Ascent Joins Uganda As Private Equity Funds Rise

The entry of Ascent Equity group as a resident private equity fund in Uganda could raise the appetite of other firms to join the market as the country’s journey towards oil production attracts huge investments.

Ascent, which manages the Ascent Rift Valley Fund (ARVF), is the latest to join a list of equity funds eyeing the country, where the economy has expanded partly as a result of activities in the oil industry. The company officially launched in Uganda last week, and announced that its target was to invest $10m (about Shs 27bn) in Ugandan companies in the next one year.

Ascent said it would invest a minimum of $2m per firm. Ascent has a presence in three countries: Uganda, Kenya, and Ethiopia. Ascent becomes the second equity fund, after Damascus capital, to have a resident office in the country. Richard Mugera, the head of Ascent Uganda’s office, said they were looking at firms in the fast-moving sectors of energy, telecoms, and manufacturing.

“Uganda has a very big population, potential huge market and promising enterprises,” Mugera said.

The country’s growth figures are starting to glow again, after a slowdown in the last two financial years. The IMF predicts that the country could grow at 6.2 per cent this financial year. Stephen Kaboyo, the managing director of Alpha Capital, said due to low returns in many parts of the world, private equity firms are combing markets to get good returns and Uganda offer the opportunity.

“International investors make an assessment of opportunities present, the potential that exists in areas that currently seem more visible in Uganda such as infrastructure, mining, oil and gas, and banking. This, therefore, makes Uganda very attractive to PE funds,” Kaboyo said.

Damascus Capital, too, has a rosy outlook for private equity funds in Uganda. It says: “Uganda is an underserved funding market with no capital to finance and steer cregraveme de la cregraveme medium-sized businesses. This segment presents the greatest returns potential for investors, yet is a challenge to find and manage for non-resident investors.”

It adds: “Savvy local investors are best-placed to solve SMEs’ most pressing challenges. Uganda is an uncrowded geography [from the capital perspective] with one of the world’s highest-performing growth track records.”

This potential continues to attract private equity funds. Plus the fact that those that have invested in firms operating in Uganda have not been disappointed, either.

Direct investments:

Private equity funds make investments directly into private companies. Their investment usually takes five to 10 years. After recouping their investment, and some profit, they usually exit the company and shift their funds to another firm. Britain’s Actis is the biggest private equity fund with investments in Ugandan firms.

The fund held a 60 per cent stake in Dfcu bank before it sold part of that to Netherland’s Rabobank. The Commonwealth Development Corporation (CDC), managed by Actis, retained, a 15 per cent stake in Dfcu. Actis, until recently, held a substantial stake in power distributor Umeme.

Early this year, Actis bought into Compuscan, one of the largest credit bureaus on the continent, which operates in South Africa, Uganda, Ethiopia, Namibia, and Botswana. Other funds like Investec have set eyes on the country. This year, it bought a huge stake in Umeme, becoming the biggest shareholder in the power distributor.

Egypt’s Qalaa Holdings, formerly known as Citadel Capital, owns an 85 per cent stake in Rift Valley Railways, which is in charge of the railway network between Kenya and Uganda. The fund recently increased its stake from 51 to 85 per cent after buying out Transcentury.

While most of these private equity funds source their money from Europe, the current process to liberalise the pension sector in Uganda could see more local pension funds attract local sources of private equity funds in the coming years. The National Social Security Fund (NSSF) of Kenya contributed $4m to Ascent.

Lucas Kranck, a partner in Ascent, said they were looking for companies with a revenue base of not less than $1m annually.

“We are looking for promising firms we want to go in with someone we are comfortable with and grow with them,” Kranck said.

While there are many local firms that fit Kranck’s description, there are a couple hurdles that might turn out to be stumbling blocks. While some businesses can be seen as promising, it is really hard for any investor to tell their actual financial health. Many firms don’t keep proper books of accounts while others have remained too informal.

Kaboyo said the private equity firms would find a challenge of finding a smooth exit option when their funds have run the course.

He said: “The exit strategies in our market environment are not guaranteed. The most common exit strategy for investors is through an IPO [Initial Public Offer of selling shares to the public], but considering the size of Uganda’s stock exchange and the low liquidity, the IPO route is not a reliable option.”

And when it comes to the company structure, Kaboyo added: “The majority of SME’s that qualify to be good candidates are family owned. Because of their closed nature, most of them may not be willing to give up control, let alone accepting the demands private equity partners would bring on board such as proper documentation and record keeping, continuity of the business and succession, accountability… ”

Some companies are regarded to be too speculative and risky for the equity funds. According to Ascent Uganda’s Mugera, they will not invest in agriculture and real estate. The agriculture sector is regarded as too risky for any investor to put there their money.

Most entrepreneurs in the sector still produce on a small scale, using traditional tools. The real estate sector has remained unpredictable over the last three to four years as the economy got battered. The sector, investors say, is prone to speculation.

“I have been in that sector [real estate] and I know what is there,” said Mugera, suggesting the sector’s fortunes could be behind it.

But there are sectors they were looking at keenly, including the oil sector, said Kranck. He said they were looking at firms offering services to companies that are directly engaged in the oil sector. They include those supplying catering services, and machinery, among others.

“Oil is really an exciting area we are looking at,” Kranck said.

Source : The Observer

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