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Cablegate: American Venture Capital Comes Calling in Kenya

VZCZCXRO5496
RR RUEHGI RUEHRN
DE RUEHNR #4443/01 3180718
ZNR UUUUU ZZH
R 140718Z NOV 07
FM AMEMBASSY NAIROBI
TO RUEHC/SECSTATE WASHDC 3446
INFO RUEHLMC/MILLENNIUM CHALLENGE CORP
RUEATRS/DEPT OF TREASURY WASHDC
RUEHLO/AMEMBASSY LONDON 2472
RUEHFR/AMEMBASSY PARIS 2397
RUEHXR/RWANDA COLLECTIVE

UNCLAS SECTION 01 OF 03 NAIROBI 004443

SIPDIS

SENSITIVE

SIPDIS

DEPT FOR AF/E, AF/EPS, EB/IFD/OMA
USAID FOR AFR/DP WADE WARREN, AFR/EA JEFF BORNS AND
JULIA ESCALONA
TREASURY FOR VIRGINIA BRANDON
LONDON AND PARIS FOR AFRICA WATCHERS

E.O. 12958: N/A
TAGS: ECON EAID EFIN KE
SUBJECT: AMERICAN VENTURE CAPITAL COMES CALLING IN KENYA

NAIROBI 00004443 001.2 OF 003


Sensitive-but-unclassified. Business proprietary information - not
for release outside USG channels.

1. (SBU) Summary: American venture capitalists are coming to Africa
in a big way, if anecdotal evidence in Kenya is any indication. In
a short span of time, the Embassy has had contact with three large
venture capital funds, all heavyweights, looking at investing a
combined $650 million in established mid-sized African companies
that cater to the continent's expanding middle classes. If this is
indeed a trend, this kind of American investment, while
unfortunately not very visible, nonetheless has the potential to
help drive growth and job creation across Africa. In a separate but
parallel effort to tap international capital markets, the Kenyan
Government is planning to issue a sovereign Eurobond in 2008. End
summary.

------------------------------------------
An Old Refrain: Not Enough U.S. Investment
------------------------------------------

2. (SBU) Government of Kenya (GOK) officials and Kenyan businessmen
have for years complained to U.S. Mission staff about the dearth of
American investment in Kenya, arguing that perceptions about
corruption and insecurity in the country are overblown and
out-of-date. In more recent times, friendly Kenya officials and
businesspeople simultaneously lament the surging economic influence
through trade and investment of other countries, especially China,
implying that China's recent gains in Kenya represent lost ground
and lost opportunities for American firms. Indeed, despite the
recent formation of the American Chamber of Commerce in Kenya
(ACCK), the amount of U.S. foreign direct investment in Kenya,
estimated at $89 million, is paltry given the size of Kenya's
economy and its pivotal regional role.

-------------------------------------------
U.S. Venture Capital Comes Calling in Kenya
-------------------------------------------

3. (SBU) Anecdotal evidence, however, suggests there may be a sea
change taking place in the thinking of at least one segment of the
U.S. private sector - venture and equity capital. After never
hearing once from U.S. venture capitalists in more than three years,
Mission Econ Counselor in the past six weeks has met with three
serious players looking long and hard at making significant
investments in East Africa and around the continent in the near
future.

------------------
Third Security LLC
------------------

4. (SBU) First up was Third Security LLC, headquartered in Radford,
Virginia. It is an independent private equity and venture capital
firm that does relatively few large investments in both start-ups
and establishing companies, with a focus on life sciences and
information technology. The company was started in 1999 by Randal
Kirk, a self-made billionaire entrepreneur now ranked among the
Forbes 400 richest individuals. Econ/C met September 27 with Jeff
Stark, a newly minted Managing Director in charge of the company's
new Africa Fund, which is forecast to total $100 million. Econ/C
introduced Stark to several local entrepreneurs and the company may
already be looking at investments in timber, broadband, and water
projects in East Africa.

