Thursday, Jul 19, 2018
Finance | Africa | Kenya

Responsible investment in Kenya

4 years ago

Michael Turner, Managing Director of Actis Africa
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Michael Turner

Managing Director of Actis Africa

Actis is “a genuine international emerging market investor” with a presence in China, India, Africa and Latin America. Michael Turner, Managing Director of Actis Africa, discussed the transformation of the Kenyan economy, Actis’ investments in the country, and the company’s commitment to responsible investment. He also discusses the increasing interest of US corporate in Africa, stating: “G.E.’s interest in Africa shows the American interest”. His advice to prospective investors in the continent: “it’s less scary than investors think”

Kenya is going through an exciting time at the moment. In a period of global economic recession, Kenya has been one of the fastest growing economies in Africa and is projected to grow over 6% in GDP (Gross Domestic Product) in 2014. How has the Kenyan economy transformed in recent years?

I describe the transformation of the Kenyan economy as one that, in the last generation or so, has moved from an economy that is largely aid dependent, largely commodity driven and largely dependent on trade with the West, especially Britain who was Kenya’s largest trading partner. With an industrial base that essentially was fairly low value added. In my view, where we are today is a completely transformed economy which is very much less aid dependent, very much more consumer driven, urban, infrastructural development improving, has trading relationships that are growing regionally as well as internationally especially with the East, South Asia and China in particular and most recently we’ve had an unexpected sort of potential economic dividend. This makes it a completely different mix as far as economy is concerned.

Fundamentally, what it means is the Kenyan economy is much more self-reliant in terms of determining its future; it’s not reliant on what donors will contribute. It’s not reliant so much on whether international tourism chooses Kenya as its destination. It is much more reliant on government-led fiscal and management policy and the internal competition driven by the consumer revolution as well as the growth in regional trade. It’s much more an enclosed economy which sort of trades with the regional partners and is growing from internal consumption, which is a much more stable basis on which to grow an economy.

This was manifested in the global banking crisis in 2008, where the Kenyan economy to quite a large extent was unaffected. The banks here were not affected since they are run on very different lines and with much more conservatively managed balanced sheets. The global recession caused global tourism to slow down, but the inter-regional trade continued to grow, and it continues to grow at nearly 20% at random and is the key driver of growth. The destiny of the Kenyan economy is very much in the hands of Kenyans, very much linked to the region’s development and has the prospect of making considerable leaps forward should the discoveries play out in the way that we hope they will.

Mr Joshua Oigara, the CEO of KCB, stressed that one of the important elements needed for the continued growth of the Kenyan economy is for Kenyan firms to partner with leading international firms such as GE. Do you agree?

We require developed market technology and knowhow and investment. We are able make such partnerships in a much more equal way today than we were a generation ago.

Kenya is already leading the way in terms of bilateral trade and a liberalized economy. What do you think Kenya can do to continue increasing economic prosperity? How can Kenya solidify the East African Community?

The development of East Africa Community relies on the genuine buying-in from all the member states and there is inconsistency in the buying in between those that are wholly committed and those that aren’t so committed and from where I sit, Tanzania seems to be one country in that equation that is more cautious of embracing the EAC. With different speeds and different degrees in enthusiasm all the countries are coming to the table but not necessarily as quickly as they possibly could.

Actis Africa launched its operations in East Africa in 2006 and it now operates in more than 18 countries with 1.8 billion dollars in operations. Can you give us a brief background of your operation here in Kenya and in East Africa?

We have a portfolio of about 300 million dollars in East Africa spread across three asset classes. We have private equity, real estate and energy funds in the region amounting to about 300 million dollars.

Our real estate portfolio currently amounts two investments in Nairobi, one is Nairobi Business Park, which is a commercial real estate development in the west of Nairobi, and the second investment is Garden City (the biggest retail mall in East Africa) on 32 acres of land which was bought from East African Breweries at the time when Thika super highway was being built. It will cost us 250 million dollars for a mixed-used development and is a development in anticipation of the developing ribbon economy along Thika highway. The mall now only takes 10 minutes to access from downtown Nairobi. We had a vision to build a mall to cater for that community in the north east suburbs of Nairobi, which was uncatered for at the time since the nearest shopping mall was Village Market outside Nairobi.

