According to the East Africa Financial Review by I&M Burbidge Capital, published in 2024 (the “2024 IMB Review”), there were 88 private equity transactions in 2024, representing a 5.4% decline from the 93 transactions in 2023. The total disclosed value was approximately USD1.10 billion, a 31.3% decrease from the previous year. The average private equity deal value decreased by 18.8% to about USD20.3 million, while the median deal value rose by 9.1% to USD9.0 million.

Venture capital was the most active investment type in 2024, with 44 transactions and accounting for 36% of total investment activity, representing an increase of 4.8% over the 42 transactions recorded in 2023. The total deal value for venture capital transactions was around USD133.9 million, a significant decline from 2023. The median deal value for venture capital transactions fell by 38% to USD2.0 million.

The I&M Burbidge Monthly Financial Review for April 2025 (the “2025 IMB Review”) indicates that deal-making in East Africa showed resilience in the first quarter of 2025, with nine recorded deals – slightly higher than the seven deals during the same period in 2024. Disclosed deal values continued to decline, dropping from approximately USD47.0 million in 2024 to USD37.4 Million in a similar year-to-date period.

Trends in M&A Deals

The 2024 IMB Review reports that mergers and acquisitions (M&A) activity saw a significant decrease in 2024, with 25 transactions, marking a 7% drop from 2023. The total disclosed deal value reached approximately USD172.2 million, a substantial (40%) decrease from the previous year. African buyers were the main drivers of M&A, accounting for 72% of all deals; global buyer deals fell to 28%, down from 41% in 2023. Key sectors for M&A transactions included manufacturing and professional, financial services, healthcare, agribusiness, information and communications technology (ICT), telecommunications and mining. Kenya led the way with 25 deals, followed by Tanzania with five deals, Ethiopia and Rwanda with two deals each and Uganda with one deal.

Active Sectors

In the first quarter of 2024, the financial services sector was the most active, recording seven transactions worth approximately USD30.8 million. The agribusiness sector followed with five transactions totalling around USD600.7 million, while the energy sector rounded out the top three with five transactions valued at about USD23.6 million. According to the April 2025 IMB Review, the numbers of deals in other sectors in the half of the year were as follows:

• healthcare – four deals;
• ICT and telecoms – three deals;
• logistics – two deals;
• hospitality – two deals;
• manufacturing – one deal;
• professional and other services – one deal;
• automotive – one deal; and
• fast-moving consumer goods (FMCG) – one deal.

Impact of Rising Interest Rates and Other Macroeconomic Factors, Including Geopolitical Events, on Private Equity Deal Activity

The macroeconomic and political developments in Kenya through the first half of 2025 continue to shape the landscape for private equity investment. Following the civil unrest triggered by the proposed Finance Bill 2024 and the subsequent withdrawal thereof in June 2024, the broader fiscal environment remained unsettled. On 31 July 2024, the Court of Appeal declared the Finance Act, 2023 unconstitutional, citing a lack of sufficient public participation. This ruling has created further legal uncertainty regarding Kenya’s fiscal policy direction and has affected investor perceptions of regulatory stability.

Despite a tough operating environment in 2024, early 2025 saw a more stable macroeconomic outlook. Interest rates, which had risen sharply in 2023–24, began to decline. The Central Bank of Kenya (CBK) eased the benchmark rate to 9.75% by mid-2025, and commercial lending rates followed, declining from highs of 17.2% to approximately 15.7%. T-bill yields also fell significantly, indicating improved monetary conditions and a potentially lower cost of debt for portfolio companies.

The start-up ecosystem continues to face challenges. High-profile failures and restructuring of ventures such as Sendy, Copia, and Gro Intelligence have underscored the need for stronger business fundamentals and more prudent capital deployment strategies. However, these developments may also foster a recalibration of investor expectations and a return to more sustainable investment models.

Notwithstanding these difficulties, there are signs of resilience and renewed opportunity. The planned privatisation of key state-owned enterprises, including the anticipated IPO of the Kenya Pipeline Company, signals a more active role for capital markets and presents new avenues for private equity participation. Additionally, Kenya’s ongoing efforts to deepen regional economic integration and its relatively stable position in the context of broader African geopolitical dynamics position it as a preferred investment destination in East Africa.

While caution persists due to ongoing regulatory and tax uncertainties, the medium-term prospects for private equity in Kenya remain positive, particularly for investors prepared to engage with local risks and structure investments thoughtfully in light of the evolving tax and policy environment.

Legal and Regulatory Developments

Central Bank of Kenya

On 11 December 2024, the Business Laws (Amendment) Act 20 of 2024 (Act) was enacted and took effect on 27 December 2024. It introduces several amendments to banking and finance laws, including under Chapter 491 of the Central Bank of Kenya Act (the “CBK Act”).

Pursuant to these amendments, the CBK Act now provides that a person cannot carry on any “non-deposit taking credit business” unless that person has been licensed by the CBK or is permitted to do so under any other written law.

Non-deposit-taking credit business includes granting loans or credit facilities to members of the public (secured or unsecured), asset financing, pay-as-you-go, buy now, pay later arrangements (excluding hire purchase), credit guarantees and peer-to-peer lending.

As it stands, the regulation of non-deposit-taking lending is so broad that even multilateral and bilateral lenders are required to be licensed. The effect of this expanded oversight is that the sector is less attractive to investors, especially private equity firms that advance credit, due to the requirement to obtain licensing to lend.

