Together with Pinsent Masons and in collaboration with Nairobi International Finance Centre (NIFC), we convened, hosted and moderated a round table conversation aimed at creating a platform where opportunities and challenges in the private equity and venture capital space were discussed with the aim of improving the investment ecosystem in Kenya. The round table brought together various stakeholder players in the private markets space, including regulators, PE and VC funds, professional service providers, associations focused on PE and VC, development finance institutions, multilateral organizations and government officials.

Keynote AddressKeynote Address

In his virtual keynote address, the Prime Cabinet Secretary H.E. Musalia Mudavadi recognized the crucial role played by private equity in the growth of economies worldwide including Kenya. He observed that over the past few decades Kenya has embarked on a transformative journey and made remarkable progress in the socio-economic, political and technological fields.

He underscored that Kenya’s present reality offers a unique convergence of factors that must be harnessed to unlock the country’s enormous potential. Appreciating that private equity and venture capital has been a catalyst for innovation, job creation, sustainable business growth and overall business expansion, he expressed commitment by the Kenyan government to supporting private equity and venture capital in the following ways:

  • creating a favorable regulatory environment that supports investment and innovation;
  • enhancing Kenya’s digital competitiveness;
  • pursuing and maintain strong trade relationships that offer large markets; and
  • investing in education and talent development to provide a skilled workforce that attracts investors and supports businesses.

He concluded by emphasizing that the success of Kenya’s private investment ecosystem depended on the collaboration and contribution of all stakeholders in the PE/VC sector. The roundtable was a perfect opportunity for all stakeholders to propose meaningful initiatives that will make Kenya even more attractive to private capital.

Kenya’s Macro-Economic Outlook – The Impact on Private Investment

The Panel was made up of Amb. Kyle McCarter (Partner at Everstrong Capital and Former United States ambassador to Kenya), Anzetse Were (Senior Economist at Financial Sector Deepening (FSD) Kenya), Kenneth Mwige (Director General of the Kenya Vision 2030 Delivery Secretariat) and was moderated by Sylvia Kithinji (Partner, Ashitiva Advocates LLP).

There are bright spots amidst Kenya’s challenging but resilient macroeconomic environment

The decline in the macroeconomic environment in several countries in Africa including Kenya characterized by inflationary pressures, major pressures on the exchange rate, debt sustainability challenges will persist in the medium term and will continue to have an impact on consumer spending, investment spending, government spending and net exports and value chain resilience.

Notwithstanding this decline, Anzetse pointed out that there are bright spots in the form of increased Foreign Direct Investment (FDI) interest in Kenya and Africa generally from a broader range of investors. The new interest from non-traditional investors offers different capabilities, risk appetite and sector interest thereby diversifying possibilities for private investment. In addition, traditional investors are reviewing their approach, financing options and sectoral interest.

.A challenging macro-environment offers opportunity for public private partnership.

In addressing what strategies private equity firms should adopt in a challenging environment, Ambassador Kyle Mc. Carter highlighted the opportunities for investors to partner with government to deliver investment such as large infrastructure projects that support economic growth and deliver tangible impact.

Kenya’s unique advantages such as the entrepreneurial spirit of its people, makes it competitive in comparison to other African jurisdictions facing similar macro-economic challenges. However, the potential for partnership led investment and economic growth can only be fully realized with a conducive and predictable policy, regulatory and tax environment.

Kenneth Mwige added that the Government of Kenya’s Vision 2030 economic aspirations are intended to be delivered through a collaborative effort between private sector and public sector with government contributing 30% of the investment to catalyze private sector investment.

Bridging the gap between the private and public sectors is key in attracting the 70% needed from the private sector. This can only be achieved through the efforts of initiatives such as the Nairobi International Finance Centre (NIFC) and the Kenya Investment Authority (KENINVEST).

In turn, private investment offers the appropriate financing options to enable Kenya to meet its long-term economic objectives under Vision 2030.

Investment Perspectives

The panel was made up of Diana Gichaga (Founder & Managing partner of private-equity support), Peter Fry (Director, Kua Ventures Limited), Mohamed Saeed (Investor Relations & Capital Raising Manager, Zoscales Partners) and was moderated by Oliver Crowley (Partner, Pinsent Masons).