The building is the largest shopping mall in East Africa (50,000 square meters). We’ve got international retailers taking space. Game who are part of the Walmart group which will be the first time they take space and we’ve got big retailers from Europe. The interest they have in this is an interesting reflection of where they are seeing growth potential since they are genuinely looking at Africa. In terms of evolution of the Kenyan economy, the growth of the consumer class is very unique.

Can you elaborate on your commitment to ‘responsible investment’ and how this guides you when making investment decisions?

It’s the full spectrum of investment: responsible investing, environmentally responsible investing, socially responsible investing and maintaining the highest possible international governance standards. Environment in the context of real estate is green buildings, and being sensitive to the environment, use of renewable energy and recycling water and addressing pollution. The social side is captivated in health and safety in the business that we operate in and ensuring that we are responsible investors i.e. no child labor, no exploitation. And governance of course is kind of a big one given the levels of corruption prevalent in Africa, one has to be very careful that people that we partner with meet our government standards both in terms of track record and in governance standards that they apply in terms of management and we insist on the highest standards in terms of the governance structure around the businesses that we run.

When you are looking for investments not only in Kenya but in the EAC, do you find that there are a lot of good investment options? When we met with the CEO of Jamii Bora bank, he said that the PE culture here is largely capital rich and looking for investments.

It can be argued both ways. The PE sort of industry in East Africa covers a very broad spectrum, from firms that are very small to firms that are very big and we are right at the far end of the firms that are very big. The very small firms are often populated by investors who are looking for specific things. They may be looking to set up a firm that purely invests in the agriculture sector, for example Africa Agriculture Capital, for not only returns but also for certain developmental purposes and that will reflect investment base that is behind the funds. There are a lot of social investments that are taking place here, such as Acumen, and there is a big mix and all these funds are put in a wraparound and called private equity, although probably not as far as the Western definition is concerned.

Competition arises partly from such kind of circumstances. There is a lot of capital aimed at private investment in East Africa covering this broad spectrum a lot of first time fund managers operating in the market and up to a point learning their trade, often backed by developed finance institutions who have partly in their mandates to do some capacity building as well.

A quote of yours that I like is: “If you all you need is money then there are other places you can get that but in private equity it’s about value added.” So what is the value added that you can get here with Actis?

Actis is a genuine international emerging market investor. We have presence in China, India, Africa and Latin America. In the course of building relationships with our partners, we need to demonstrate our value added. For example, there are things that AutoXpress wanted from us that we can genuinely provide but what we wanted to do was to demonstrate that we had industry knowledge of tire distribution from other markets that could really contribute to the strategic development of this business. One of my colleagues in the Sao Paolo office in one of his former jobs ran a tire business. So we flew him across to look at AutoXpress and one of his classic comments in the course of assessing the business here was “Tire distribution in Kenya Is where the tire industry in Brazil was 20 years ago” and he said it in front of us all including the two partners. The implication being, that we had the understanding of the evolution of this business in Brazil which we can bring to Kenya and East Africa.

Kenya-US relations have never been better economically. Last year, bilateral trade was around 900 million dollars and it is projected to grow to over 1 billion in the next couple of years. Where do you see possibilities for economic relations to increase between Kenya and the US?

For the large U.S. corporates to invest in Africa and in this context Kenya or East Africa, it’s about scale and Africa has reached that point of critical mass. Growth in Western markets is increasingly hard to find, whether it is in the industrial sector or retail sector. The focus towards emerging markets in the last few years has focused on Africa as providing the highest growth opportunity and this has certainly caught the attention of U.S corporates and it was only a month or so ago when we had Jeffrey Immelt of G.E. here. He makes a point of visiting Africa on a regular basis and he comes to Kenya on a pretty regular basis, twice in the last 12 months. And listening to him talking about G.E.’s interest in Africa shows the American interest in Africa and Kenya is genuinely on the map for U.S corporates, whether it is big infrastructure developments, whether it is investment in resources in East Africa, which is a big thing at the moment in offshore gas, oil discoveries in the region… there is a lot to aim for.

Given your wealth of knowledge and experience in the market, what advice would you give to American investors looking to invest in Kenya? What idiosyncrasies would they find in Kenya?

First, Africa is less scary than the investors think. The business practices and the respective legal systems around Africa are relatively conventional, hence it’s not a completely new kind of regulatory and legal framework than have been used to.My advice would be, come take a look, take good local advice and begin as soon as you possibly can start to forge local relationships to gain local support. The sooner you start the process the better.




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