INVESTMENTS: Recent trends in Tanzania private equity market

This is the first of a ten-part article series on the market, legal and regulatory perspectives of private equity in Tanzania. In this part, we discuss the level of activity and recent trends of this relatively new phenomenon in the country.

Private equity is medium to long-term finance provided by private equity investors/funds in return for ownership (‘equity’) stakes in potentially high-growth and unlisted companies, as opposed to venture capital which is provided to seed and early-stage companies whose cash flows may still be negative but have promising business models. In a study How Private Equity Investors Create Value, Ernst & Young and African Private Equity and Venture Capital Association (AVCA), after examining 350 private equity exits that occurred in Africa from 2007 to 2016, found that private equity investors created and preserved value in the companies they invested in, through providing capital and operational expertise and fostering close working relationships between the investors and company management.

Tanzania has one private equity fund, Mkoba, based in the country at present. Other funds that are active in the Tanzanian market, such as, Centum Investments, Catalyst Principal Partners, Metier and Phatisa Fund are based out of Nairobi and Johannesburg.

Most of these private equity funds raise the majority of their capital from outside investors, including development financial institutions, high net worth individuals, endowment funds, governments, pension funds and insurance companies.

There is a significant increase in fundraising by private equity funds. A survey report by KPMG and EAVCA titled ‘Private Equity Sector of East Africa for the period 2015 to 2016’ shows that $1.1 billion was raised between 2015 and 2016 by pan-African and East African firms for investments in East Africa, including Tanzania, compared to $1.6 billion raised between 2007 and 2014. This indicates interest in East Africa. North America and Europe have become by far the biggest sources of this capital—the vast majority of which is obtained from the outside investors named above.

In terms of deal value, Tanzania had 11 percent (equivalent to, $66 million) of the 36 deals (with a value $600 million) reported in the East Africa between 2015 and 2016, according to the KPMG/EAVCA report.

Deal activity was enormously focused on potentially high-growth assets in financial services, manufacturing and renewable energy. This shows that Tanzania’s private equity investment sector profile is not yet well-diversified, compared to neighbouring Kenya’s profile which, in addition to financial services, manufacturing and renewable energy, includes agribusiness, healthcare, fast moving consumer goods, real estate, and transport/logistics.

These sectors are important drivers, which could provide opportunities for private equity in Tanzania, and determine investment trends. The mining sector is expected to recover from deal drought following the promulgation of the new mining regulations which have paved the way for the Mining Commission to start issuing mining licenses.

Although private equity could help to create and grow small, early-stage (start-up) companies in Tanzania, the vast majority of private equity in the Tanzanian market has targeted more established companies. The reality is that early-stage companies are having a tough time raising equity capital.

Having only one private equity fund established in Tanzania is a gross inadequacy for an economy of Tanzania’s size and growth trajectory. Angel investing is also yet to emerge in Tanzania. In short, early-stage and venture investments account for a tiny share in overall private equity activity. The recently launched Tanzania Venture Capital Network and the Tanzania Angel Investors Network are welcome initiatives.

The exit environment in Tanzania has faced pressure from tight liquidity conditions manifested in the slowing of credit growth to the private sector. Nevertheless, the environment is still expected to be favourable due to the country’s long-standing reputation for political stability. The preferred exit strategies are sales to strategic investors and secondary sales to other private equity funds.

Tanzania’s dual membership in the EAC and SADC regional economic blocs has increased trade options and led to many Kenyan and South African companies setting up operations in Tanzania. This bodes well for active deal activity, but the country needs to improve its human development indicators and increase linkages between universities/TVET institutions and industry; between agriculture and industry; and between trade and technology.

The author is managing partner of Isidora & Company Advocates. The article continues next week.