By Muhereza Kyamutetera
Private Equity (PE) is taking root in East Africa as an alternative source of financing. While Uganda has over the last 5 years seen closure of some multi-million dollar deals, most of these, if not all of them, were done out of Nairobi. In July 2014, Ascent Capital Africa Ltd became the first PE fund manager to set up a permanent office in Kampala. 14 months later The CEO Magazine, caught up with Richard Mugera, Ascent Capital Uganda Country Manager to discuss the fortunes of the company and the future of PE in Uganda and the region in general.
Who is Ascent Capital?
Ascent Capital Africa Ltd is East Africa’s relatively new private equity player and the first PE fund with permanent presence in Kampala, Addis Ababa and Nairobi. Ascent Capital Uganda Ltd is the investment adviser to Ascent Capital Africa Ltd in Uganda.
Ascent manages the Ascent Rift Valley Fund (ARVF) – that was launched in July 2014 with US$ 50 million at first close but has just done the final close; locking down US$ 80million (UGX256 billion)- US$ 20 million or 33% above our initial US$ 60 million target.
The fund has a broad range of reputable institutional and individual investors from Europe and the East African region. We are the first Private Equity fund in the region to tap into the regional pension industry, securing US$ 5 million from Kenya Power and Nation Media Group pension funds.
What sort of businesses are you targeting?
We invest in businesses with a proven track record and a potential for rapid growth. Ideally the companies should have been in operation for at least 2 years.
Sectors of interest include: manufacturing, especially in the Fast Moving Consumer Goods sector (such as foods & beverages), agro-processing, industrial goods and construction materials. Others are: security, distribution, oil & gas supplies, financial and other services and ICT. We seek to invest in businesses that are scalable and can potentially be expanded regionally. Additionally, we are looking to partner with companies where we can add significant value on the operational side.
We target to invest a minimum of US$ 2 million and a maximum of US$ 10million per enterprise.
Do the businesses have to be profitable to attract your interest?
Although already profitable businesses are ideal, this is not the only parameter we look at. We will consider investing in companies that are making a loss for reasons that would be correctable through injection of equity and perhaps a strengthening of business strategy, sales and marketing efforts and/or management as well as governance.
Most of the businesses you are targeting are probably family-run businesses where the founders are keen on keeping close control of the business. How do you address this issue?
When we invest in any enterprise, we’re not just infusing cash; we come in as a partner; we are flexible with regard to the equity stake we take. In many cases the stake is determined by the investment size. In any event we do not get involved in the day to day management of the company but are always available to support and commit resources to the company in which we have invested.
14 months following your launch into Uganda, what is your assessment of the market?
The last 14 months have been interesting both for our Ugandan operation but also for the group in general and generally for PE as an industry.
From the investment side, in September, we closed our very first deal in Uganda; acquiring a significant stake in Chims Africa (U) Ltd- a Ugandan mobile money agent, bringing to two the number of deals by the fund since we launched. In February 2015, Ascent invested US$ 2.5million into Medpharm Holdings Africa, a leading Ethiopian medical diagnostic laboratory with eyes on the East African region. I am also reliably informed that there is another 2 deals in the pipeline, possibly to be closed by the end of this year.
From the capital raising side, like I earlier said, we just did a final close of the ARVF where we raised 33% above our initial target of US$ 60 million. Most importantly we have been able to tap into the regional pension industry, securing US$ 5 million from Kenya Power Pension Fund and Nation Media Group Pension Fund.
With the ongoing pension reforms in the region, we believe this presents great potential; we expect to unlock and invest a lot of locally raised savings into growing and expanding our own home-grown businesses.
The traditional Ugandan enterprise is used to debt financing from banks and other sources, which is relatively easier and quicker. Why should entrepreneur choose PE capital which will see them give up a stake in their business?
First of all, every PE investor targets with an exit strategy in the medium term- so it is not really giving up a stake in a business, but rather, it is about inviting a strategic investor, for some time so as to create a mutual benefit for both parties.
Private equity provides capital that is aligned with the owners of the business. We are there for the whole business cycle, sharing the risks and rewards that come with the fortunes of the business. Further to that we bring additional experience, bandwidth, technical and process knowledge, networks and act as a sounding board for the management.
But specifically for the region, you also have to look at the general financial markets and what other opportunities are available for SMES.
The last 4 years have seen an increasingly tight financial environment characterized by rising interest rates, a depreciating Ugandan Shilling, rising credit defaults and the resultant tighter controls by commercial banks that have been the traditional sources of debit finance for SMES. While in other markets out of Sub-Sahara Africa, you have well-functioning development banks and special purpose banks such as building or agriculture banks, in the region, this source of financing is not well developed.
This has been exacerbated by an erratic shilling that has for example since January depreciated against the US Dollar by an average 33% from Ushs 2,779 to the current Ushs 3,695. Interest rates are also above 20%, which virtually makes it difficult for a business to borrow at these rates and still remain attractively profitable.
Under such circumstance entrepreneurs, especially owners of SMEs need to skillfully balance their sources of growth capital so as to be able to sustainably meet their growth and profitability objectives- making PE a good alternative.
Looking at what is happening in Uganda and the region, what would you say is the future of PE?
As observed above, the financial markets are becoming tighter. For businesses that target export markets, it is going to become virtually harder to be competitive with firms that are using cheaper PE financing. To remain competitive in this global market, certainly every business needs to put into consideration its cost of financing because even for companies producing for local markets, we will be having cheaper goods being imported into the country.
That said, the trend in the region is encouraging. According to a recent report, by the East Africa Venture Capital Association (EAVCA) titled ‘Spotlight on East Africa Private Equity between 2007 and 2014’, there were 158 reported PE transactions in East Africa totaling to US$ 1.5 billion. Although Kenya dominated with 87 deals worth US$ 1.14 billion (55% and 76% of total number of deals and value of transactions respectively} Uganda came second with 25 deals (16%) worth US$ 120 million. The rest (29%) totaling to US$ 240 million was shared amongst Rwanda, Tanzania and Ethiopia.
This shows a positive trend across the region and Uganda in particular, I do believe have a local presence will do a great deal in getting many more Ugandans to warm up to the idea of PE.