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

UNCLAS SECTION 01 OF 03 NAIROBI 004443 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT FOR AF/E, AF/EPS, EB/IFD/OMA 
USAID FOR AFR/DP WADE WARREN, AFR/EA JEFF BORNS AND 
JULIA ESCALONA 
TREASURY FOR VIRGINIA BRANDON 
LONDON AND PARIS FOR AFRICA WATCHERS 
 
E.O. 12958:  N/A 
TAGS: ECON EAID EFIN KE
SUBJECT: AMERICAN VENTURE CAPITAL COMES CALLING IN KENYA 
 
NAIROBI 00004443  001.2 OF 003 
 
 
Sensitive-but-unclassified.  Business proprietary information - not 
for release outside USG channels. 
 
¶1.  (SBU) Summary: American venture capitalists are coming to Africa 
in a big way, if anecdotal evidence in Kenya is any indication.  In 
a short span of time, the Embassy has had contact with three large 
venture capital funds, all heavyweights, looking at investing a 
combined $650 million in established mid-sized African companies 
that cater to the continent's expanding middle classes.  If this is 
indeed a trend, this kind of American investment, while 
unfortunately not very visible, nonetheless has the potential to 
help drive growth and job creation across Africa.  In a separate but 
parallel effort to tap international capital markets, the Kenyan 
Government is planning to issue a sovereign Eurobond in 2008.  End 
summary. 
 
------------------------------------------ 
An Old Refrain: Not Enough U.S. Investment 
------------------------------------------ 
 
¶2.  (SBU) Government of Kenya (GOK) officials and Kenyan businessmen 
have for years complained to U.S. Mission staff about the dearth of 
American investment in Kenya, arguing that perceptions about 
corruption and insecurity in the country are overblown and 
out-of-date.  In more recent times, friendly Kenya officials and 
businesspeople simultaneously lament the surging economic influence 
through trade and investment of other countries, especially China, 
implying that China's recent gains in Kenya represent lost ground 
and lost opportunities for American firms.  Indeed, despite the 
recent formation of the American Chamber of Commerce in Kenya 
(ACCK), the amount of U.S. foreign direct investment in Kenya, 
estimated at $89 million, is paltry given the size of Kenya's 
economy and its pivotal regional role. 
 
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U.S. Venture Capital Comes Calling in Kenya 
------------------------------------------- 
 
¶3.  (SBU) Anecdotal evidence, however, suggests there may be a sea 
change taking place in the thinking of at least one segment of the 
U.S. private sector - venture and equity capital.  After never 
hearing once from U.S. venture capitalists in more than three years, 
Mission Econ Counselor in the past six weeks has met with three 
serious players looking long and hard at making significant 
investments in East Africa and around the continent in the near 
future. 
 
------------------ 
Third Security LLC 
------------------ 
 
¶4.  (SBU) First up was Third Security LLC, headquartered in Radford, 
Virginia.  It is an independent private equity and venture capital 
firm that does relatively few large investments in both start-ups 
and establishing companies, with a focus on life sciences and 
information technology.  The company was started in 1999 by Randal 
Kirk, a self-made billionaire entrepreneur now ranked among the 
Forbes 400 richest individuals.  Econ/C met September 27 with Jeff 
Stark, a newly minted Managing Director in charge of the company's 
new Africa Fund, which is forecast to total $100 million.  Econ/C 
introduced Stark to several local entrepreneurs and the company may 
already be looking at investments in timber, broadband, and water 
projects in East Africa. 
 
------------------------ 
GEF Africa Consumer Fund 
------------------------ 
 
¶5.  (SBU) Econ/C met November 1 with Judith McHale, until recently 
the President and CEO of Discovery Communications, the parent 
company of the Discovery Channel, which she grew in size from $300 
million in revenues in 1994 to $3 billion in 2006.  McHale left that 
company at the end of 2006 to form a new investment fund, the GEF 
African Consumer Fund.  It is raising $150 million, which it will 
use to fund established small and medium-sized enterprises across 
the continent.  Investments will range in size from $1 million to $5 
million each.  The Fund's target sector is retail/consumer 
businesses - those that it sees as moving to the next level of size 
and sophistication by serving Africa's growing middle classes.  The 
Fund will look to establish three offices on the continent - one 
each in West, East, and South Africa. 
 
