Family owned companies miss out on equity funds

Private equity firms in East Africa continue to give a wide berth to family owned enterprises due to among other things succession plans.

These ventures, although attractive to equity providers in all aspects, present a complex entry and exit plans for the funds a situation that few would want to get entangled in.

As a result, despite growth potential exhibited by family owned outfits, they are missing out on the financing largesse from firms that continue to look for investment opportunities in the region.

“Some of these firms have a complex structure in running the business that is tied up along family lines. This makes them a hard catch for private equity companies operating in East Africa,” says Mr Murray Grant a partner at London-based private equity firm, Actis.

In most family owned businesses, the shareholding is carefully distributed among members with the patriarch holding a considerable stake.

Therefore any deemed dissolution of this is, in most cases, warded off unless the circumstances are unavoidable.

In the event of need for capital, enterprises turn to family savings or bank loans to save the rainy day. This has made syndicated loans provided by commercial banks a favourite for these outfits as they seek to grow.

“Typically, a private equity will come in and create some realignment based on professional needs of the firm and this might also not go well with the family. This makes them a little complex to invest in,” says Mr Grant.

In Kenya, Nakumatt Holdings is an example of such family business that has excelled in retailing. The supermarket chain has a steady profit stream and healthy cashbook that would make it a perfect attraction for any private equity firm.

Bidco Oil Refineries is also another family owned business that has transcended its initial scope to become a leader in the edible oils, fats and hygiene products making segment.

The pair has had successful runs expanding to neighbouring countries making them among the successful family led business empires in the region.

But the overall interest in Africa as new growth frontier for private equities is also driven by the potential on the continent.

In Kenya, for example, several funds have opened up shop over the last five years each trying to secure a business deal to ensure steady return to investors.

“Look at Europe and the America, the Middle East and Far East they have been exhausted and now everyone is looking at Africa. This is where the business is,” explains Mr Grant.

Among those that have comfortably pitched tent in the country include Citadel Capital, Emerging Capital Partners (ECP), based in Washington DC, Business Partners International, AfricInvest and InReturn Invest.

With a clear miss from family owned businesses in the region, a number of private equity firms have now made a beeline for infrastructure related investments. Over the past three years for example, those involved in the energy sector have indicated a growing interest to pump in money.

In February last year, Mr Joseph Njoroge, the managing director of Kenya Power and Lighting Company (KPLC) was quoted by our sister publication Business Daily saying that there was a rise in unsolicited requests by private equity firms.

Demands in power sector have been boosted by increased growth in population and hence economies of East Africa. This has created a need for additional investments in energy across the five countries of EAC an attraction for private equity firms.

But with expected economic growth of about five per cent in Kenya, a lush ground still exists for private equity providers. Neighbouring Uganda and Tanzania are also expected to record 6.0 per cent and 6.5 per cent in 2010 and 2011 respectively.

On the other hand Rwanda is due to continue with its robust growth while Burundi is noted to have made a steady intend to grow its economy.