For the best experience, please enable JavaScript in your browser settings.
Troubled Kenyan firms waiting on the wings for buyouts by global private equity (PE) and venture capital investors are fretting as the season of record buyouts that had made the country a hotspot for private deals draws to a close.
This is amidst global market turmoil and recession fears as central banks across Europe, Asia and the United States (US) hike interest rates, restricting the flow of billion of dollars and other hard currencies from rich countries into emerging and frontier markets such as Kenya.
The deep-pocketed investors have splashed billions of shillings on firms in real estate, e-commerce, education, Information and Communication Technology (ICT) and hospitality, among others.
ICT was a particularly attractive prospect. But is the good run coming to a crashing end? Some analysts reckon it is.
They argue that with rising inflation in advanced economies spurring central banks to raise interest rates, Kenya, alongside other emerging markets has become less attractive as an investment destination.
Consequently, higher returns available in other global markets, especially the US and European investors are less to consider Kenya for fresh investments.
Data from the Central Bank of Kenya (CBK) shows that cash from foreigners flowing into domestic assets - both direct investment such as mergers and acquisitions and portfolio investments, including buying of stocks and corporate or government bonds - has been slowing down. The slowdown in the inflow of foreigners' cash has been in the acquisition of stocks, both listed and non-listed, CBK data shows.
For three straight months, this inflow has been in a freefall. Most of the foreigners have been evacuating their cash from the local economy, with the outflow expanding from $92 million (Sh11.1 billion) in June to $160.6 million (Sh19.4 billion) in August.
Year-on-year, foreign ownership of domestic assets increased by 71.4 per cent from $392.9 million (Sh47.5 billion) in August last year to $673.4 million (Sh81.4 billion) in the same month this year, CBK data shows.
However, the flow of foreign cash into the Kenyan economy for acquisitions of businesses, mergers or even setting up of plants, has been declining from a high of $678 million (Sh82 billion) in June this year to $674.1 million in July and $673.4 million (Sh81.5 billion) in August.
As far as private equity and venture capital are concerned, the worst is yet to be felt, with Kenya, and other sub-Saharan African countries, defying the financial turmoil to record several private deals in the first half of the year.
However, the negative effects of tightening by advanced countries, analysts say, will start to bite either in the second half of this year or the first quarter of 2023.
Armed with billions of dollars, foreign buyout firms have for years been taking advantage of what has been a record decade for mergers and acquisitions (M&A), buying and selling some of their assets in the country for top dollar.
This has earned Nairobi the reputation of a vibrant investment hub.
Between 2008 and 2010 and 2013 and 2015, Kenya's share of private equity investment in sub-Saharan Africa jumped from eight per cent to 16 per cent, according to a 2018 survey by the World Bank.
Stay informed. Subscribe to our newsletter
The report attributed the jump in the inflow of private equity into the country to regulatory stability, the country's popularity as a private-led economy and the sophistication of the business environment.
"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," read the policy research working paper titled Survey of the Kenyan Private Equity and Venture Capital Landscape.
In the first half of this year, Kenya recorded 43 private capital deals valued at $859 million (Sh104.3 billion), a historical high, third-quarter survey by the African Private Equity and Venture Capital Association (AVCA).
AVCA noted that early-stage deals in companies offering retailing services comprised a significant 60 per cent of Kenya's consumer discretionary deals in the first half of 2022.
"Notable deals include the $125 million (Sh15.2 billion) (Series B round in Wasoko, a tech-enabled company transforming the informal retail supply chain, and the $50 million (Sh6.1 billion) (Series C in B2C (Business-To-Consumer) e-commerce platform Copia Global," reads part of the survey.
The Kenyan economy has not been spared the aftereffects of the global economic turmoil. The shilling has been on the back foot since January amid foreign currency pressures.
"Monetary policies enacted by government agencies in Kenya and Nigeria, limiting their local currency's repatriation to safeguard the US dollar reserves, significantly impacts MSCI Frontier and Select EM's ability to convert local denominated assets and liabilities amounts to US dollars using quoted immediate currency settlement rates," noted New York-based investment management firm BlackRock. "As of August 31, 2022, MSCI Frontier and Select EM's assets and liabilities denominated in Kenyan shillings and Nigerian Naira are using the six-month and 12-month non-deliverable forward rates respectively." Some of the recent mergers and acquisitions activities in Kenya cut across key sectors, including financial services, renewable energy and technology.
Many of the largest buyouts in the last decade were based on revenue and profit expectations that were optimistic.
The strain is showing already. In June this year, Kune, a Kenyan food start-up founded by Frenchman Robin Reecht in 2020, closed its doors after saying it failed to raise Sh30 million from a French investor for operations amid rising costs.
The firm has also failed to raise money to finance operations, suggesting that investors mostly from the developed world are pulling back investments due to fears of recession and interest rate hikes.
Kune, which had announced plans to expand to other Kenyan towns in the next 12 months as the demand for home-made healthy meals on order gained momentum, said it was unable to keep up with rising operational costs. "With the current economic downturn and investment markets tightening up, we were unable to raise our next round. Coupled with rising food costs deteriorating our margins, we just couldn't keep going," said Mr Reecht in a statement in June.
And later in August, Kenyan logistics start-up Sendy revealed it had laid off 10 per cent of its 300-strong workforce, or 30 employees, after running into financial challenges.
The Kenyan start-up, which facilitates door-to-door deliveries between individuals and businesses, had expressed optimism of raising $100 million (Sh12.1 billion) this year to fund its expansion plans into other African markets, including Nigeria, Ghana, South Africa and even Egypt.
These start-ups are casualties of PE firms retreating to home markets. analysts say. Before the current turmoil, many global investors had bet on Kenya.
"Africa is the place to be for European development financiers. It is a continent where jobs and investments are very much needed, and at the same time, it is the new frontier where opportunities abound, and life is getting better for millions of people," Finnfund Chief Executive Officer Jaakko Kangasniemi explained recently while underlining why Finland's sovereign wealth company, Finnfund had chosen Nairobi as a launchpad for its regional operations.
"Some of our best and most impactful investments are in East Africa, and we intend to make many more such investments in the coming years."
Mr Kangasniemi spoke when Finnfund opened a regional office in Nairobi, seeking to expand its portfolio in the local market where it has already made several investments.
"The location supports and streamlines the follow-up of the regional market and existing projects and collaboration with co-investors."
But Finnfund is not an isolated case as more firms have stepped up investments in Kenya.
The Finish fund had followed other sovereign wealth funds in setting up a regional office in Nairobi in the recent past with eyes on local deals. Others who have done so include Proparco (French), DEG (German), CDC (UK) and FMO (Dutch).
The funds say they see a new promise in Nairobi. But they are not alone.
A group of 30 technology entrepreneurs with links to Silicon Valley, for instance, recently raised $200 million (about Sh22 billion) for investing in promising tech start-ups in Kenya and elsewhere in Africa.
The new Africa-focused fund backed by Stockholm-based Norrsken fund had said it will target to provide early-stage funding to promising start-ups and founders in Kenya and the region, the Swedish fund said.
Improvement in ease of doing business, high return potential across all sectors, a well-diversified economy and consolidation in sectors such as financial services had created an avenue for increased PE activity.
In financial services, several analysts had said they expect consolidation in the banking industry and innovations to be the main drivers of activity.