How East Africa’s PE industry has been impacted by Covid-19

East Africa is about one to two months behind Europe and the US in terms of Covid-19 trends but businesses in the region have already been affected by the pandemic. To understand how East Africa’s private equity and venture capital industry is managing the situation, EAVCA recently hosted a webinar with industry stakeholders. Africa Private Equity News highlights the main takeaways from the discussion.

(Disclaimer: The webcast was livestreamed on 2 April. There may have since been some changes in the business environment.)

Fundraising

For the time being, limited partners (LPs) remain willing to at least talk to East African private equity firms with regard to fundraising, according to Ananya Sengupta, head of transactions advisory for PwC in Kenya.

“We are not yet sure exactly how this would play out in terms of their ability to complete transactions quickly … We anticipate that if [the crisis] goes on for a prolonged period of time, which it looks like it will, there would be delays in transactions closing. But so far, we have not seen [LPs] saying, ‘Oh, we don’t even want to talk about [fundraising], let’s just wait until the outbreak is over.’”

Sengupta advises those private equity fund managers which are currently fundraising to continue doing so as long as they remain able to engage with potential investors. However, she suggests those about to embark on a fundraising drive should consider holding back until the situation has quietened down.

Dealmaking

Charles Omanga, managing principal of Nairobi-based M&A and capital raising advisory firm Horizon Africa, said there is already a delay in deals currently in motion. 

According to Paras Shah, a partner at law firm Bowmans in Kenya, there has been a slowdown in dealmaking but not a complete stop. He said many of the deals his firm has been involved with since the start of the year are still progressing, albeit at a slower pace. “Those that were in the negotiation phase, people are still negotiating, and I suspect signing will probably be delayed depending on what happens with the crisis,” he added.

To illustrate how the Covid-19 crisis has influenced the dealmaking environment, Shah highlighted a recent transaction Bowmans worked on which contained a strong material adverse change (MAC) clause that allows the investor to walk away if the pandemic meaningfully affects the company before the transaction closes. While MAC provisions are nothing new, Shah anticipates them to be more detailed going forward, addressing specific issues such as supply chain disruptions and forced business closures.

Despite a slowdown in dealmaking throughout Africa, Shah pointed out that Bowmans continues to receive enquiries from European and American investors interested in the region.

Covid-19 also has a bearing on company valuations, which could further contribute to stagnation in new investments. Omanga foresees disagreements between business owners and fund managers in terms of company valuations. He noted it is possible those business owners who have seen a drop in their companies’ valuations could temporarily pull back from potential deals, build up their businesses again and return to the table in a year or two.

Deal logistics

East Africa’s legal system remains “semi-open”, according to Shah. He said Bowmans recently received online rulings from judges and described the greater use of technology as a positive step.

He added that the Competition Authority of Kenya has also embraced technology and is allowing online filings. “So, nothing is stopping from that point of view. If there are transactions that were signed and are going into closing mode, there may be a bit of a slowdown in terms of getting the approvals, but government agencies, quite impressively, have said they will continue to work the best they can.”

Lockdowns or movement restrictions in countries such as Uganda, Rwanda and Kenya have affected investors’ ability to do physical due diligence. But this doesn’t mean all due diligence activity has to be halted, according to Nigel Smith, head of strategy and deal advisory for East Africa at KPMG, who said financial information can be uploaded to virtual data rooms. “We are currently working on a transaction which we hope will be completed within the next six to seven weeks and we have done a lot of work over last weekend digitalising some of the hard copy files. We’ve uploaded that into data rooms and it is working a lot better and more efficiently than perhaps we had feared,” he said.

LP liquidity

There are reports of European LPs that have defaulted on their capital calls due to the economic fallout from Covid-19. Smith revealed that he is aware of some LPs which have already made contact with African fund managers to enquire about the timing of their next capital calls.

However, he doesn’t expect the large development finance institutions (DFI) – which account for a sizable portion of capital invested in African private equity funds – to default anytime soon but suggested family offices could be under greater pressure.

“There’s no doubt high-net-worth individuals are the ones that are likely to have more pressures; they are more likely to default than the multinational organisations that probably have resources behind them …When you look at East African high-net-worth [individuals], you have to remember they’re also businessmen in their own right and are impacted as well [by Covid-19].”

“I’d be surprised if some of these long-standing and reputable DFIs defaulted,” he added.

Smith said private equity fund managers might have to be more lenient towards their LPs in terms of the timing of capital calls. “PE houses themselves need to also show a degree of flexibility to the LPs and, rather than hold them to that 10- or 14-day deadline, maybe try and provide some degree of extension.”

Reach Africa’s private equity community by publishing a Showcase Article on Africa Private Equity News. Contact us at editor@africaprivateequitynews.com for our rate card and more information.