Contravention of this law is an offence for which a person is liable upon conviction to imprisonment for a term not exceeding three years, or to a fine not exceeding KES5 million.

East Africa Community Competition Authority

The East African Community Competition Act of 2006 governs the supervision of merger activities within the East African Community (EAC) member states (ie, Kenya, Uganda, Tanzania, Rwanda, Burundi, Rwanda, South Sudan and the Democratic Republic of Congo). It mandates that any merger or acquisition that has a cross-border effect in the East African Community be notified to the East African Community Competition Authority (EACCA).

On 31 December 2024, the EAC promulgated and brought into effect an amendment to the East African Community Competition Act (the “Amendment Act”), as well as new regulations that set out the applicable merger thresholds and filing fees in the EAC.

The promulgation of the Amendment Act and its regulations represents significant progress in the scaling up of competition enforcement by the EAC Competition Authority. It is also a notable development in the trend towards regional competition enforcement in Africa, where the past two decades have seen the Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of West African States (ECOWAS) become fully operational. What remains to be seen, as the Competition Authority becomes operational, is the extent to which the EAC Competition Authority, COMESA Competition Commission (CCC) and ECOWAS Regional Competition Authority will be prepared to collaborate on mergers that raise their concurrent jurisdiction. Nevertheless, in order to avoid surprises late in a transaction’s timeline, private equity firms active in EAC member states should remain aware of the imminent full operation of the EAC Competition Authority.

It is therefore important for private equity funds to take note of the developments of the EACCA so as to ensure that all the regulatory approvals within the jurisdiction are obtained.

Removal of local shareholding for ICT companies

The local 30% shareholding requirement for Kenya companies providing ICT services has been removed off the back of international pressure to make Kenya a more attractive hub for international investors. The previous setup requiring investors to cede a portion of ownership to local shareholders made the sector less attractive as their corporate structures were not easily adjustable according to the requirements. The aim of the removal of this shareholding requirement is sector expansion, as it makes the sector more attractive to multinationals.

Regulation of private equity

The Capital Markets Authority (CMA) currently regulates venture capital companies incorporated in Kenya under the Capital Markets (Registered Venture Capital Companies) Regulations, 2007. The Kenyan government has taken steps to expand this regulatory oversight to venture capital organisations operating in Kenya. In this regard, the Capital Markets Act was amended in 2020 to enable the CMA to licence, approve and regulate private equity funds with access to public funds. The term “public funds” remains undefined in the Capital Markets Act. The aim of the amendment is to safeguard funds accessed by private entities from public entities in Kenya, such as public pension schemes. In Kenya, pension schemes can invest up to 10% of their assets under management in private equity or venture capital investments.

There have been no guidelines or regulations issued on how the proposed regulation of private equity funds that access “public funds” in Kenya will be effected, or whether the regulation will apply to offshore funds. The authors do not expect that this change will affect a majority of private equity funds with investments in Kenya, as the majority of these funds raise their capital offshore. It is, however, prudent to keep an eye on the developments for regulatory purposes.

Evolution of the Kenyan tax regime

The Finance Act, No 9 of 2025 (the “Finance Act”) came into force on 1 July 2025, resulting in the following amendments that affect local private equity investments.

Tax loss carry forward

The carry forward of losses is limited to five years, with the possibility of an extension for an additional five years upon application to the Cabinet Secretary. The amendment is poised to significantly affect private equity-backed companies in capital-intensive sectors that incur tax losses in the early years.

Nairobi International Financial Centre (NIFC)

The Act has introduced incentives aimed at promoting investment in the NIFC by lowering the corporate income tax rate to 15% for the initial three years, followed by a 20% rate for the subsequent four years, for start-ups accredited by the NIFC. Enterprises undertaking large-scale investments of KES3 billion or more will benefit from a 15% corporate income tax rate for ten years, increasing to 20% for the subsequent ten years. Lastly, the Act has introduced an exemption for dividends paid by a company certified by the NIFC if it reinvests KES250 million in that year of income.

VAT in the e-mobility sector

Electric vehicles (ie, electric bicycles and electric buses) have been treated as exempted goods rather than zero-rated goods for the purposes of assessing value added tax (VAT). The change from zero-rated to exempt status removes the suppliers’ ability to reclaim input VAT, increasing production costs and thus weakening the incentive to invest in the targeted sectors.

Implementation of the African Continental Free Trade Area (AfCFTA) Agreement

The AfCFTA came into force in 2019 and created the world’s largest trade area (by the number of participating states), with a population of about 1.3 billion people and a combined GDP of USD3.4 trillion. The main objectives of the AfCFTA are to create a single market for the trade of goods and services on the continent, facilitated by the free movement of businesspersons and investments, and significantly increase economic growth and development on the continent through an integrated single market for goods and services.

The AfCFTA has the potential to positively impact private equity investment in several ways, as outlined in the following.

Increased market access

The AfCFTA creates a larger and more integrated market, reducing trade barriers and making it easier for businesses to access new markets across African countries. This expanded market can attract private equity investors who seek opportunities in sectors benefiting from increased intra-African trade.

Diversification of investment opportunities

The agreement could lead to greater diversification of industries and sectors within African economies. Private equity investors can tap into a broader range of investment opportunities, including manufacturing, infrastructure, agriculture, services and technology, as countries focus on economic diversification.

