Kenya is the anchor of East Africa’s private capital market, and the trends described below should be read with that dominance in mind. According to the AVCA East Africa Regional Report published in April 2026 (the “2026 AVCA Report”), Kenya accounted for 61% of deal volume and an overwhelming 87% of total deal value in the region in 2025, reflecting its position as East Africa’s largest economy and Nairobi’s role as the region’s business, financial and technology hub.

According to the East Africa Financial Review by I&M Burbidge Capital, published in 2025 (the “2025 IMBC Review”), regional private capital markets presented a mixed picture in 2025 against a backdrop of persistent macroeconomic headwinds. Total private equity (PE) deal volumes remained flat year-on-year at 88 transactions, indicating stabilisation following the contraction of prior years. Total disclosed deal value rose to approximately USD1.43 billion, a 29.9% increase over 2024, with the average PE deal value increasing 23.3% to approximately USD25 million. The median deal value, however, fell 44.4% to approximately USD5 million, pointing to a small number of large transactions lifting aggregate value.

The headline stability masked a marked divergence between segments. According to the 2025 IMBC Review, venture capital (VC) cooled sharply, recording 28 transactions – a 36.4% decline from 44 in 2024 – with total disclosed deal value falling 62.5% to approximately USD50.2 million, reflecting tighter fundraising conditions and more cautious early-stage deployment. That said, the median VC deal value rose 75% to USD3.5 million, indicating fewer but larger tickets as investors concentrated capital in more mature ventures. Traditional PE, by contrast, rebounded strongly: 41 transactions (up 60% from 25 in 2024), total disclosed deal value of USD1,248.5 million, and a median deal value up 14% to USD30.45 million.

Trends in M&A Deals

According to the 2025 IMBC Review, M&A activity was the standout in 2025, with the region recording 30 transactions – up 20% from 25 in 2024 – and total disclosed deal value surging to USD2.5848 billion.

The 2025 IMBC Review also records a notable shift in buyer profiles in 2025: global buyers accounted for 50% of all transactions, up sharply from 28% in 2024 and the highest share on record, reflecting renewed international interest in Kenyan and regional assets. Local and regional buyers made up 33.3% of deals and pan-African buyers 16.7%.

Several themes defined investor behaviour in 2025:

• a discernible shift towards downside-protected instruments – commercial debt, convertibles and structured financing – reflecting caution amidst global monetary uncertainty and limited exit options;
• collaborative investment through consortia and blended finance remained central to structuring larger or higher-risk transactions; and
• foreign investors increasingly looked to Kenya to diversify away from developed markets, drawn by competitive valuations and long-term growth prospects, as evidenced by record inflows to the Nairobi Securities Exchange (NSE) in August and strong participation in high-value transactions.

Active Sectors

According to both the 2025 IMBC Review and the 2026 AVCA Report, financial services and fintech emerged as the dominant sectors for deal activity in 2025, reflecting Kenya’s mature mobile-money ecosystem and supportive regulatory environment. Healthcare, energy and automotive followed as the next most active sectors, with automotive activity driven by growing investor interest in the region’s e-mobility sector.

Impact of Rising Interest Rates and Other Macro-Economic Factors, Including Geopolitical Events, on PE Deal Activity

Macro-economic and political developments in Kenya during the first half of 2026 continue to influence PE activity. Geopolitical tensions in the Middle East have increased energy and transportation costs, contributing to inflationary pressures. According to the Central Bank of Kenya (CBK), global inflation is projected to rise from 4.1% in 2025 to 4.4% in 2026, while global growth is expected to slow from 3.4% to 3.1%. In Kenya, inflation rose from 5.6% in April 2026 to 6.7% in May, remaining within the CBK’s target range, while GDP growth projections were revised downward from 5.3% to 4.9%.

Despite these challenges, the outlook remains positive. The industrial sector recorded a strong recovery driven by increased construction activity, while the banking sector remained stable, with strong liquidity and capital adequacy levels.

A key capital markets milestone in 2026 was the privatisation of Kenya Pipeline Company (KPC) through an initial public offering (IPO). The government sold a 65% stake, raising approximately KES106.3 billion (USD823 million). KPC listed on the NSE on 10 March 2026, making it Kenya’s largest IPO since Safaricom’s 2008 listing and the country’s first fully electronic IPO. For sponsors, the significance lies in the reopening of a public-market exit route that had been largely dormant – the 2026 AVCA Report notes the absence of IPO activity since 2015 – improving exit visibility.

