Arusha. Tanzania can overtake its peers in East Africa in private capital if corrective measures are taken to address some shortcomings, even as the region’s performance soars in attracting foreign direct investments (FDIs) through private equity.
The region’s second-largest economy is fast emerging as an attractive destination following recent policy and administrative changes, according to a just-released report.
There has been a resurgence in investments in the agriculture, tourism, natural resources, and infrastructure sectors, in addition to the mainstay financial services sector.
However, the report shared by the East African Venture Capital Association (EAVCA) insisted Tanzania has to address its business transaction architecture to catch up with other countries.
“The institutionalisation of business in the country lags behind its East African peers, lengthening transactions and potentially creating value, it said, suggesting corrective measures.
The development of private sector equity in East Africa has been underway in cycles dating back to the 1960s, but it is the pre- and post-Covid-19 periods that can shed light on its performance in the years to come.
In the period from 2013 to 2023, private equity investments in the region have increasingly taken a new route that complements existing fund investment strategies.
During the 10-year period (2013-2023), a total of 427 private equity and direct DFI investments were recorded in the East African region, with the disclosed deals valued at $7.3 billion.
Kenya, the largest economy in the region and which had traditionally taken the lion’s share, accounted for 69 percent of all transactions in the period, followed by Uganda, which accounted for 12 percent.
Tanzania, Rwanda, and Ethiopia accounted for six percent each. The remainder were multi-country deals, according to the 48-page report obtained by The Citizen.
However, Tanzania is ahead of Kenya among the five countries surveyed in the value of deals entered, despite inking only 27 deals in private equity investments.
Tanzania struck only 27 deals valued at $18 million, compared to Kenya’s 335 deals valued at $12 million.
Uganda and Rwanda entered into 57 and 22 investment deals valued at $6.3 million and $7 million, respectively.
Kenya’s dominance of the private capital markets is also reflected in the deal values, with the country accounting for 74 percent of the total disclosed deal value.
Uganda and Ethiopia accounted for eight and seven percent, respectively, while five percent of all the flows went to Rwanda, with the rest being multi-country transactions.
Although private equity and direct DFI investments in the region declined at the height of the COVID-19 pandemic, analysts say they are set to rebound due to infrastructure development and relative political stability.
Tanzania’s chances to take over some of its neighbours lie primarily in its fast-growing sectors, notably financial services, agriculture, tourism, and ICT/telecommunications.
The financial services sector, the report says, has attracted the most private equity and DFI (investments and exits) in the past decade, accounting for 20 percent of all deals.
The agribusiness, energy, and ICT sectors comprise the top three, accounting for 14 percent, 12 percent, and 12 percent, respectively.
The healthcare sector has also played a crucial role in recent years.
Similar to the deal numbers, the financial services and energy sectors attracted the largest investment allocation, accounting for 26 percent of the total disclosed deal value each.
The ICT and telecommunications sector is third, with 14 percent of all disclosed deal values during the period. The financial services, agriculture, and energy sectors averaged $40 million per transaction.
While Tanzania has a comparative advantage in tourism, natural resources, and agricultural sectors, Kenya’s performance hinges on its highly diversified economy and a logistic hub for most economic activities in the region.
Uganda, like Tanzania, has attracted investments into the financial services and agriculture sectors but is increasingly becoming a popular destination for energy investors following the discovery of oil.
It is expected that the oil and gas and logistics sectors will attract more investors in Uganda, with the landlocked country now becoming a gateway to DR Congo after the latter’s admission into the East African Community (EAC).
Ethiopia, touted as the fastest-growing economy in Africa, remains a promising investment destination in particular “due to its very attractive demographics”.
Rwanda, the tiny country in the heart of Africa with lots of surprises, has long had favourable investment policies that have attracted significant investment from venture capital and private equity.
The report sees private capital as being instrumental in driving the growth of pioneering enterprises, reshaping industries, and shaping new paths for the future of the EA economies.
“Private equity in EA has grown significantly in the last decade to become a cornerstone of the regional capital markets,” the report said, noting that the region has some potential.
The region presents an attractive investment destination for both developmental and commercial private capital given its strong fundamentals, among them its demographics and economic growth.
Three of the countries in the region are on the top 10 list of “most connected economies” in Africa.
This, combined with a population of over 250 million, presents “a large addressable market for growth”.
Increased investments have been spurred, among others, by recent mega investments in infrastructure development with a focus on transportation, energy, and ICT.
The investments in question have not only created highways for market expansion and creation in the region, which has landlocked countries, but also notionally and geographically.
“It has opened up previously unexplored population centres and enabled innovative commercial solutions such as e-commerce”, the dossier pointed out.
Optimism lay with Tanzania and Rwanda, where governments have made deliberate efforts by introducing investor- and business-friendly policies that have largely reduced bureaucracy.
During the last decade, the landscape of private capital investments in EA, particularly within the realm of venture capital (VC), has undergone a remarkable transformation.
The VC sector’s exponential growth has propelled it to a noteworthy milestone, amassing a cumulative value of $5.5 billion, making the region “a burgeoning hub for innovation and investment opportunities.”