Requirement to disclose beneficial ownership details with the registrar of companies

In addition, the Companies (Beneficial Ownership Information) Regulations, 2020 (the “BO Regulations”) introduced a requirement for companies incorporated in Kenya to file a register of beneficial owners holding. A beneficial owner is a natural person who holds at least 10% of the shares or voting rights, a right to directly or indirectly appoint or remove directors of a company, or a right to exercise significant influence or control over the company. Private equity funds may therefore be required to disclose limited partners (LPs) with controlling beneficial ownership, as set out in the BO Regulations. Each officer of a company that fails to declare beneficial ownership commits an offence and is liable, upon conviction, to a fine not exceeding KES5,000. The Beneficial Ownership disclosure requirements were developed to adopt the recommendations developed by the Financial Action Task Force (FATF), which ensures a co-ordinated global response to prevent organised crime, corruption and terrorism. Private equity funds need to be aware of this requirement and the imposition of penalties when deciding whether to invest in a Kenyan target company.

Key Regulators and Regulatory Issues Relevant to Private Equity Funds and Transactions

Merger control

The Competition Authority of Kenya (CAK) is responsible for ensuring merger control and antitrust compliance. In this regard, the CAK analyses and approves transactions with respect to the prescribed thresholds involving an acquisition of shares, business or other assets, whether inside or outside Kenya, resulting in a change of control of a business, part of a business or an asset of a business in Kenya.

The CAK has set specific thresholds for merger transactions that are:

• always subject to notification;
• potentially excluded from notification; or
• excluded from notification.

Transactions always subject to notification include:

• those with a minimum combined turnover or asset value (whichever is higher) in Kenya of KES1 billion, and where the turnover or assets (whichever is higher) of the target firm is above KES500 million;
• those where the turnover or value of the assets (whichever is higher) of the acquiring firm is above KES10 billion and the merging parties are in the same market, or can be vertically integrated, unless the transaction meets the CCC merger notification thresholds;
• those in the carbon-based mineral sector if the value of the reserves, the rights and the associated assets to be held as a result of the merger exceeds KES10 billion; and
• those where the firms operate in COMESA, the combined turnover or value of the assets (whichever is higher) does not exceed KES500 million and two-thirds or more of the turnover or assets (whichever is higher) is generated or located in Kenya.

Transactions potentially excluded from notification include:

• those where the combined turnover or value of the assets (whichever is higher) is between KES500 million and KES1 billion; and
• those where, irrespective of the asset value, the firms are engaged in prospecting in the carbon-based mineral sector.

Transactions excluded from notification include those where:

• the combined turnover or value of the assets (whichever is higher) does not exceed KES500 million;
• the merger meets the COMESA merger notification thresholds, and at least two-thirds of the turnover or assets (whichever is higher) are generated or located outside of Kenya;
• the merger takes place wholly or entirely outside of Kenya and has no local nexus; or
• the merger involves a holding company and its subsidiary wholly owned by undertakings belonging to the same group, or amalgamations involving subsidiaries wholly owned by undertakings belonging to the same group.

Transactions that have a regional impact may also need approval from various regional authorities. If a transaction involves a party that operates in multiple member states of COMESA, and the merging company’s turnover/asset value meets the following thresholds, the transaction may require approval from the CCC:

• the combined annual turnover or value of the assets (whichever is higher) in the common market of all parties to a merger equals or exceeds USD50 million; and
• the annual turnover or value of the assets (whichever is higher) in the common market of each of at least two of the parties to a merger equals or exceeds USD10 million, unless each of the parties achieves at least two-thirds of its aggregate turnover or assets in the common market within the same member state.

However, transactions that qualify for notification to the CAK and CCC need not be notified to the former if two-thirds of the turnover or assets (whichever is higher) is generated or located outside of Kenya. In this instance, the parties are required to file the merger notification with the CCC and only inform the CAK of the filing at the CCC within 14 days.

EU Foreign Subsidies Regulation (FSR) regime

The EU FSR grants the European Commission the authority to investigate financial contributions provided by non-EU governments to companies operating within the EU. This includes:

• financial contributions from non-EU governments to companies with significant activities in the EU; and
• bids in public procurement processes by non-EU governments that meet certain thresholds. These regulations are unlikely to impact transactions in Kenya, and Kenya does not have comparable regulations in place.

Capital markets

As stated in 2.1 Impact of Legal Developments on Funds and Transactions, the CMA has the authority to licence, approve and regulate private equity funds that have access to public funds. In addition, the CMA oversees the capital markets sector in Kenya, and its approval is required for the acquisition of companies listed on the Nairobi Securities Exchange (NSE) or entities licensed by it, such as investment banks, stockbrokers, securities exchanges, fund managers, dealers and depositories.

The CMA also regulates venture capital companies incorporated in Kenya that provide substantial risk capital to small- and medium-sized businesses in the country through the Capital Markets (Registered Venture Capital Companies) Regulations, 2007 (the “VC Regulations”). Fund managers of venture capital companies registered under the VC Regulations need to be approved by the CMA. The VC Regulations do not apply to venture capital companies or private equity funds registered outside Kenya.

Other regulators

Private equity transactions will be subject to additional regulations under other laws specific to particular sectors, especially if these laws have provisions regarding ownership and control changes. For example, subscription for shares in financial institutions and payment system service providers will need approval from the CBK, while buying significant rights in an aviation company will require clearance from the Kenya Civil Aviation Authority.

Similarly, transactions in the communication, insurance and energy sectors would require the approval of the Communications Authority of Kenya (CA), the Insurance Regulatory Authority (IRA) and the Energy and Petroleum Regulatory Authority (EPRA), respectively. It is important to note that approvals from the regulators are not mutually exclusive and that acquirers may be required to obtain multiple approvals for a transaction.

