Private equity (PE) transactions are often hailed as engines of economic growth, bringing much-needed capital to businesses and boosting their expansion potential. However, poor planning and misaligned expectations between investors and investee companies have emerged as key stumbling blocks, leading to acrimonious exits, unrealised value, and losses. This sentiment was extensively discussed at the East Africa Private Equity & Venture Capital Association (EAVCA) Annual Conference 2024 at the luxurious Speke Resort Convention Centre in Kampala.
The conference, among others, featured a distinguished panel of experts, including Richard Mugera, Associate Partner at Ascent Capital Uganda; Marieke Geurts, the Investment Director at Amethis; Edward Burbidge, CEO of I&M Burbidge; Edgar Mukasa, the Associate Director – Tax & Regulatory Services at KPMG Uganda; and Kendall Evans, Partner at Bowmans Kenya. Their discussion centred around best practices for preparing and executing successful exits, the importance of alignment between investors and founders, and the critical role of effectively structuring deals.
Planning for the Exit Begins Before Investment
One of the key takeaways from the discussion was the necessity of planning for an exit long before an investor even injects capital into a business. “The preparation for an exit starts before you actually invest,” said Marieke Geurts. “You need to ensure that you have multiple exit options and that all stakeholders are aligned on these from the beginning.”
Transaction documents should outline various potential exit strategies, including trade sales, secondary buyouts, and IPOs. Additionally, removing roadblocks such as rigid exit structures and unrealistic minimum hurdle prices can help facilitate smoother transitions.
Richard Mugera reinforced this, stating, “Before we make an investment, we ensure that promoters understand that we will exit. Everything we do with them is geared toward that eventuality.” He emphasised that setting clear milestones—such as revenue or EBITDA targets—can help reduce uncertainty and prevent tensions later on.
A well-structured exit plan also enables investors to react swiftly to changing market conditions. The panellists agreed that flexibility is key, as the ideal exit strategy may evolve due to economic shifts, regulatory changes, or unexpected business performance challenges. By having contingency plans built into investment agreements, investors can ensure a smoother and more lucrative exit.
The Investor-Entrepreneur Relationship: A Delicate Balance
The panellists highlighted that successful exits depend heavily on the chemistry between investors and founders. Poor communication and unmet expectations often result in friction, which can derail exit negotiations. “It’s like a marriage where you are also preparing for a divorce from day one,” joked Kendall Evans, emphasising the need for transparency.
Edward Burbidge, who has been involved in multiple exits in recent years, underscored the importance of alignment. “If the PE firm and the founder are on the same page from the start, everything goes smoother. But when a PE firm exits while the founder stays, that’s where misalignment creeps in. The founder sees the due diligence process as a burden rather than a necessary step.”
To mitigate such issues, Burbidge suggested structuring deals to include clear incentive mechanisms for founders. “If a founder is involved in selecting the next investor, they are more likely to support the transition rather than resist it.”
Alignment also extends to the broader shareholder base. As Marieke Geurts pointed out, differing priorities between private equity investors, family-owned business founders, and other stakeholders can create tension when exit negotiations begin. Establishing clear governance structures and decision-making frameworks from the outset can help prevent last-minute disagreements that could derail an exit.
Put Options: A Double-Edged Sword?
Pearl Bank Celebrates Customers in Festive Campaign Dubbed Pearl SantaPut options remain a widely used exit strategy, allowing investors to sell shares back to founders at a predetermined price. However, as Marieke Geurts pointed out, this can sometimes create misalignment. “If the family is expected to buy back shares, they may struggle if the company has grown beyond their financial reach,” she said. Instead, she recommended using put options as a defensive mechanism rather than a primary exit route.
Put options can also be a valuable risk mitigation tool, particularly in uncertain economic environments. However, the panellists cautioned that they should be structured carefully to avoid unintended consequences. A poorly structured put option can place undue financial strain on a business, leading to liquidity challenges and operational disruptions.
The Role of Transaction Advisors and Tax Considerations
Transaction advisors play a crucial role in ensuring smooth exits. They help bridge gaps between stakeholders, manage negotiations, and create competitive bidding processes to maximise valuations. However, as Burbidge pointed out, “In East Africa, exits can be a protracted process. People get frustrated when deals take too long, and suspicion can creep in. That’s where advisors step in to keep things on track.”
A key challenge in East African private equity exits is the regulatory and tax landscape. Edgar Mukasa of KPMG Uganda emphasised the significance of tax planning in exit strategies. “Investors should consider tax implications at the outset of a transaction. Certain jurisdictions in East Africa impose high capital gains taxes, which can significantly impact returns,” he explained. For instance, Uganda’s 30% capital gains tax has proven to be a major hurdle in PE exits, often requiring extensive negotiations between buyers and sellers.
Mukasa also pointed out that regional tax disparities can influence investment decisions. “Some investors prefer structuring deals in jurisdictions with more favourable tax regimes, such as Mauritius, to minimise exit-related tax liabilities,” he noted.
Top Tips for Successful PE Exits
Summarising the discussion, the panellists shared their top tips for investors looking to execute successful exits:
- Think About Exits from Day One: Always enter an investment with a clear understanding of how you will exit.
- Build for the Buyer: Design the business strategy with a future buyer in mind to ensure a seamless transition.
- Ensure Alignment: Regular communication and shared expectations between investors and founders are crucial.
- Have the Right Advisors: Engage experienced transaction advisors to navigate complexities.
- Stay Focused on Performance: A strong financial track record is key to attracting buyers and achieving a high valuation.
- Understand Tax Implications: Proper tax planning can prevent last-minute surprises that could derail a deal.
- Be Flexible: Market conditions can change, so multiple exit strategies are crucial.
- Establish Clear Governance Structures: Well-defined decision-making processes reduce conflicts during exit negotiations.
- Prioritise Business Growth: A well-performing business is more attractive to potential buyers.
- Maintain Transparency: Open communication fosters trust and smooth negotiations.
Conclusion
The EAVCA 2024 conference underscored that successful exits are not just about financial returns but also about strategic planning, alignment, and transparency. With East Africa’s private equity ecosystem maturing, investors and business owners must collaborate to ensure that deals are structured for long-term success. As the region continues to attract investment, mastering the art of smooth exits will be crucial in unlocking sustainable growth and value realisation.
Ultimately, private equity firms that prioritise proactive exit planning, strong relationships, and strategic flexibility will be best positioned to navigate the complex world of PE exits in East Africa. By learning from past challenges and implementing best practices, investors can optimise returns and contribute to the continued growth of the region’s economy.