NAIROBI 00004443  002.2 OF 003 
 
 
 
----------------- 
The Rohatyn Group 
----------------- 
 
¶6.  (SBU) The next day, Econ/C met with Nick Rohatyn, CEO of the 
Rohatyn Group (TRG), a Park Avenue venture capital firm with around 
$2 billion in assets under management and four overseas offices in 
South America and Asia.  Rohatyn is the son of legendary Wall Street 
banker Felix Rohatyn, who put together the financial bailout of New 
York City in the 1970s and was later U.S. Ambassador to Paris in the 
mid-1990s.  The younger Rohatyn left Morgan Guaranty after its 
acquisition by Chase Manhattan and founded TRG in 1999.  He was 
joined on November 2 by Ernest Stern, a former Managing Director 
(and frequent acting President) of the World Bank.  TRG has recently 
launched the $400 million Africa Catalyst Fund, which will make 
$10-30 million investments in mid-sized companies in 12 focus 
countries in sub-Saharan Africa, including Kenya.  It is in the 
process of opening an office in Johannesburg. 
 
------------------------------------------ 
Common Analysis: Africa is the Place to Be 
------------------------------------------ 
 
¶7.  (SBU) Motivating all three companies to invest in Africa is the 
belief, as noted by TRG's Stern, that Africa is the last frontier 
for high returns on venture capital in the developing world.  Asia, 
he said, is mature and saturated, and South America is becoming so. 
All three companies have done extensive political and economic 
analysis and found Africa desirable based on a number of recent 
trends, including greater democratization, improved fiscal 
management, reduced debt, more mature market structures, growing 
middle classes, and faster growth rates.  Africa, in their view, is 
the place to be to make money. 
 
-------------------------------------------- 
Common Approach: Fund the Guys in the Middle 
-------------------------------------------- 
 
¶8.  (SBU) Another common theme: All three of these new funds target 
medium-sized firms, i.e. those that typically are too big for 
micro-finance loans (which are a growth industry in Kenya at least) 
but too small and risky to get long-term credit from the banking 
system.  These are the firms, the U.S. venture capitalists believe, 
that are good bets to grow quickly into large companies, generating 
wealth and jobs along the way. The funds also have an element of 
social conscience in that all plan to provide hands-on management 
expertise to the companies they invest in - a kind of profit-driven 
technical assistance. 
 
------------------------------- 
Kenya Plans to Issue a Eurobond 
------------------------------- 
 
¶9.  (U) In a separate but parallel effort to raise long-term private 
sector funding for economic development, the Kenyan Government is 
planning tap to international debt markets by borrowing $300-$700 
million through a 5-10 year Eurodollar bond offering tentatively 
scheduled for the first quarter of 2008.  The plan is motivated by a 
desire not just to raise money, but also to develop an independent 
alternative to borrowing from the World Bank and other donors, and 
to establish an international benchmark for Kenyan debt.  The bond 
issue would reportedly be only the fifth by an African country. 
Currently, Kenya has a B+ rating for long-term foreign currency debt 
from Standard and Poor's, and the government is in the process of 
obtaining a second rating from Fitch Ratings.  Finance Minister Amos 
Kimunya led a team of Kenyan officials to the U.S. and the UK in 
October in what was dubbed a "no deal roadshow" to gauge preliminary 
interest in a Kenyan sovereign bond issue.  Interest was reportedly 
strong. However, the government has yet to hire a lead bank to 
advise it on the transaction. 
 
------- 
Comment 
------- 
 
¶10.  (SBU) The good news is that American investment is coming to 
Africa in the form of private venture capital, which has the 
potential to help drive the continent's economic development.  By 
targeting established mid-size entrepreneurs, this kind of capital 
can complement other forms of investment, such as official 
 
NAIROBI 00004443  003.2 OF 003 
 
 
development assistance, and help catalyze wealth generation and job 
creation in the private sector.  The downside is that this is 
indirect, financial investment, and thus it isn't very visible. 
From the perspective of commercial diplomacy, it's not quite the 
same as having General Electric come to Kenya and build a factory 
that employs hundreds of local employees and pays local taxes.  That 
kind of green field investment, from any source (even Chinese), is 
still pretty rare in Kenya, which is still a tough and expensive 
place to do business. 
Ranneberger