------------------------
GEF Africa Consumer Fund
------------------------

5. (SBU) Econ/C met November 1 with Judith McHale, until recently
the President and CEO of Discovery Communications, the parent
company of the Discovery Channel, which she grew in size from $300
million in revenues in 1994 to $3 billion in 2006. McHale left that
company at the end of 2006 to form a new investment fund, the GEF
African Consumer Fund. It is raising $150 million, which it will
use to fund established small and medium-sized enterprises across
the continent. Investments will range in size from $1 million to $5
million each. The Fund's target sector is retail/consumer
businesses - those that it sees as moving to the next level of size
and sophistication by serving Africa's growing middle classes. The
Fund will look to establish three offices on the continent - one
each in West, East, and South Africa.

NAIROBI 00004443 002.2 OF 003

-----------------
The Rohatyn Group
-----------------

6. (SBU) The next day, Econ/C met with Nick Rohatyn, CEO of the
Rohatyn Group (TRG), a Park Avenue venture capital firm with around
$2 billion in assets under management and four overseas offices in
South America and Asia. Rohatyn is the son of legendary Wall Street
banker Felix Rohatyn, who put together the financial bailout of New
York City in the 1970s and was later U.S. Ambassador to Paris in the
mid-1990s. The younger Rohatyn left Morgan Guaranty after its
acquisition by Chase Manhattan and founded TRG in 1999. He was
joined on November 2 by Ernest Stern, a former Managing Director
(and frequent acting President) of the World Bank. TRG has recently
launched the $400 million Africa Catalyst Fund, which will make
$10-30 million investments in mid-sized companies in 12 focus
countries in sub-Saharan Africa, including Kenya. It is in the
process of opening an office in Johannesburg.

------------------------------------------
Common Analysis: Africa is the Place to Be
------------------------------------------

7. (SBU) Motivating all three companies to invest in Africa is the
belief, as noted by TRG's Stern, that Africa is the last frontier
for high returns on venture capital in the developing world. Asia,
he said, is mature and saturated, and South America is becoming so.
All three companies have done extensive political and economic
analysis and found Africa desirable based on a number of recent
trends, including greater democratization, improved fiscal
management, reduced debt, more mature market structures, growing
middle classes, and faster growth rates. Africa, in their view, is
the place to be to make money.

--------------------------------------------
Common Approach: Fund the Guys in the Middle
--------------------------------------------

8. (SBU) Another common theme: All three of these new funds target
medium-sized firms, i.e. those that typically are too big for
micro-finance loans (which are a growth industry in Kenya at least)
but too small and risky to get long-term credit from the banking
system. These are the firms, the U.S. venture capitalists believe,
that are good bets to grow quickly into large companies, generating
wealth and jobs along the way. The funds also have an element of
social conscience in that all plan to provide hands-on management
expertise to the companies they invest in - a kind of profit-driven
technical assistance.

-------------------------------
Kenya Plans to Issue a Eurobond
-------------------------------

9. (U) In a separate but parallel effort to raise long-term private
sector funding for economic development, the Kenyan Government is
planning tap to international debt markets by borrowing $300-$700
million through a 5-10 year Eurodollar bond offering tentatively
scheduled for the first quarter of 2008. The plan is motivated by a
desire not just to raise money, but also to develop an independent
alternative to borrowing from the World Bank and other donors, and
to establish an international benchmark for Kenyan debt. The bond
issue would reportedly be only the fifth by an African country.
Currently, Kenya has a B+ rating for long-term foreign currency debt
from Standard and Poor's, and the government is in the process of
obtaining a second rating from Fitch Ratings. Finance Minister Amos
Kimunya led a team of Kenyan officials to the U.S. and the UK in
October in what was dubbed a "no deal roadshow" to gauge preliminary
interest in a Kenyan sovereign bond issue. Interest was reportedly
strong. However, the government has yet to hire a lead bank to
advise it on the transaction.

-------
Comment
-------

10. (SBU) The good news is that American investment is coming to
Africa in the form of private venture capital, which has the
potential to help drive the continent's economic development. By
targeting established mid-size entrepreneurs, this kind of capital
can complement other forms of investment, such as official

NAIROBI 00004443 003.2 OF 003


development assistance, and help catalyze wealth generation and job
creation in the private sector. The downside is that this is
indirect, financial investment, and thus it isn't very visible.
From the perspective of commercial diplomacy, it's not quite the
same as having General Electric come to Kenya and build a factory
that employs hundreds of local employees and pays local taxes. That
kind of green field investment, from any source (even Chinese), is
still pretty rare in Kenya, which is still a tough and expensive
place to do business.
Ranneberger

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