Need for proper documentation and record keeping by entrepreneurs.

Lack of documentation combined with unrealistic expectations set by entrepreneurs, unwillingness to give capital and an unfavorable macro-economic environment were highlighted as some of the key barriers to PE/VC investments in Kenya. Proper record keeping and documentation significantly support investment decisions by investors. It enables investors to verify representations made by the entrepreneurs as accurate especially during the due diligence process. Diana argued that lack of documentation often translates to lack of preparedness by entrepreneurs thus deterring investors.

Relationship management and mutual understanding by both entrepreneurs and investors

Entrepreneurs also need to set realistic expectations with investors which is crucial for building trust, managing risks, avoiding disappointment and generally maintaining credibility. Peter Fry observed that entrepreneurs need to manage relationships with investors whilst maintaining transparency and making investors aware of the aspects of their businesses that need investor support. By the same token, it is crucial for investors to understand entrepreneurs better by thinking through their lenses and therefore understanding their businesses better.

Coupling of investment and exit strategies for successful deals.

A successful PE exit marks the success of the investment lifecycle. The panel acknowledged that the region’s exit environment has not been without challenges, whilst highlighting that Africa’s initial public offers (IPOs) are scarce and therefore not suitable as an exit mechanism for PE investors. Mohamed attributed exit success to applying a multifaceted approach such as diversifying exit options, longevity in the assessment period and planning on the exit prior to acquisition. This coupled with strong investment strategies contribute to a successful exit option. He gave an example of Zoscales’ ‘3c’ investment approach which entails (a) concentration by having relatively few portfolio companies; (b) control through obtaining an equity stake in the entrepreneur’s business; and (c) champions by working with industry leaders.

Leveraging the Nairobi International Finance Centre (NIFC) to deepen PE and VC investments in Kenya

[Mr. Oscar Njuguna, the Ag. CEO of NIFC delivered a presentation on how investors can leverage the NIFC to deepen their investments in Kenya.]

The Nairobi International Finance Centre (NIFC) was established as a flagship project under the economic pillar of Kenya’s National Vision 2030. NIFC is designed to be a leading financial hub, that offers an efficient gateway for investors and businesses to the African market. The NIFC is focused on providing an operating environment that is efficient and attractive for investors. Its key pillars include; providing efficiency in operating frameworks, improving the legal and regulatory environment in Kenya, including the dispute resolution frameworks within the financial and technology sectors, and providing incentives and predictability in Kenya’s tax regime.

In its bid to achieve its objectives, the NIFC’s framework has been designed to ensure that the following measures are put in place for the benefit of investors:

  • No company ownership restrictions while setting up in Kenya;
  • No nationalization or expropriation of property;
  • No restrictions on repatriation of profits;
  • Investors can employ qualified staff of choice;
  • Tax and regulatory predictability;
  • Efficient business establishment; and
  • Government and regulatory support from the NIFC

Currently, companies certified under the NIFC are enjoying various incentives. For example, Capital Gains Tax (CGT) application, in instances where a company invests five billion Kenya shillings; and the transfer of such investment is made after five years, the applicable CGT rate shall be the rate that was prevailing at the time that the investment was made. In addition, the Corporate Tax application, in instances where a company operates a carbon market exchange or emission trading system, the applicable corporation tax rate shall be 15% for the first ten years from the year of commencement of its operations.

 

Enhancing the private investment policy, tax and regulatory landscape in Kenya.

The panel was made up of Dr. Adano Roba (Acting Director General, Competition Authority of Kenya), Josephine Kang’ong’a (Head of Legal and Regulatory Framework, Capital Markets Authority- Kenya), Michael Koome Mburugu (Regional Tax Partner, PKF International), Hope Wandera (VC Investor, VU Venture Partners) and was moderated by Ribin Ondwari- Partner, Ashitiva Advocates LLP.

The panel discussed various issues touching on the current policy, tax, and regulatory landscape in Kenya, with the main focus on factors that investors consider prior to making an investment in Kenya, and areas that can be enhanced to make Kenya an ideal environment for PE and VC investments.

Tax certainty and fairness are crucial for investor confidence.

