Private equity (PE) is a developing feature in many African markets whose growth is facing many lips and bumps in a public that grapples to understand it. Coined from their private nature of raising and investing funds, PE firms, instead of approaching banks and the capital markets to raise funds, approaches sophisticated investors. They promise a return slightly higher than that offered by traditional assets which include government securities among others. Centum, is an example of a private equity firm in Kenya and has historically invested in private companies such as Isuzu East Africa, Almasi Beverages and Nairobi Bottlers.
Currently, one of the PE firms, Cytonn, is in the spotlight for failing to meet its obligations to investors. Founded in 2014, the firm has experienced its highs and lows. I credit Cytonn for raising billions of shillings in a record short time. For instance, as of June 2021, two of its unregulated products (CHYS & CPN) had an asset-base of Kes.15.9bn vis-a-vis liabilities amounting to Kes.14.3bn. So is all the heat and condemnation on Cytonn warranted?
Most Private Equity funds invest in long term projects with characteristic challenges arising from their long life. In Cytonn’s case; there is value, only that the Cytonn promise was over ambitious with time. Cytonn recruited clients with short term views to finance its long term portfolio, exposing itself to liquidity risk and a tarnished reputation. Coupled with a slumping market for real estate, they have to attract new strategic investors to boost liquidity. Its short-term minded investors remain with few options, such as converting their debt into residential units, extending the maturity periods or taking legal action.
I opinion that we blame the Capital Markets Authority (CMA) for being the proverbial dog that barks without biting. In cases such as the Atlas Africa Industries where CMA failed to enforce proper financial reporting. CMA watched Imperial bank’s floatation of bonds worth Kes. 2bn only for the bank to go under a month later. Commercial Banks on the other hand have brainwashed fixed deposit investors by offering them peanut returns on their “safe” investments. Investors are also to be blamed for not reading investment proposals carefully, underestimating potential risks involved and how the Force Majeure clause can be exercised. I conclude in the words of Peter Lynch, “Never invest in any idea you can’t illustrate with a crayon.”