EFFECT OF PRIVATE EQUITY ON PROFITABILITY COMMERCIAL BANKS

IN KENYA

IN UNAITAS SAVINGS AND CREDIT CO-OPERATIVE

EFFECT OF PRIVATE EQUITY ON PROFITABILITY OF MICROFINANCE

INSTITUTIONS IN KENYA
1.1 Background of the Study
The establishment of a successful business entity is a great aspiration to many people
since it offers job opportunities, improves living standards and it contributes to economic
growth. This calls for exploiting the available business opportunities or creating them
where there is none hence the need of financing to undertake such activities. The start or
expansion of a business entity requires funds through retaining profits, borrowing from
family/friends or borrowing from banks. However, such sources of financing may be
difficult to access especially for small and medium enterprises (SMEs) hence private
equity (PE) being a suitable alternative. European Venture Capital Association (EVCA)
(2007) defined private equity as the provision of equity capital by financial investors over
the medium or long term to non-quoted companies with high growth potential.

PE is increasingly becoming a source of finance for high growth potential companies

whereby they assist several business entities achieve their growth
objectives and provide strategic advice to businesses in their various stages of
development. Gompers and Lerner (2001) indicate that PE has developed as a vital
intermediary in financial markets by providing capital to firms that might otherwise have
difficulty attracting financing. These firms are mainly small and young, plagued by high
levels of uncertainty and large differences between what entrepreneurs and investors
know. Blundell (2007) indicated that PE plays a key role in transforming under-
performing companies. Presently, PE deals are very strong and use of leverage in deal
making is accelerating sharply, similar to the late 1980s. The process is being driven by a
number of factors, particularly low yields which result from excess global liquidity.

1.2 Statement of the Problem

Most firms have expansion or growth as one of their main objectives hence this requires
access to additional capital to finance this growth. There has been a variety of common
sources of capital ranging from bank loans, debentures, share capital, borrowing from
family and friends and retained earnings. Nowadays, private equity is becoming an
important source of fund and seen to have a positive relationship with economic growth
of a country or region. In Kenya, the PE deal declined from US $83m in 2011 to US
$36.1m in 2012 but then increased to US $112m in 2014 whereas over the same time
period, GDP growth increased from 4.4% in 2011 to 4.7% in 2013 (Deloitte, 2014).
Nevertheless, Kenya recorded the highest number of PE deals in East Africa which could
be attributed to the country’s economic robustness compared to the neighboring
countries. However, the economic growth models seem to support a positive relationship
between PE and economic growth provided that there is advancement in technical knowledge
especially in the form of new products, processes and markets in a country.

With the aims to change to banks, Unaitas doubled its share capital in 2014 following
strong demand for its shares by investors who are racing to be in the lender’s register
before its conversion into a fully-fledged bank. Currently, the Saccos share capital is
Sh752 million compared to Sh696 million in 2013. In the its 2014–2018 Strategic Plan,
the society plans to establish itself as a bank after meeting the set minimum requirements
by the government. Despite this significant growth, there is no empirical literature that
illustrates the effect private equity on economic growth in Unaitas savings and credit co-
operative. Thus the current will answer the following answers, that is, what are the impacts
of effect of private equity on economic growth in Kenya.

1.3 Research Objectives

This study seeks to establish the effect of private equity on economic growth in Unaitas
savings and credit co-operative.
References
Blundell, W, A., (2007). The Private Equity Boom: Causes and Policy Issues.

Deloitte, (2014). East Africa Private Equity Confidence Survey: Seeing Beyond the
Waves.

European Private Equity and Venture Capital Association (EVCA) (2007). Guide on
Private Equity and Venture Capital for Entrepreneurs.

Gompers, P. &Lerner, J. (2001). The Venture Capital Revolution. Journal of Economic

Perspectives, Vol. 15, No. 2, Spring, 145-168.

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