Nairobi - Kenyan entrepreneur Ayisi Makatiani scrapped his first effort to launch a private equity fund 10 years ago because his pitch to invest in Africa could not raise enough cash to make it work.

Fast forward a decade and he is now a managing partner of Fanisi Capital, a $50 million (R537m) fund that has investments across east Africa in agri-business, health care, retail and education. A second $100m fund is on the way.

“The returns in Europe and the rest of the world have been low so the only place where you get good risk-adjusted returns is Africa,” Makatiani, 47, said from a swanky office block on Nairobi’s upmarket Riverside Drive, where other new financial ventures have set up a regional base.

Their expansion marks a turnaround in attitudes to Africa, but masks many of the challenges for private equity firms on the continent.

Private equity is still a relatively new financial vehicle on Africa’s landscape and challenges include offering enough added value to encourage family companies to open up to external financing, finding local managers with the skills to see a project from investment to exit and winning over African pension funds and other local funding sources to create a more indigenous industry.

“There are other places you can get” money, said Michael Turner, the Kenya managing director for emerging markets specialist Actis Capital. “Private equity is about value added.”

Describing his most recent investment in AutoXpress in Kenya, Turner points out that it was his South African colleagues who had prompted him to scout for a tyre company because they saw growth in that sector in their market.

And it was an Actis specialist from Brazil with experience running a tyre firm who had helped “seal the deal” by explaining the potential to the family owners. Actis secured a 36 percent stake. Turner now sits on the board, but said this was a big leap for any family firm. “It is like opening up your house to a stranger,” he said. – Reuters