DealMakers AFRICA 2020 Annual
East African Capital Markets Review - 2020
by Kevin Kuria
2020 was a year of unprecedented challenges, chiefly from the coronavirus pandemic which wreaked havoc across all global markets, and a majority of the key sectors. The East African capital markets were also significantly affected by travel restrictions and poor performance dampening transaction prospects. However, as is detailed in our review, the pandemic has further segmented the market which seems to have shifted in favour of private equity over M&A-driven activity. This, we believe, is due to the challenging business environment in the region, more so in Kenya, and the increased availability of developmental capital from developed economies.
Private Equity and Venture Capital Activity
Private equity activity in 2020 kept pace, and even outdid that of 2019. There were a total of 73 private equity investment transactions, including Venture Capital (VC) and Development Finance Institution (DFI)-led deals, with a disclosed value of US$821 million (+38.9% from 2019) from 40 transactions, which had a disclosed deal value, and a median deal value, of $6,7 million. This marks the second year running that PE investment values have outpaced M&A inflows, reflecting an increase in liquidity from private equity parties, particularly from developmental capital sources, and the challenging business environments in the region which have dampened trade player investment. There were three private equity exits during the year, a sharp drop from the seven recorded in 2019. It is important to note, however, that anecdotal evidence from our market participation reveals that some private equity funds exited their holdings back to the original entrepreneurs, without public disclosure. As such, exit figures may be higher. We do expect that we will see an acceleration in exit numbers over the next couple of years, as investment horizons mature. It remains to be seen how investors will tackle valuation challenges arising from likely lower profitability in 2020, vis-a-vis investment horizon and fund life pressures. Our COVID impact valuation publication from 2020 gives some insight into the ways that buyers and sellers can navigate these questions.
Of the 73 PE investment deals recorded in 2020, 16 transactions – with a disclosed deal value of $423,7 million, and a median deal value of $15 million, were led or had significant participation from DFIs. DFIs increased their direct market participation significantly during the year, with the value of these types of deals increasing by 84.9%. VC activity was also robust with 16 transactions, with a disclosed deal value of $39,07 million ($5,35 million FY 2019) and median deal value of $2,28 million ($0,50 million FY 2019).
Notable transactions recorded during the year included Leapfrog’s acquisition of a 24% stake in ICEA Lion, Helios’ $100 million investment into Acorn Holdings, and Greenlight Planet securing $90 million of investment from CDC and other investors.
The highest volume of investment deals was witnessed in the Financial Services and ICT sectors, with seven deals in each. Among the other sectors with significant deal activity were the Logistics and Healthcare sectors, with five and four deals respectively. Exits were spread between Energy, Agriculture and ICT, with one deal each.
We expect that PE activity will remain robust in 2021, driven by a demand for capital from local businesses starved by the pandemic, which matches well with the increased stock of developmental capital available for investment. While we do expect to see more exits during the year, it is likely that many investors will hold off executing transaction documents, awaiting valuation uplifts from higher profitability expected in 2021.
M&A activity continued to decline in 2020 with 25 transactions recorded (-16.6% compared to 2019), with a total disclosed deal value of $326,31 million (-53.14% from 2019) and a median deal value of $14,7 million (-28.29% from 2019). While the coronavirus pandemic played a key role in the diminished performance in M&A activity, we posit that the fundamentals of the business and political environment in the region have also dampened M&A activity. In what can best be described as a perfect storm, particularly in Kenya, the interest rate cap, liquidity challenges, the collapse of three banks, the Nakumatt bankruptcy and the heated political environment over the last five years have proved to be hugely detrimental to business confidence. Political challenges plague Tanzanian businesses, while Ethiopian businesses are also plagued by structural challenges, including strict foreign exchange controls. Uganda and Rwanda offer some hope, though both economies are relatively small and thus may be unattractive to some buyers. As a majority of M&A activity in the region is driven by foreign trade players, these challenges have made the region less appealing as a target for inorganic expansion. Following on from 2019, the financial services sector in 2020 had the highest number of M&A transactions with 12, followed by Energy with three deals. The rest of the sectors under M&A activity had only one transaction each in 2020.
In the short term, we expect that M&A will be muted as businesses recover from the effects of the COVID-19 pandemic. This may well continue in the medium term, particularly for foreign trade player driven transactions, if the structural challenges to doing business are not addressed. However, we expect to see more local consolidation, with some of this likely to be driven by bolt on acquisition transactions for PE portfolio companies. This may well be the case in industries where long investment periods are required to generate competitive returns, and platform strategies are likely to counter this challenge profitably.
Kuria is a Senior Associate with I&M Burbidge Capital, Kenya.