The Central Bank of Kenya’s Monetary Policy Committee increased the base lending rate from 9.50% in June to 10.50% in August, a 100 basis point increase from the second quarter of 2023.
However, deal-making in the private sector continues to exceed expectations. I&M Burbidge Capital reports 34 recorded deals in the first half of 2023, up from 20 deals in the same period last year. The declared value of these transactions is $1.3 billion, a 126% increase over the first half of 2022.
This is a positive indicator for investors in private equity, according to the report. Activity slowed in August, which I&M Burbidge attributed to European August holidays interrupting deals. As the fourth quarter approaches, I&M anticipates a revival.
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These private equity developments come despite tax changes in Kenya’s 2023 Finance Act affecting local investments.
Capital gains tax increased from 5% to 15% on gains from selling shares or comparable assets in a partnership or trust deriving over 20% of value from Kenyan property. This affects private equity funds exiting a Kenyan partnership.
Further, a new requirement to notify the Kenya Revenue Authority commissioner of any direct or indirect transfer of 20% underlying ownership of an asset introduces an additional obligation for private equity buyers and sellers.
The definition of share market value in an employee stock ownership plan changed from “market value when granted by employer” to “market value when option exercised by employee” affecting private equity funds setting up ESOPs in target companies.
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The positive relationship between interest rates and private equity is unusual since lower rates generally benefit private equity. A plausible explanation is the need to diversify portfolios. As rates rise, investors may seek avenues like private investments to balance portfolios. Moreover, private equity can offer better yields if the portfolio company performs well, even with higher rates.
The report notes that while a short-term recovery in private sector deals is expected, the medium-term picture over the next 12 months remains unclear due to global economic conditions and unpredictable rate hikes by the U.S. Federal Reserve and other central banks that can both discourage and support deals.
“The decisive and painful fiscal measures taken by the authorities in Kenya are likely to hamper performance for the next 12 months but at the same time are expected to shore up confidence in the country’s ability to manage its debt obligations,” the report states.