With regard to any recent developments or evolution of these regimes in Kenya, see 2.1 Impact of Legal Developments on Funds and Transactions.

Foreign investment restrictions

Restrictions on foreign investment tend to be sector-specific, as outlined in the following.

ICT industry

As indicated in 2.1 Impact of Legal Developments on Funds and Transactions, the local 30% shareholding requirement for Kenya companies providing ICT services has been removed off the back of international pressure to make Kenya a more attractive hub for international investors. The previous setup requiring investors to cede a portion of ownership to local shareholders made the sector less attractive as their corporate structures were not easily adjustable according to the requirements. The aim of the removal of this shareholding requirement is sector expansion, as it makes the sector more attractive to multinationals.

Banking

In the banking industry, no individual or entity other than licensed financial institutions, the government, foreign governments, state corporations, foreign companies licensed as financial institutions in their own countries and non-operating holding companies approved by the CBK may hold more than 25% of the share capital of a Kenyan bank.

Insurance

In the insurance industry, at least 33.33% of the controlling interest in an insurer must be owned by citizens of a partner state of the EAC, a partnership whose partners are all citizens of an EAC partner state or a corporation whose shares are wholly owned by citizens of an EAC partner state.

Aviation

In the aviation industry, for companies licensed to provide air services, at least 51% of the voting rights must ultimately be held by Kenyan citizens, the government of Kenya or both.

Pensions

In the pensions industry, at least 60% of the paid-up capital of a pension scheme administrator must be owned by Kenyan citizens, unless the administrator is a bank or insurance company registered in Kenya.

Fintech

In the fintech industry, there are no specific restrictions on foreign investment yet. However, the Kenyan government has introduced the Virtual Assets Service Providers Bill, 2025 (the “VASP Bill”), which aims to safeguard investors and restore trust in the crypto market. The VASP Bill seeks to regulate virtual assets, which are defined as “any digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes and does not include digital representation of fiat currencies, e-money, securities and other financial assets”.

The government has been considering local shareholding restrictions in order to promote local participation in the financial services sector, while also attracting foreign investment. The restrictions on foreign investment are designed to strike a balance between these two goals.

National security review

There is no specific rule requiring security reviews for private equity transactions or investments by sovereign wealth investors. However, it was recently reported that the National Security Council sought involvement in the approval process for the sale of a 60% stake in a national telecommunications firm to the National Treasury by a private equity investor. This involvement was based on the fact that the telecommunications firm provides critical services to various government departments. It is anticipated that if a transaction involves matters of national security or significant public interest, the National Security Council will likely seek to be involved.

Listed company transactions

In the event that a private equity fund wishes to acquire a stake in a public company listed on the NSE, the acquisition may be subject to the Capital Markets (Takeovers and Mergers) Regulations, 2002 (the “Takeover Regulations”).

The Takeover Regulations prescribe that the following scenarios may require mandatory reporting to the CMA, for which the acquirer is then required to submit a takeover document as prescribed:

• direct or indirect acquisition of effective control of the voting rights of a listed company (ie, control of 25% of the shares or voting rights);
• direct or indirect acquisition of a company that has effective control of a listed company;
• acquisition of more than 5% of the voting rights in any one year by an existing shareholder, if the shareholder holds more than 25% of the shares but less than 50% of the voting rights;
• acquisition of voting rights by an existing shareholder holding at least 50% of the voting shares; or
• acquisition of at least 25% of a subsidiary that has contributed at least 50% of the overall turnover of the listed company in the previous three fiscal years.

Importantly, changes to the Takeover Regulations have been proposed in the 2023 draft Capital Markets (Takeovers and Mergers) Regulations 2023 (the “Draft Regulations”) as part of an overhaul of capital markets regulation in Kenya. Key proposed changes in the Draft Regulations include:

• an increase in the threshold for determining effective control from 25% to 30%; and
• an exemption for squeeze-out transactions (ie, a holder of 90% of issued shares of a listed company acquiring the remaining 10%) from its application – under the Takeover Regulations, if an acquirer purchases 90% of a company’s voting shares, they must make an offer to the remaining shareholders to buy their shares at a price higher than the current market value.

The Draft Regulations provide for exemptions for complying with the subsequent takeover requirements in the following instances, subject to any conditions that may be imposed by the CAK:

• acquisition for the purpose of a strategic investment in a listed company that is tied up with management or any other technical support relevant to the business of such company;
• a management buyout involving a majority of the employees of the offeree;
• a restructuring of the listed company’s share capital including acquisition, amalgamation, compromises, arrangements, reconstructions and any other scheme approved by the CAK;
• acquisition of a listed company in financial distress;
• acquisition of effective control arising out of the disposal of pledged securities;
• indirect acquisition where there is no transfer of shares in the listed entity and no impact on the listed company’s operations, governance, assets, market capitalisation, sales or earnings;
• maintenance of domestic shareholding for strategic reason(s); or
• any other circumstances that, in the opinion of the Authority, serve the public interest.

The Draft Regulations are yet to be placed before Parliament for discussion.

Anti-bribery and sanctions

On 1 September 2023, the Anti-Money Laundering and Combating of Terrorism Financing Laws (Amendment) Act, 2023 was enacted into law and came into force on 15 September 2023.

ESG compliance

There have been no significant changes in ESG compliance in the past 12 months. However, ESG considerations remain an integral part of private equity transactions, as discussed in 4.1 General Information.