In addition, Kenya continues to strengthen its position as Africa’s leading start-up hub. According to Startup Genome, Kenyan start-ups raised USD984 million in 2025, with Nairobi attracting USD536 million in Q3 2025 alone – 54.2% of all African start-up funding in that quarter. Growth was driven largely by energy and climate-tech companies, with investment concentrated in established players such as d.light, Sun King, M-KOPA, Burn and PowerGen.

Legal and Regulatory Developments

The COMESA Competition and Consumer Regulations 2025

On 5 December 2025, the Common Market for Eastern and Southern Africa (COMESA) Competition and Consumer Protection Regulations (the “COMESA Regulations”) came into effect, repealing and replacing the COMESA Competition Regulations 2004.

With respect to mergers, the COMESA Regulations provide that mergers shall be notifiable to the COMESA Competition and Consumer Protection Commission (CCCC) where they meet the threshold set out in 3.1 Primary Regulators and Regulatory Issues.

The East Africa Community Competition Authority

The East African Community Competition Authority (EACCA) became operational on 1 November 2025, establishing a regional merger-control framework for transactions affecting the East African Community (EAC), which operates alongside Kenya’s local competition regime and COMESA, meaning that transactions with a regional footprint may require an assessment of whether filings to competition regulations at all three levels are necessary. The EAC is composed of the following member countries: Burundi, Democratic Republic of the Congo (DRC), Kenya, Rwanda, Somalia, South Sudan, Tanzania and Uganda.

Accordingly, PE funds should incorporate EACCA analysis early in deal planning to have clarity on jurisdiction, filing requirements, timing and sequencing.

Enactment of the Privatisation Act

The Privatisation Act, No 18 of 2025 (the “Privatisation Act”) came into force on 4 November 2025 and seeks to establish a clear legal framework for selling or divesting stakes in State-owned enterprises with the aim of reducing the State’s direct involvement in commercial activities and generating revenue. The enactment of the Privatisation Act presents significant new opportunities for PE firms seeking to acquire privatised assets, as the government moves to divest from a range of State-owned enterprises across key sectors. PE funds should monitor the Privatisation Authority’s pipeline of divestments closely, as these transactions may offer attractive entry points into strategic sectors such as energy, transport and infrastructure.

Changes to the Kenyan tax regime

The Finance Act, No 19 of 2025 (the “Finance Act”) came into force on 1 July 2025, resulting in the following amendments that affect local PE investments.

Capital gains tax on indirect transfers

The Finance Act broadens Kenya’s taxing rights over indirect transfers and group reorganisations with Kenyan value by bringing within scope gains derived from the disposal of shares by a non-resident company where:

• the shares derive their value from assets in Kenya; or
• the disposal results in a change in the ownership or group membership of a Kenya-resident company, or in rights over property situated in Kenya.

For PE funds, this expansion of capital gains tax on indirect transfers has material implications for offshore structuring and exit planning. Minority exits, secondary sales and offshore reorganisations may now attract Kenyan tax exposure even where the direct transfer occurs outside Kenya. Funds should review their holding structures to assess potential tax liabilities and consider whether to seek advance rulings from the Kenya Revenue Authority on contemplated transactions.

REIT tax incentives

On the other hand, the Finance Act has provided for a capital gains tax exemption for transfers of property into real estate investment trusts (REITs) and expands stamp duty relief for instruments conveying or transferring beneficial interests in property into a REIT.

For PE funds with real estate or infrastructure exposure, the REIT tax incentives may support new investment and exit structures. Funds holding commercial property portfolios or infrastructure assets may consider transferring these into REITs to benefit from the capital gains tax exemption and stamp duty relief, while retaining exposure through listed or unlisted REIT units. This may also facilitate partial exits or portfolio aggregation strategies, allowing funds to monetise real estate holdings without triggering immediate tax liabilities on direct asset sales.

Key Regulators and Regulatory Issues Relevant to PE 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 Kenya;
• the merger takes place wholly or entirely outside 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 the EAC, and the merging parties’ turnover/asset value meets the following thresholds, the transaction may require approval from the EACCA:

• the higher of the combined turnover or asset value of the parties in the EAC is at least USD35 million; and
• at least two parties involved in the transaction have a combined turnover or assets value of USD20 million within the EAC, unless each of the parties achieves at least two thirds of its aggregate turnover or assets in the EAC within one and the same member state.

