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Tanzania warms up to private equity but challenges exist

Tanzania warms up to private equity but challenges exist

Investors want in on the action, particularly in today’s lower-returns world. But with meagre stocks and bonds listed and traded on the Dar es Salaam Stock Exchange (DSE), how do investors get a foothold in the country?

And how do Tanzanian businesses get much-needed funds? Well, the answer lies in Private Equity (PE).

Simply defined, private equity is the purchase by a private investor of a share of a company that has not gone public and therefore is not listed on any stock exchange.

The company can use the money from the sale to expand operations or carry on other investments, as agreed by the shareholders and permitted by law. In return, the owner relinquishes some control, as the new investor takes a seat on the board of directors.

Ultimately the investor makes money by selling his shares or receiving dividends. A dividend is, according to the Merriam Webster dictionary, an amount of a company’s profits that the company pays to people who own shares in the company.

Recently the Tanzania Private Sector Foundation (TPSF) underscored the importance of private equity by hosting a consultative seminar on the expansion of private equity investment financing in Tanzania.

“The targeted 10 per cent average GDP growth rate as outlined in the Tanzania Five Year Development Plan FYDP 2011/2012 - 2015/2016 cannot be achieved without massive private sector investments into the economy,” says TPSF Executive Director, Mr Godfrey Simbeye. Launches of new Africafocused private equity funds take place frequently.

The African Development Bank (AfDB) launched an equity investment of USD50 million into the Carlyle Sub Saharan Africa Fund, which has a total of USD 500 million lined up for sub-Saharan Africa investments.

The Carlyle Fund views Tanzania as one of the attractive places to allocate capital, in addition to Kenya.

The East Africa region alone has more than fifteen private equity funds; the majority of which are expected to increase outlays this year. Total investment values are on the rise.

The value of investments in sub-Saharan Africa increased by 38 per cent in the first half of 2011 compared to USD 1.7 billion in the first half of 2010, according to the Emerging Markets Private Equity Association.

Private equity placements come in all sizes. In 2013, Tanzania had three deals valued at USD 5million, a significant drop from 2012, where Carlyle Group and Standard Chartered PE completed two large deals.

The largest in East Africa so far is a $287m deal by Egypt’s Citadel Capital in Rift Valley Railways.

The range of sectors that continue to attract the interest of investors is also expanding into financial services, technology, telecoms, healthcare, agribusiness, mining, energy, oil and gas, consumer products and infrastructure.

On the other side of the coin, is Venture Capital (VC) – which focuses on small, early-stage companies, with the aim of nurturing and growing them fast, then selling them in M&A deals or listing them on the stock exchange.

In Tanzania, as elsewhere in Africa, venture capital remains, strictly speaking, a subset of private equity deals. For the bigger private equity fund community, the road to profitable investing is not so rosy.

The challenges for investors include: The divergence in expectations of the returns; acquiring the necessary resources and expertise to properly assess the investment opportunities; selection of the human resource to implement the strategy which will provide the required risk-return profile and finding a profitable way to exit.

On the human resource front, there is hope in the return of thousands of people from the African diaspora. Welleducated, bright and optimistic Tanzanians are returning home, as employment in the developed nations has fallen.

Likewise investors are concerned about their ‘exit strategies’ and in particular, how to realise returns on their investments. It suffices to say that private equity investment is motivated by profit, not philanthropy.

Venture capitalists occasionally turn to larger private equity funds to purchase their stakes.

Another option involves selling all or part of a company to an expanding multinational enterprise that wants to take advantage of the liberalised flow of goods and services within the East African Community (EAC) and/or other regional trade blocs.

Recently Kenyan investment firm TransCentury sold its entire stake in Tanzania’s leading packaged tea manufacturer, Chai Bora Limited, to Catalyst Principal Partners, a private fund which invests in emerging and mid-sized companies in East Africa.

This marked a successful exit for TransCentury and allowed it to focus on its infrastructure, power and engineering businesses. Over the years Chai Bora has made great progress.

Investment in new technology has led to increase in production capacity thereby offering the impetus for exponential financial growth. One common exit strategy is the Initial Public Offering (IPO) or sometimes simply referred to as ‘flotation’ or ‘listing.’

If the IPO market is hot, an IPO can be a great way for an investor to exit by sellinga part of its stake when the company floats its shares for sale on the Dar es Salaam Stock Exchange (DSE).

However, the Tanzanian stock market is still thin and illiquid and so IPOs are relatively rare, although not unheard of. Mr Isidore Leka Shirima, Economist and Principal Consultant at FK EconoConsult, suggests a different strategy.

“If you look back to US history, before there were liquid markets, investors made their money through dividends. So you can establish a preferredshare structure,” which allows certain shareholders to take privileged dividend payout.

Obtaining private equity financing is not without its risks. Company owners will not usually be okay with the pressure they might get from their new partners. Moreover, in the event that exit strategies prove elusive, investors may lose interest altogether.

Nevertheless, private equity appears to be stepping in to fill the funding gap left from the banks. “For most companies in Tanzania, raising capital means taking a loan from the bank,” adds Mr Shirima.

“Private equity brings special financing along and does not require interest payments.”

The author is the Managing Partner of Kibuuka Law Chambers. He can be reached at paul.kibuuka@kibuukalaw. com

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