Red-flag or selective legal due diligence is an increasingly common form of due diligence in Kenya. However, it is not uncommon for private equity funds undertaking their first investment in the Kenyan market to also undertake comprehensive due diligence. The nature of the due diligence is usually tailored to meet the private equity fund’s interest and risk appetite, and according to the target’s business.

Legal due diligence exercises usually cover the corporate structure and related issues, material contracts, competition, financial arrangements and indebtedness, employment, litigation, intellectual property, information technology, data protection, real estate, material assets, environmental, licences, insurance and tax.

ESG compliance is now a consideration in the legal due diligence exercise and often includes a review of a target’s compliance with business ethics, corporate governance, bribery and corruption laws, human rights legislation and international treaties, occupational health and safety requirements, supply chain and waste management laws and inspections of environmental practices in relation to environmental licences, permits and legislation.

Vendor due diligence tends to be used in large private equity transactions or auctions in Kenya and allows private equity firms to address potential risk areas in the target, and to prepare for queries that a potential buyer might have. Typically, vendor due diligence tends to be red-flag or selective due diligence.

In addition, it is not unusual for sell-side advisers to rely on vendor due diligence reports by way of reliance letters provided to the relevant sell-side adviser.

Private equity acquisitions in Kenya are typically effected by way of subscription for new shares or a purchase of existing shares, with the latter being common in private equity exits. The terms of acquisition do not differ materially between privately negotiated transactions and auction sales.

In terms of deal structure, it is common in Africa, and therefore in Kenya, for private equity investments to be made into offshore holding companies of targets with subsidiaries in Kenya, rather than directly into operating entities in Kenya. Offshore holding companies are usually situated in areas that offer greater tax efficiency to the fund on exit, typically Mauritius or Delaware. Mauritius’s placement (and subsequent removal) on the “Grey List” has also opened the door for new offshore jurisdictions, such as Rwanda with its financial centre, offering tax incentives for investors. The offshore holding companies mostly invest directly in the target company and are also directly involved in the negotiation of the documentation.

Private equity deals are typically financed through either equity or debt, or a combination of both. A combination of equity and debt would be structured as a convertible loan agreement or a note purchase agreement, with agreed milestones on conversion to equity.

Although Africa-focused private equity funds are currently encountering fundraising difficulties, the practice of securing committed debt funds at the signing stage of deals is less prevalent in Kenya compared to more developed financial markets. Private equity firms in Kenya typically do not rely on financing from third-party lenders like banks and financial institutions. Instead, they typically raise funds from existing investors to spread risk and ensure returns at the point of exit. Additionally, the use of equity or debt commitment letters in Kenya-based private equity transactions is uncommon. When such letters are used, they are often not disclosed publicly and may include stringent conditions that are challenging to meet given the prevailing macroeconomic conditions.

Deals involving a consortium of private equity sponsors are common in Kenya. The authors have seen private equity firms invest in consortiums in a bid to spread the risk of large transactions, and to ensure a return on investment at the point of exit. In 2021, it was reported that a consortium of investors led by a major South African private equity fund manager had invested in a major mobile network in South Africa. This has been the recent trend, with private equity firms looking to spread risk.

Co-investments by other investors alongside the lead private equity fund are also relatively common. Co-investors may include LPs of the fund who opt to invest directly in specific deals alongside the lead private equity fund, as well as external co-investors who are not part of the original fund.

Co-investors can take either passive or active roles in the investment. Passive co-investors are more common, especially among LPs of the fund, as they typically have existing relationships with the lead private equity fund and may have access to co-investment opportunities as part of their overall investment strategy. However, external co-investors can also be actively involved if their expertise or resources are critical to the success of the acquisition.

Consortia comprising a private equity fund and a corporate investor are not prevalent in Kenya. This will vary depending on the specific market conditions and investment opportunities. This type of consortium combines the financial expertise and resources of a private equity fund with the strategic advantages and industry knowledge of a corporate investor.

In Kenya, the type of consideration mechanism used in private equity transactions is dependent on the transaction structure and what the parties negotiate. The consideration structures that are predominantly seen in the market are outlined in the following.

Consideration Structures

Locked-box mechanisms

This consideration mechanism is generally used by private equity funds in less complex transactions in order to streamline and expedite the payment collection process, as there is less risk exposure.

Earn-out mechanisms

This mechanism is used when the private equity fund would like to ensure that the vendor, usually a founder or senior management with interest in the business, is motivated to contribute to the successful performance of the business during the transition.

Closing account mechanisms

This mechanism is used by private equity funds if there is a set of complex future factors that may affect the value of the target company, and the private equity fund is unwilling to take on the uncertain risk.

Fixed-price consideration

This mechanism is generally used in simple transactions with little to no risk so as to expedite completion of the transaction.

Deferred consideration

This mechanism is used mainly to bridge the valuation gap between the buyer and the seller when there are uncertainties about the target company’s future performance, or when the parties have different expectations about its future earnings.

Typically, the involvement of private equity funds results in the use of more sophisticated and complex consideration mechanisms. In Kenya, where the parties are not as commercially aware or do not engage counsel, fixed-price consideration structures or the use of deferred consideration through an escrow set-up is the norm.

In Kenya, it is not typical for interest to be charged on the equity price or reverse-charged on any leakage that occurs during the locked-box period. If this is to be an element of the purchase price mechanism, it will be unique and negotiated by the parties.