If a transaction involves parties that operate in multiple member states of COMESA, and the merging parties’ turnover/asset value meets the following thresholds, the transaction may require approval from the CCCC:

• 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 USD60 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 CCCC need not be notified to the former if two thirds of the turnover or assets (whichever is higher) is generated or located outside 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 CCCC within 14 days. There is no similar carve-out for transactions notifiable to the EACCA, and as such transactions may need to be notified to the EACCA, in addition to the CCCC and/or CAK (as applicable).

The 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

The Capital Markets Authority (CMA) oversees the capital markets sector in Kenya, and its approval is required for the acquisition of companies listed on the NSE or entities licensed by it, such as investment banks, stockbrokers, securities exchanges, fund managers, dealers and depositories.

The CMA also regulates VC 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 VC companies registered under the VC Regulations need to be approved by the CMA. The VC Regulations do not apply to VC companies or PE funds registered outside Kenya.

It is important to note that the Kenyan government has taken steps to expand this regulatory oversight to VC organisations operating in Kenya. In this regard, the Capital Markets Act was amended in 2020 to enable the CMA to licence, approve and regulate PE 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 PE or VC investments.

No guidelines or regulations have been issued on how the proposed regulation of PE 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 PE 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.

Other regulators

PE 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.

Foreign investment restrictions

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

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.

National security review

There is no specific rule requiring security reviews for PE 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 PE investor. This involvement was based on the fact that the telecommunications firm provides critical services to various government departments. It is expected 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 PE 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; it 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 PE 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 PE 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 PE 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 PE transactions or auctions in Kenya and allows PE 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.

PE 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 PE 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 PE 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 on (and subsequent removal from) 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.

PE 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 PE 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. PE firms in Kenya typically do not rely on financing from third-party lenders such as 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 PE 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 PE sponsors are common in Kenya. The authors have seen PE 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 PE fund manager had invested in a major mobile network in South Africa. This has been the recent trend, with PE firms looking to spread risk.

Co-investments by other investors alongside the lead PE fund are also relatively common. Co-investors may include LPs of the fund who opt to invest directly in specific deals alongside the lead PE 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 PE 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 PE 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 PE fund with the strategic advantages and industry knowledge of a corporate investor.

In Kenya, the type of consideration mechanism used in PE 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 PE 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 PE 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 PE funds if there is a set of complex future factors that may affect the value of the target company, and the PE 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 PE 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 PE 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, it will be referred to another dispute resolution mechanism (eg, 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 PE 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 where:

• 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 PE 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 PE-backed buyer to accept a “hell or high water” undertaking. PE-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, while 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 PE transactions in Kenya. PE-backed buyers will strongly oppose the payment of a fee if the transaction does not close.

As termination rights reduce deal certainty, PE 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.

PE buyers usually demand comprehensive warranties regarding the target’s business and operational affairs. PE 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 PE 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 PE funds to guard against any liability upon making an acquisition.

Please refer to 6.8 Allocation of Risk. It is not unusual for a PE-backed seller to provide limited warranties to a buyer on exit so as to minimise its risk exposure. The PE-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 PE-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 PE-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 PE-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 PE-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 PE-backed buyer to acquire additional equity. This can be part of the post-completion accounts mechanism or an option providing the PE-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

PE-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 PE transactions in Kenya. Parties are more willing to settle matters out of court, or through alternative dispute resolution, especially since PE-backed buyers are looking to maintain a relationship with the target company and promote growth.

Public-to-private transactions by PE-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 PE-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.

PE-backed bidders need to be aware that this requirement under the Licensing Regulations solely applies to public companies in public transactions.

Further, the Capital Markets (Securities) (Public Offers, Listing, and Disclosures) Regulations, 2023 require several types of disclosures, including:

• periodic 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 the distribution of shareholders and 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 when:

• 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 that 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 PE 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 IPO, 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 PE 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. However, like other shareholders, they do 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.

PE 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, PE 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

PE 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 PE fund will aim to ensure that they are included in all of the decision-making process.

Information Rights

PE funds usually require certain documents, such as financial statements and director reports, to be submitted at set intervals. This ensures that the PE 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 perpetrate fraud or circumvent statutes fraudulently.

In Kenya, the common types of exits are sales to other PE funds or corporates. However, the Kenyan market has also seen exits through sales to management-led investor consortiums and founding shareholders. 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 PE exits such as IPOs, auctions or dual- or triple-track exits in the last 12 months. However, the successful KPC IPO discussed in 1.2 Market Activity and Impact of Macro-Economic Factors may signal a reopening of the IPO exit route for PE sponsors.

It is common for PE 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 PE 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 PE-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.