mobilise pension funds, much more experienced fund managers, and also more EA players paying attention to Ethiopia.

Glossary
AVCA – Africa Venture Capital Association
EA – East Africa
PE – Private Equity
LP – Limited Partners
DFI – Development Finance Institution
IFC – International Finance Corporation
PROPARCO – A Development Financial Institution partly owned by the French Development Agency
SME – Small Medium Enterprise
MSME – Micro Small & Medium Enterprises
VC – Venture Capital

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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