In Kenya, it is typical to have an independent expert as an alternative dispute resolution mechanism in case there is a dispute with respect to the consideration structures in a private equity transaction. The use of an independent expert is usually separate from other dispute mechanisms, such as arbitration, and is limited to specific aspects of the consideration such as how it should be determined or the review of the financial statements.

If the dispute concerns other issues, such as the period within which the consideration was determined, then it will be referred to another dispute resolution mechanism, such as arbitration, for resolution.

Ideally, with a more complex consideration mechanism (eg, the closing account mechanism), the dispute will more likely be referred to an expert in conjunction with other dispute resolution mechanisms.

In Kenya, it is common for private equity transactions to contain conditions that must be met before completion. These typically include the resolution of issues or red flags picked up during legal due diligence and will therefore vary from one transaction to another. Standard conditions in every deal include the waiver of pre-emption rights by existing shareholders, and obtaining appropriate board and/or shareholder approvals and merger approvals.

In addition, certain conditions are typical depending on certain elements of the transaction, such as:

• either of the entities is operating within a regulated industry that requires consent to be obtained, or a notification to be lodged, before completion, as outlined in 3.1 Primary Regulators and Regulatory Issues;
• the target company has encumbered assets that may require the parties to notify or obtain consent from the financiers; and
• the material contracts contain change-of-control provisions that require parties to obtain consent or notify third parties of the proposed transaction.

Lastly, material adverse change provisions are common in Kenya, permitting the private equity fund to terminate the agreement on the occurrence thereof. The definition of “material adverse change” tends to be heavily negotiated.

In Kenya, it is not typical for a private equity-backed buyer to accept a hell or high water undertaking. Private equity-backed buyers typically exclude hell or high water provisions since merger control approval is considered mandatory when the merger meets the thresholds outlined in 3.1 Primary Regulators and Regulatory Issues.

Further, in Kenya, merger control provisions are not typically distinguished from foreign investment conditions, similar to other jurisdictions such as South Africa. One can, however, distinguish between the two on the basis of the fact that merger control provisions cannot be waived, whilst foreign investment conditions, which include but are not limited to obtaining requisite consents, may be waived if they might result in a delay in the closing of the transaction. As outlined in 3.1 Primary Regulators and Regulatory Issues, the FSR are unlikely to impact Kenya-based transactions and are therefore not featured in foreign investment negotiations.

Unlike private transactions, break fees are unusual in private equity transactions in Kenya. Private equity-backed buyers will strongly oppose the payment of a fee if the transaction does not close.

As termination rights reduce deal certainty, private equity sellers and buyers prefer to limit the circumstances that can result in the deal being terminated. Therefore, these are usually reserved for specific scenarios – ie, where the mandatory conditions (conditions precedent) stipulated in the agreement are not, or cannot be, fulfilled by the long-stop date, which is usually set three to six months from the signature date if not extended by mutual agreement.

Private equity buyers usually demand comprehensive warranties regarding the target’s business and operational affairs. Private equity sellers typically take on minimal risk concerning the target company’s operations. The warranties they provide are usually limited to affirming their ownership and lack encumbrances on the securities being sold.

Corporate sellers will typically provide broader warranties compared to private equity sellers, although it is typical for corporates to limit the time and quantum of damages arising from a breach. Corporate buyers will also seek greater indemnification rights as compared to private equity funds to guard against any liability upon making an acquisition.

Please refer to 6.8 Allocation of Risk. It is not unusual for a private equity-backed seller to provide limited warranties to a buyer on exit so as to minimise its risk exposure. The private equity-backed seller typically provides warranties with respect to:

• the ownership of the shares it is transferring;
• the status of the shares it is transferring; and
• its capacity to enter into the agreement and transfer its interest – the private equity-backed seller will usually decline to provide warranties and indemnities that are related to the commercial operations and tax status of the target company.

As the private equity-backed seller has limited its exposure, the warranties and indemnities that relate to the operations of the target company are provided by the target company or the management thereof, where applicable. These include but are not limited to warranties and indemnities in relation to corporate, legal and regulatory status, tax, employment and the material assets, intellectual property and material contracts of the target company.

In Kenya, the limitations on warranties and indemnities depend on what is negotiated. Warranties and indemnities may be limited by:

• limiting the thresholds within which the claim can be made;
• including an overall cap on liability;
• limiting the period within which a breach of warranty or indemnity can be made;
• qualifying the warranty to the knowledge of the seller; and
• qualifying the warranties with information that has been disclosed to the seller.

This is undertaken by way of a disclosure letter. It is not common for a general disclosure of the contents and documentation to be shared in the data room; usually, specific disclosures are required.

Further to the approach taken by private equity-backed buyers discussed in 6.8 Allocation of Risk and 6.9 Warranty and Indemnity Protection, other protections in acquisition documents are outlined in the following.

Claw-Back Provisions

Acquisition documentation typically includes claw-back provisions that enable private equity-backed buyers to reclaim funds by adjusting the purchase price or financial arrangements after the acquisition has completed. In the event that the equity-backed buyer is unable to receive financial compensation for the loss suffered, the authors have seen claw-back clauses that enable the private equity-backed buyer to acquire additional equity. This can be part of the post-completion accounts mechanism or an option providing the private equity-backed buyer with the right to purchase the founder’s shares, in the event of a breach of a warranty or indemnity, based on the loss suffered. Ideally, the put option is only exercisable for a set duration.

