In last week’s ninth part of our ten-part article series on private equity in Tanzania, we discussed about the ways in which a private equity firm influences the governance of an investee company after the investment is made in return for an ownership stake. In this week’s tenth and last part of the series, we focus on the exit routes that the private equity firm can take to realise its return on investment (ROI) and say a meaningful goodbye (Swahili: Kwaheri) to the company.
It is the ultimate goal of the private equity firm to enjoy a smooth exit with a positive ROI. But the economic conditions that have prevailed over the past three years have not made it easy for private equity firms to enjoy smooth exits for their Tanzania investments. In light of this, it is important—and befitting—that we end this article series by analyzing the four most common exit routes.
Initial public offering (IPO) is an exit strategy whereby the company offers its shares for sale to the general public. With favourable market conditions this strategy can, ceteris paribus, attract the highest return for the private equity firm. Yet, as you might imagine, the IPO process is usually long; is costly; and is very intensive with many regulatory hurdles. Because capital raising activities in the capital markets in Tanzania have remained subdued in recent years, private equity firms have resorted to other exit strategies. Between 2015 and 2016, exit via IPO was the least preferred route in East Africa, being undertaken in only 3 percent of the total private equity exits, according to a June 2017 survey report by KPMG and EAVCA.
A share buyback of the private equity firm’s stake by the investee company is another common exit strategy. It is initiated by the company as per the provisions of the Companies Act, 2002. If properly implemented, a share buyback can be an effective way for the private equity firm to exit the company. In practice, however, implementing this strategy is quite challenging, particularly for companies that are not highly liquid.
Exiting through a trade sale involves the private equity firm selling all of its shares held in the company to a strategic investor. This is done by exercising the drag-along right. Normally, the strategic investor would be operating in the same economic sector as the company and has certain unique advantages e.g. easy access to new markets in acquiring shares in that company at a premium. With this route, due diligence and closure is fast because the strategic investor is knowledgeable about the company. Little wonder, then, that this route is ranked first among the exit routes in the above mentioned report by KPMG and EAVCA.
A sale to another private equity firm is another common exit route whereby the investee company is sold by the private equity firm to another private equity firm. The company not being ready for an exit through a trade sale or IPO is one of the reasons why the original private equity firm may opt for a sale to another private equity firm. This strategy allows for a smooth exit since the incoming private equity firm wants to invest the capital pooled and it can afford to wait longer to make a ROI. The challenge is how to match the investment rights of the incoming private equity firm with those of the continuing investors, if any.
In connection with the exit routes described above, the Tanzanian government guarantees private equity firms (as investors) unconditional transferability of foreign capital in and outside Tanzania through authorized dealer banks. In terms of Section 21 of the Tanzania Investment Act, 1997, private equity firms are guaranteed to transfer foreign currency (through the said banks) involving remittance of proceeds (net of all taxes and other obligations) from a sale or liquidation of a company.
Smooth and profitable exits for Tanzania investments would attract better investments in the future and enhance the confidence of investors in the Tanzanian private equity market. The earlier the exit conversation starts, the better the chances for a meaningful ‘kwaheri’ by the private equity firm.