In response to what investors look for in a tax environment, Micheal Mburugu indicated that investors search for certainty and fairness in a country’s tax regime. Investors will deter from investing in a jurisdiction with an unpredictable tax regime. PE and VC have a long-term investment horizon, and uncertain tax regimes would discourage investment decisions in certain jurisdictions.

Investors also look for jurisdictions with fair tax regimes that optimise revenue collection across the country’s tax base as opposed to the application of disproportionate tax increments on a segment of the tax base. This could lead to unintended consequences such as informalization, reduced economic growth and reduced competitiveness.

Collaboration on policy and regulatory development is needed to create a favourable environment for PE and VC investment.

Josephine Kang’ong’a highlighted that the Capital Markets Authority (Venture Capital Regulations) were established as a regulatory tool intended to promote VC domicile and investments in Kenya. It was introduced with a tax incentive structure on dividends associated with VC financing transactions, with the goal of promoting VC investments in Kenya. Regrettably, these regulations failed to achieve their objectives due to limited VC investment activity in the country at the time of their enactment, which was prior to the recent increased VC activity.  Additionally, these regulations exclusively applied to VC entities organized as companies, overlooking the fact that partnerships have been the more favoured model for VC legal structures.

It is therefore imperative to establish a coordinated regulatory development approach involving regulators and all relevant stakeholders for responsive regulations.

It was added that players in the PE and VC ecosystem should be included in policy and regulatory development processes. For example, the Start-Up Bill 2022 Kenya (the Bill), needs to incorporate perspectives from start-ups, SMEs, PE and VC players, to ensure that the Bill once passed, responds to market realities and achieves its intended objective. Hope Wandera observed that the Bill’s definition of a startup does not adequately capture the distinct characteristics that differentiate startups from small and medium-sized enterprises (SMEs), and whose legislative architecture could potentially fail to address the real needs of startups.

Regulation should be used as a tool to promote PE and VC investment.

Dr. Adano Roba, highlighted the importance of regulators playing both a facilitative and enforcement role to promote investment. For example, the Competition Authority of Kenya (CAK) is mandated to investigate restrictive trade practices on horizontal, vertical and abuse of dominance cases that could lead to market distortion. This is crucial in fostering fair competition, creating market transparency, and encouraging innovation which consequently attracts investments.

He mentioned that the Competition Authority of Kenya (CAK) has adopted a well-balanced regulatory approach that strikes a balance between anti-competitive behaviour and permitting legitimate business to thrive including approval of M&A deals.

Dr Adano further mentioned that despite the availability of a robust legal and institutional competition framework, the dual notification process involving CAK and the COMESA Competition Commission in relation to regional cross border transactions could potentially dampen PE- VC interest. Dr Adano suggested the importance of reevaluating this dual notification process so as to not dissuade PE-VC investors from participating in M&A deals within Kenya and the broader region.

Josephine Kang’ong’a added that there needs to be an effective legal framework that allows PE and VC investors to smoothly exit through the capital markets. Presently, Kenya has not experienced any exits through the capital markets. However, if the legal and policy frameworks are favourable for exit for example the application of fair tax treatment and availability of effective dispute resolution mechanisms, such legal and policy measures would contribute to the growth of the PE and VC sector whilst simultaneously deepening the capital markets.

 

 

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Navigating the Investment Landscape

The Panel was made up of Belvas Otieno (Investment Officer, International Finance Corporation), Joseph Murabula (Chief Executive Officer, Kenya Climate Innovation Center), Chibuzo Ene (Chief Executive Officer, Nathan Claire) and was moderated by Lisa Botha (Partner, Pinsent Mason).

Kenya remains an attractive investment destination, albeit more can be done.

Kenya is deemed to have many investment opportunities in comparison to other jurisdictions including in sectors such as climate, water, energy, consumables, infrastructure, energy and many more, due to various factors including being a regional gateway. It was suggested that incentivizing entrepreneurs by lowering tax rates as well as enhancing the ease of complying with tax procedures would be beneficial to the country’s entrepreneurial ecosystem.

Data driven decision making is crucial in enhancing governance in the region.

