The effect of investment strategies on the financial perfomance of private equity funds investing in Kenya

Abstract

Private equity investing (PE) has over the years experienced a rapid growth and has become a significant industry. Academic literature shows that there are many different strategies associated with private equity investments. The most common strategies include venture capital, leveraged buyouts, special situations and mezzanine financing. Managers who specialize in some of these strategies may also target the application of their investment money and expertise over a number of different points in a company‘s life cycle. Such points might include early seeding, start-up, expansion or replacement capital. The objectives of this study were; to evaluate the investment strategies used by private equity fund investors in Kenya; to evaluate the performance of the private equity fund sector in Kenya and to evaluate the effects of investment strategies on the financial performance of private equity funds in Kenya. The study adopted a descriptive survey design in order to meet the objectives. The population of this study was the 20 licensed investment fund managers in Kenya. For the purposes of this study, both primary and secondary data were used. Primary data was collected through the use of a questionnaire structured based on the objectives of the study. Secondary data was sourced from the reports and websites of the various fund management companies as well as the CMA website and the NSE website. Data was analysed using descriptive statistics as well as linear regression. The findings show that 45% of the companies adopted venture capital as a strategy, 33% adopted leveraged buyouts and 22% adopted mezzanine financing as an investment strategy. The results also showed that venture capital as an investment strategy had a significant positive effect on the performance of PE funds (β = 1.727). This effect was significant at 5% level of confidence. The study also found that leveraged buyouts as an investment strategy had a significant positive effect on performance of PE funds (β = 1.947). This effect was significant at 5% level of confidence. Finally, the results showed that mezzanine financing as an investment strategy had a significant positive effect on performance of PE funds (β = 1.175). This effect was significant at 5% level of confidence. The study concluded that all the investment strategies had a positive and significant effect recommends that the government should put up measures to ensure that the economic climate is conducive for the PE fund sector to grow. This will help spur growth in the financial sector and in the economy as a whole