- Kenya’s private equity deals size are expected to remain modest this year.
- However, despite the high optimism, deal sizes in East Africa are expected to remain modest.
- However, businesses are concerned that firms will be scouting for exits, too.
Kenya and its East Africa peers are confident that the fundraising environment for businesses will continue improving in the next 12 months even as the continent experiences mixed expectations.
New findings by Audit firm Deloitte show that while East and West Africans largely anticipate an improvement, opinions in North and Southern Africa are divided, with some expecting improvements, others predicting stagnation, and some foreseeing deterioration.
This outlook comes against the backdrop of persistent high interest rates, inflation, and geopolitical uncertainty, which led to a 9 per cent drop in finalized funds year-on-year in 2023.
The Deloitte Africa Private Equity Confidence Survey 2024, shows that in East Africa, optimism is on the rise, with 52 per cent of respondents expecting the fundraising environment to improve over the next 12 months.
Concerns on Kenya’s private equity deals
However, despite the high optimism, deal sizes in East Africa are expected to remain modest. The survey says that 54 per cent of those polled anticipate deal sizes to be below $25 million or KSh3.2 billion, with an additional 35 per cent expecting deals between $25 million and $50 million (KSh6.4billion).
Only 12 per cent of respondents foresee larger deals in the range of $50 million to $100 million, a reduction from previous years.
“The view of an improved fundraising environment could be based on increasing Foreign Direct Investment flows into East Africa, including from traditional markets and growing FDI flows from Asia,” the report reads in part.
Deloitte says respondents identified governments and Development Finance Institutions (DFIs) as their preferred third-party funding sources, given the longer exit timelines associated with these entities.
Banks, with their substantial reserves, have also emerged as a key funding source. According to the survey, the focus on small and medium-sized enterprises (SMEs) largely drives these expectations.
Looking ahead, respondents in East Africa expect Europe and the United States to be the most significant sources of capital over the next 12 months, with the Middle East and Asia also playing crucial roles.
Africa itself, including regions like North Africa and South Africa, is also seen as an important fundraising source.
China’s position as East Africa’s largest trading partner and creditor under the Belt and Road Initiative further underscores the importance of Asia in the region’s capital-raising efforts. However, more businesses are also concerned that firms will be looking to leave the market.
An estimated, 52 per cent of respondents in East Africa expect an increase in exit activities over the next 12 months, despite challenges like currency depreciation and inflationary pressures that have dampened private equity (PE) fund returns and portfolio performance.
However, 37 per cent of respondents believe exit levels will remain unchanged. The expected rise in exits is linked to the steady economic recovery post-pandemic.
Read also: Kenya pushes for IPO Private Equity exits to shore up markets
Private equity firms in East Africa
When closing shop, the report found out that private equity firms in East Africa predominantly prefer secondary sales, with 56 per cent opting to sell to other PE firms for quicker returns.
Strategic sales to investors are the second most favoured option, chosen by 32per cent of respondents for the higher prices they typically command. However, IPOs remain less appealing due to concerns over low liquidity and complex listing processes in East African stock exchanges.
Despite limited IPO activity in the past, the Kenyan government is actively encouraging private equity firms to consider the stock market as a viable exit strategy to bolster the region’s capital markets.
Read also: Investing in Africa: Private Equity and Venture Capital in Africa
