Private equity as an alternative asset class is a very attractive investment vehicle for investors, due to its ability to deliver higher returns relative to other asset classes over the long term. Private equity is widely practiced in developed countries as it compensates for the scarce credit available to local enterprises and supports the growth of local businesses. In the last few years, private equity investments have found their way to Uganda and have since been appreciated as a potential way of funding new and existing businesses.
Over the past few years, optimism about Uganda’s economic prospects has grown. A growing and better-educated labour force, urbanization, the consequent rise of a middle-class, improving infrastructure and rapidly expanding foreign direct investment are contributing to this trend. With this optimism has come increased interest in investment activity. As one of the continent’s fastest-growing economies, Uganda can capture the attention of investors.
The value created by the private equity investments.
The Ugandan economy is characterised by the large presence of family-run MSMEs, which operate in fragmented markets with poor access to financing. The possibility of funding these firms would allow equity investors to offer more than just funds. By injecting risk capital, they become partners in a firm’s growth. This would help these companies expand, create jobs, and ultimately facilitate growth in the Ugandan economy. Therefore PE is a perfect fit for developing Uganda’s economy.
Viable investment opportunities for PE in Uganda.
According to the World Bank agribusiness is projected to be a US$1 trillion industry in Sub-Saharan Africa by 2030. The agribusiness sector in Uganda has become an increasingly important destination for investments, and investment in this sector is projected to grow further in the future. PE investments may represent an additional, important source of capital for agriculture, support MSMEs involved in agriculture, and aid in the development of local value chains.
Renewable energy is one of the fastest-growing segments in Uganda in terms of both demand and volume of public and private investment. Solving persistent, high demands for energy solutions in a country where people lack access to cheap electricity will continue to be a focus in 2021 and beyond.
Uganda’s healthcare sector is under scrutiny and will likely remain a key focus area post covid, due to a demand for investment in affordable healthcare. Figures from the IFC estimate that healthcare investments in Africa deliver a 9.6 percent investment level gross internal rate of rate and it’s one of the reasons why healthcare is attractive for private equity investments.
PE firms may invest in Uganda’s financial sector to bring about financial innovation, efficient payment, and clearing systems, and a faster and more flexible credit financing system. Financial technology (fintech) has historically attracted PE investments and will likely continue over the years. In 2019, more than 40 percent of total investments in Africa went to this sector with financial inclusion remaining the main driver the financial sector will continue to attract a lot of investments in Uganda.
Infrastructure activity also remains strong in Uganda as many projects struggle to bring in both domestic and international investors who remain uncertain of the risks associated with financing these projects. Infrastructure investments can provide consistent predictable returns.
Overall, Uganda remains an attractive PE investment destination. Just as in any other industry, there will be highs and lows with some investments that will fail and others that will succeed. The key is to seek the long-term sustainability of the investment through good practices and skilled management. And this is especially true in Uganda, where the business environment is particularly challenging.
Although the impact of the ever-changing covid 19 pandemic on investments in Uganda is unclear, the long-term outlook for PE in Uganda appears bright.
Hassan Kitenda is an equity and fixed income analyst.
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