The panel recognized that the quality of governance has significantly improved in the course of the years in Kenya which has contributed to its success as a financial center compared to other African destinations. Kenya and other countries in the region should however be more deliberate in harnessing quality data and utilizing such data to guide decision making by government agencies and authorities.

Development impact is clear, but commercial return remains elusive.

Investment in Kenya (and Africa generally) generates clear developmental impact results. However, there is a scarcity of deals that offer promising commercial viability and consequently, there is an apparent need for entrepreneurs to enhance return to their investors in order to deepen investment by attracting commercial investors, whose investment participation is crucial for later stage investment rounds as opposed to development finance institutions (DFIs) whose participation should be more prevalent at the earlier stages.

Lisa, summarized the discussion by  noting that there’s need to maximize returns and narrow the loss gap; entrepreneurs need more clarity on legislation; SMEs need more  access to innovative finance suitable to grow business; there is need to incentivize the growth of talent as well as harness it so that top talent with entrepreneurial skills does not remain working independently thereby limiting their ability to grow; and there is need to enhance the involvement of stakeholders, including at grassroot level, in decision-making by government.

Fire Side Chat: Harnessing Kenya’s Potential to Deepen Private Investment

The Roundtable ended with a fireside chat by Dr. James Mworia, CFA (Group CEO and Managing Director, Centum Investment Company PLC) who was interviewed by Terryann Chebet (Strategic and Business Development Lead, CNBC Africa) on how investors can harness Kenya’s potential and deepen private investment.

Diverse and Lucrative Sectors

James started off by outlining the most profitable sectors which most savvy investors ought to invest in: Housing, Education, Financial Services, Energy Agriculture and Technology. These three sectors are the most lucrative and most profitable. These sectors were chosen based on an analysis of the economy and identifying which sectors will prove critical to the economy moving forward.

A suitable investment climate is crucial to harness Kenya’s potential

He added that to deepen private sector investment, the government must create a suitable investment climate. This can be done through operating frameworks such as the Two Rivers International Finance and Innovation Centre (TRIFIC) Special Economic Zones (SEZ). The TRIFIC SEZ aims to solve the problem of fiscal inefficiencies faced by investors bringing capital into the country.

He added that SEZs established under the Special Economic Zones Act enjoy incentives such as exemptions from Capital Gains Tax (CGT), exemptions on taxes on interest, royalties and management fees. These incentives make it easier for FDI to come into the country through the SEZ regime.

Operating frameworks such as SEZs provide entities with a fiscally attractive environment that allows them to scale their operations and compete on a global stage.

The role of leadership is critical in harnessing Kenya’s potential

James highlighted that as a business owner seeking private investment, your company’s leadership is key to the success of your company. Many investors and business owners typically make their investment decisions based purely on the company’s value creation plan while ignoring “the how” which is the company’s implementation and execution of its value creation plan.

A business owner must set out a clear implementation plan which includes the selection of a good leader and competent management team and the establishment of processes to make sure that the leader can support their team during the implementation process.

With regard to execution, he stated that rather than focusing solely on results, the business’ emphasis should be on what should be done to achieve these results. It’s important to manage the inputs into the results and working with the team to review the actions that should be taken to achieve the end goal. Intense focus should be placed on the “how” and the execution.

Another critical role played by an effective business owner is “clearing the path”. This entails dealing with any potential challenges that are beyond the control of the business e.g. regulatory challenges, financing structures etc. As an effective owner, you must clear the path for the business and allow the leadership of the business to focus on the operation of the entity and achieving the goals that have been set out.

Finally, he added that savvy investors and business owners must always work with the end in mind. It’s important to establish clear structures that will be able to monitor the operations of the company. A business owner should focus on the drivers of the value creation plan but also on the risk management. A business that can strike the balance between value creation and risk management is extremely lucrative to potential investors.

Investment strategies should be market driven.

Kenya is an extremely lucrative market for investors and global trade. In terms of doing business, Kenya is on par with most countries in the world. This gives us a great advantage in maximizing global trade & the PE/VC asset class. Investment strategies should be market driven. Private investors need to invest and scale behind a hypothesis. Investments should be data driven.

“Accept the data, pivot and scale your investment until the numbers & data make sense.” This is how investors in Kenya will harness the investment potential available in Kenya.

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