Private Equity in Uganda: An Insight on Deal Sourcing

Defining Private Equity

This may seem like a basic term for any financially literate person however, in Uganda many are hearing about this concept for the first time. In simple terms, private equity is financing provided for equity stakes in potentially high growth companies that are privately owned.

Private equity is a financial engine that came to the fore in 1946 with Georges Doriot’s founding of American Research and Development Corporation, the world’s first publicly owned venture capital firm. The idea was to boost private sector investments in businesses run by soldiers who had returned from the Second World War.  Since then, private equity has mutated over the years into a lucrative investment opportunity for those with the financial ability to provide accessible alternative capital raising solutions for businesses.

From North America to Europe, private equity firms finally found their way to Africa, especially over the last two decades, as most African countries found relative political stability that spurred annual GDP growth rates of over 6%. In Africa, East Africa has become one of the hubs for venture capitalist and private equity firms with Kenya attracting the highest number and value of private equity transactions across the region.

The History of Private Equity in Africa

Private equity transactions in Africa date back to the 1980s when fund managers found interest in South Africa. The success of these investments encouraged Development Financial Institutions (DFIs) to support fund managers who were specifically deal sourcing in Africa. By the early 2000s, funds had been raised specifically to invest in the African region. The main drivers that have led to increasing attractiveness of the region include:

• An increase in the purchasing power strengthened by the growing middle class.
• Strengthened regional co-operation allowing for robust trade.
• Annual GDP growth rates of above 6% per year on average.
• Reduced political tensions which favoured the business community.
• Increased Foreign Direct Investment which has widened the capital base.

It should be noted that deal types have historically evolved from growth capital deals into buyouts and venture capital. The reason for this is that PE firms initially looked for companies with the highest growth potential in the most promising sectors. However, with the success of Safaricom’s MPesa and the Kenyan IT hub coupled with the quantitative-easing era’s availability of funds, there has been an increase in the number of technology sector venture capital deals.

According to East African Deal Dashboard from EAVCA (East African Private Equity and Venture Capitalist Association), over the period of 2010-2016, consumer businesses dominated the deals with 40% of the deal value, followed by the financial sector that took up 35% of the deal value with the remaining sectors such as healthcare and energy making up for the rest. However, for deals with a value of at least US$ 20 Million, the financial sector dominated with 35% of deal value, closely followed by the consumer and energy sectors. The three sectors took up to 81% of invested capital.

Is Uganda Ready?

A number of successful deals have been done in Uganda. However, the volume of the transactions is relatively low in comparison to Kenya; Uganda has had 31 reported deals while Kenya has had 88 over the period of 2010-2016.  Notable private equity deals in Uganda include Orient Bank, Quality Chemicals, Biyinzika Poultry, and KK Foods. While the drivers indicate that deals within the country would be attractive to execute, the business community has been held captive by the prevailing capital raising options which are mainly banks and money lenders. This captivity has been fueled by two major factors that affect deal sourcing which are lack of trust and lack of financial knowledge.

“… the business community has been held captive by the prevailing capital raising options which are mainly bank loans and money lenders.”

Withdrawn Business Community

The Ugandan business community over time has been mostly self-reliant and thriving in the informal sector. The reason for this is that most entrepreneurs prefer to remain at a distance from authoritative bodies in order to retain profit margins. Entrepreneurs have remained closed and tied to their businesses with little trust in new ideas and strategic partnerships. The greatest fear most have is the loss of control of their businesses which they prefer to be managed and handed down to family members however unprofessional.

While this may be the case, government agencies are actively looking for ways to penetrate the informal sector in order to sensitise entrepreneurs about operational and governance structures that ease capital acquisition. The Uganda Investment Authority for example, organises an annual private equity and venture capital conference that creates a networking forum for investors and entrepreneurs.

Other agencies like Enterprise Uganda provide SMEs with financial literacy training and mentoring in order to enlighten the overall business community. With these in place the business community is gradually beginning to gain trust and acknowledge the diverse magnitude of opportunities beyond those prevailing.

Financial Knowledge Gaps

Financial literacy is quite a powerful tool in the overall financial transformation of an economy. The business community in Uganda has had a slow appreciation of this tool with businesses stagnantly held up in the culture of using rudimentary techniques to analyse internal and external performance of their industry.

The banking community took advantage and trained the demanding community about tailored credit products for their businesses. However, the prevailing knowledge is spoken in banking code and despite increased awareness of it, majority of enterprises struggle to access credit which is expensive as well.

In order to improve people’s knowledge, skills and confidence to manage personal and family finances, Bank of Uganda started the Strategy for Financial Literacy . Private organisations also followed suit noticing that the business community needed support beyond banking and micro-financing solutions.  Further to that, the local business community is also increasingly engaged by private equity and venture capitalist firms from Africa and beyond which participate in regularly organised investment conferences.

Future Outlook

The Ugandan business community is gradually opening up to alternative financing options due to some notable deals and an intense education drive carried out by government agencies and the growing number of private equity firms. With so many firms looking for deals that could generate strong returns for their investors, the deal market will exponentially become stronger in the medium term.