Interview with Centum's James Mworia: Investing in family-owned businesses

James Mworia is the CEO of Nairobi-based investment firm Centum. In this interview – first published in Asoko Insight's 'East Africa's family-owned business landscape' report – Mworia shares his thoughts on investing in family businesses and what it will take for African funds to attract more capital from commercial LPs.

There’s often a fundamental gap between the short-term exit horizons for private equity (PE) and the long-term planning of a family-owned business. What’s your take on bridging that gap and getting to alignment of interests?

In terms of investment horizons, it’s not so much an issue of time for PE investors as it is clarity on how to create value over and above what the owner could do on their own. The struggle comes in when there is an expectation mismatch between return on value and exit. This becomes more difficult when the value-add of the investor is also elusive, which is why the value an investor brings to the table needs to be defined at the point of inception. The key signal to family businesses considering an investment partner should be real clarity on the new value creation compared to the value if they continued to pursue their own course. So if Centum came in, for example, we need to make a clear point that the firm’s business valuation would be better by the time of exit if they have us as a partner. The founder or family needs to know what the value uplift from the partnership is and, crucially, if it is sufficient to leave both partners better off at the end of the period. If the value is clear and expectations align around it, there is no gap to bridge.

Access to limited partner (LP) capital remains a challenge for African general partners (GPs), and the data shows a significant dependency on development finance institutions. What will it take for African funds to scale commitments from private investors?

Liquidity is a big issue in the region and private equity has yet to be competitive enough as an asset class, so the onus is on GPs to make a compelling case that they will exit at a price that creates returns for both their investors and the business managers. In Kenya, pension funds and life insurance are the only institutional sources of capital, and their view of GPs has been tainted by previous investments that didn’t achieve expected returns. Compounding this is the illiquidity of the market, which means you have to be in for a long period of time, whereas pension funds are looking at returns in a 2-3-year horizon so they opt for real estate bonds or listed securities.

GPs that can’t prove their value proposition have a hard time attracting investment, especially because LPs have had negative experiences of delayed exits. Investors everywhere are looking for returns and PE fund managers have to do a better job marketing Africa as competitive. Centum previously relied exclusively on its own capital, but we’re joining the fray now and raising external funds, so we understand LP needs. Our strategy has been to back market leaders, helping them to be even better. Because the market is so competitive, we’ve found it difficult to support scale-ups – those businesses coming in as challengers. Instead, our focus has been on larger deals in the $30 million to $40 million range, where the scale is already proven and the risk is more manageable.

What is Centum’s outlook on the East African market in terms of business development and the investment environment?

The outlook for East Africa is positive compared to other regional blocs on the continent. Growth is robust on the back of real opportunities in consumer-focused spaces, with domestic demand largely driving growth in the absence of large-scale extractive industries, compared to West Africa. Short-term challenges exist, of course, but the trajectory is positive in the long term, which is what you look at when making investments. At Centum, we are optimistic about the long-term prospects of the market.

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