Warranty and Indemnity Insurance

Warranty and indemnity insurance is not common in Kenya. However, in cross-border deals this is now being considered as an option, where parties have utilised warranty and indemnity insurance from international insurance companies.

Escrow or Retention

Private equity-backed sellers are looking to limit their risk and return their investment to their investors on exit. In this respect, their obligations are highly unlikely to be backed by an escrow or retention.

Litigation in courts due to breach of contract and warranties is not common in private equity transactions in Kenya. Parties are more willing to settle matters out of court, or through alternative dispute resolution, especially since private equity-backed buyers are looking to maintain a relationship with the target company and promote growth.

Public-to-private transactions by private equity-backed bidders are uncommon in Kenya, and if they do occur, they are often kept confidential and not widely reported. However, there have been a few of these transactions, such as Kuramo Capital Management’s acquisition of a 25% stake in TransCentury PLC. In such transactions, the board is obligated to adhere to Capital Markets principles, ensuring that all shareholders are treated equally. This requires that all agreements, whether relationship or transactional, be made available to shareholders for inspection as part of the transaction process.

The Capital Markets (Licensing Requirements) (General) Regulations, 2002 (the “Licensing Regulations”) specify that any person (including a private equity-backed bidder) who acquires a “notifiable interest” (ie, 3% or more) in shares in a public company, or who ceases to be interested in such shares, must notify the public company of the acquisition or cessation of interest in the shares. The Licensing Regulations also require that public companies report the following to the NSE on a monthly basis:

• all persons who acquire or cease to have a notifiable interest in its shares;
• all directors holding 1% or more in the relevant share capital; and
• the cumulative holdings of the relevant share capital of directors.

Private equity-backed bidders need to be aware that this requirement under the Licensing Regulations solely applies to public companies in public transactions. However, a similar obligation is applicable to private companies with respect to beneficial ownership, as discussed in 2.1 Impact of Legal Developments on Funds and Transactions.

Further, the Capital Markets (Securities) (Public Offers, Listing, and Disclosures) Regulations, 2002 require several types of disclosures, including:

• a quarterly disclosure to the NSE of every person who holds or acquires 3% or more of the listed company’s ordinary shares;
• publication by a listed company, in its annual report, of (i) the distribution of shareholders and (ii) the names of the ten largest shareholders – and the number of shares in which they have an interest, as shown in the issuer’s register of members;
• immediate disclosure by an issuer of any information likely to have a material effect on market activity; and
• disclosure, in the annual report, of any substantial sale of assets involving 25% or more of the total assets.

The Takeover Regulations, as described in detail in 3.1 Primary Regulators and Regulatory Issues, prescribe that an entity is presumed to have a firm intention to take over a public company if the entity acquires a company that holds “effective control” in a public company or, together with the shares already held by associated persons or related companies or persons acting in concert, will result in “[the acquisition of] effective control” of the listed company. The threshold for “effective control” is control of 25% of the shares in a public company.

The Takeover Regulations also prescribe circumstances under which a person is presumed to have a firm intention to make a takeover bid, namely:

• the acquirer holds more than 25% of the shares, but less than 50% of the voting rights, and acquires more than 5% of the voting rights in the company;
• the acquirer holds at least 50% of the voting shares and acquires additional voting shares, or directly or indirectly acquires a company with effective control of a listed company; and
• the acquirer obtains at least 25% of a subsidiary that has contributed at least 50% of the general turnover of the company in the previous three financial years.

Both payment in cash and by way of shares is acceptable in Kenya. With respect to public companies, the Takeover Regulations provide that the mode of payment would need to be set out in the takeover offer document.

Use of Conditions

The Takeover Regulations and the CMA do not limit the use of offer conditions in takeovers. It is common for conditions to be imposed in a takeover with respect to the minimum number of issued voting shares of the listed company, the mode of payment, regulatory approvals and the maintenance of a minimum percentage of shareholding by the general public in order to satisfy the continuing eligibility requirements for listing. However, the Takeover Regulations do require the conditions to be clearly indicated in the takeover offer document and the notice of intention.

Under the Takeover Regulations, an acquirer is not allowed to announce an intention to make an offer if there are no reasonable grounds to believe that the acquirer will be able to fulfil their obligations once the offer is accepted. The acquirer is also required to demonstrate to their financial adviser that they have sufficient funds to ensure the takeover offer will not fail. Additionally, when presenting the offer document, the acquirer must include a statement that assures all shareholders who wish to accept the offer that the acquirer has sufficient funds to complete the takeover and that they will be paid in full; therefore, a tender offer cannot be conditional on a bidder obtaining financing.

Security Measures

With respect to listed companies, the Takeover Regulations do not forbid the implementation of measures to ensure the safety of a deal. However, it is a requirement for such measures to be revealed in both the takeover offer document and the notice of intention. Common deal security measures include exclusivity, break fees and non-solicitation provisions. These deal security measures are also employable by private companies.

Additional Governance Rights

If a bidder does not seek 100% ownership of the target, the bidder may seek additional governance rights, which are typically included in the shareholder agreements or a similar agreement governing shareholder relationships, related to certain transactions such as private equity transactions. In cases where the buyer does not want full ownership, the buyer usually requests governance rights, such as the right to have representation on the target company’s board and the power to veto certain decisions.

When it comes to public M&A transactions, the CMA’s Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 (the “CMA Governance Code”), requires companies to treat all shareholders fairly, including minority and foreign shareholders. Companies are also required to fully disclose any non-compliance, and while satisfactory explanations may be considered, the mandatory provisions of the Disclosures Regulations must be followed in the CMA Governance Code.

Squeeze-Out Mechanism

The Business Laws (Amendment) Act 2020 amended the Takeover Regulations to allow the purchaser to squeeze out dissenting shareholders where the purchaser acquires 90% of the share capital of the target.

Under the Takeover Regulations, if an acquirer purchases 90% of a target company’s voting shares, they must make an offer to the remaining shareholders to buy their shares at a price higher than the current market value. Although the acquirer has the right to acquire the remaining shares, minority shareholders can challenge this process by appealing to the court. In addition, notices must be given for three months starting from the day after the offer period ends or six months from the date of the offer.

Usually, it is standard practice to obtain a firm agreement from both major shareholders and all shareholders in general before revealing any plans to make an offer. However, if there are any agreements related to voting, they must be disclosed in the takeover documents. For instance, after a target company’s initial public offering, the target company may require current shareholders to promise not to sell their shares for a period of 24 months.

Equity incentive plans are commonly used in private equity investments in Kenya. Share option plans are most frequently implemented for management and/or the founders. The option pool is typically around between 5% and 10% of the share capital of the target company.

Management participation is typically structured in accordance with an employee stock ownership plan (ESOP), allowing management to exercise their right to acquire shares at a fixed price – which is typically lower than the market value of the shares. ESOPs are typically structured as trusts and set out the vesting criteria for the shares in the plan.

Vesting Provisions

Equity incentive schemes such as ESOPS, as outlined in 8.2 Management Participation, provide managers with vesting provisions and therefore payment on exit.

Leaver Provisions

These provisions are stipulated for shareholders who hold managerial positions within the target company. The typical leaver provisions include:

• good-leaver provisions – where the manager is permitted to maintain their equity within the target company if they leave said company in “good” circumstances (eg, retirement); and
• bad-leaver provisions – where the manager is obligated to sell their shares to the shareholders at a price below market value if they leave the company in “bad” circumstances (eg, gross misconduct).

Restrictive Covenants

In Kenya, no restrictive covenants are provided to management shareholders. The restrictions agreed to by management shareholders are usually set out in the shareholder’s agreement and the employment contract. The typical restrictive covenants are outlined in the following.

Non-compete clause

This clause limits the business activity that the manager can undertake after leaving the target company. The limitation pertains to a particular jurisdiction and period. It is important to note that the limitation needs to be fair so as not to impede the manager’s ability to earn a living. If the clause is extensive, there is a risk that the courts in Kenya may deem it unenforceable. Parties can negotiate for compensation to be provided on exit, in order for this clause to be binding and adhered to by the manager.

Non-solicitation

This clause prohibits the manager from soliciting the target company’s employees and clients for a certain period. There are no limits to enforceability.

Confidentiality

The manager will be bound not to disclose confidential information. Usually, the clause is extensively drafted, clearly highlighting what is deemed confidential.

Non-disparagement clause

The manager is bound not to disclose or say anything negative about the target company – either in private or public – that may damage the target company’s reputation.

Management shareholders do not typically benefit from strong minority protection of any form. They do, however, like other shareholders, enjoy some limited protection under the Companies Act, which mandates majority (50%) and special (75%) shareholder approval requirements, as well as derivative actions in the event of oppressive behaviour against the target company.

Private equity funds aim to ensure that their investment is protected and that the target company performs so as to make the most out of their investment. In this respect, private equity funds aim to ensure that they are aware, or in control, of the day-to-day management of the target company by instituting the following in shareholder agreements.

Board Appointment Rights

Private equity funds usually aim to have control of the board by acquiring the rights to appoint board members, depending on their shareholding and usually with veto rights. They will typically negotiate board observer seats at the minimum.

Reserved Matters

Reserved matters are mostly highly negotiated. The shareholder’s agreement clearly outlines what is a board-reserved matter and what is a shareholder-reserved matter. The voting threshold on reserved matters is also a point of negotiation, as the private equity fund will aim to ensure that they are included in all the decision-making process.

Information Rights

Private equity funds usually require certain documents, such as financial statements and director reports, to be submitted at set intervals. This ensures that the private equity fund is aware of the performance of the target company.

In Kenya, as a target company has a separate legal personality from its shareholders, shareholders are generally not liable for the actions of a limited liability company (in this case, the target company). However, there is an exception where the corporate veil can be pierced, and the shareholders are held liable for the actions of the Kenyan target company. This is the case when the shareholders have used the Kenyan target company to perpetuate fraud or circumvent statute fraudulently.

In Kenya, the common types of exits are sales to other private equity funds or corporates. The authors have also seen sales to the Kenyan government with respect to equity stakes in publicly listed companies, but they have not seen other forms of private equity exits such as IPOs, auctions or dual- or triple-track exits in the last 12 months.

It is common for private equity transactions in Kenya to have drag and tag rights. In practice, drag and tag rights are not typically enforced as minority shareholders are usually willing to collaborate with the private equity funds in the event of a proposed exit from a Kenyan investment.

The authors are not aware of equity funds exiting by way of an IPO in Kenya. Exits are mainly undertaken through trade sales and transactions with other financial buyers – unlike the Johannesburg Stock Exchange, which has had the most private equity-backed IPOs in Africa. Nevertheless, exit by way of an IPO is an option.

With respect to lock-in arrangements, the Capital Markets (Securities) (Public Offers Listing and Disclosures) Regulations, 2002 provide for a two-year lock-up period from the date of listing of the shares.