A catalyst for regional champions in East Africa
When terrorists attacked the high-end Westgate Mall in Nairobi, Kenya, in September 2013, businessman Chris Getonga was just driving away. He had gone to the mall that Saturday morning to buy a present for his friend’s daughter on the way to her graduation party. As he did most mornings, he also stopped in to say hello to staff at his Mimosa Pharmacy. The chain of pharmacies was Getonga’s most valuable venture, and its flagship store was on Westgate’s ground floor.
As he steered into Nairobi traffic less than five minutes after leaving the mall, Getonga’s phone rang. His brother was calling to say gunshots had been reported inside Westgate, possibly connected to a bank robbery. But soon it was clear the attack was the work of terrorists.
Footage from the four-day siege by the extremist group al-Shabab, taken by CCTV cameras, shows the four gunmen speaking to customers and then shooting them and mowing people down as they tried to flee. At least 67 people were killed.
Paul Kavuma, MBA ’93, Founder and CEO of Catalyst Principal Partners
“Luckily my staff were all okay,” Getonga says. His pharmacy was looted and the remaining merchandise was soaked when an explosion elsewhere in the mall set off the fire sprinkler system. Getonga had been on the verge of opening two new Mimosa branches on the Kenyan coast. But the mall attack undid his goal of creating a Kenyan spinoff of CVS or Duane Reade — at least initially.
Mimosa’s Westgate branch accounted for more than 20 percent of Getonga’s business. For two years while the mall was closed, he lost that revenue. The U.S. travel ban issued for Kenya in the wake of the attack compounded his company’s woes; foreign tourists — the lifeblood of the Kenyan economy — no longer flocked to the country’s palm-fringed beaches.
Despite these sudden blows, the private equity firm Catalyst Principal Partners, still a relative newcomer to the market but an enterprising and quickly relevant one, saw great potential in Mimosa’s foundation. Catalyst founder and CEO Paul Kavuma, MBA ’93, had a long-term relationship with Getonga and had discussed the potential of investing in Mimosa for many years. Unintimidated by the crisis, Catalyst accelerated engagement and acquired the pharmacy chain in 2014, planning to leverage the platform and build a regional chain with world-class differentiated product offerings. Getonga retained a 5 percent stake, and Kavuma’s team at Catalyst partnered with two other investors. They hired a CEO and COO who both had experience launching outlets of the British pharmacy chain Boots and relaunched the company as Goodlife Pharmacy. They quickly began acquiring more retail space and reopened Goodlife’s Westgate branch in late 2015.
“It was a complete repositioning of the business, leveraging a platform and key relationships in the market with suppliers and landlords that Getonga had built over many years,” Kavuma says, noting that although the company had been saddled with financial struggles after the Westgate attack, it was still the “preferred pharmacy” for real estate developers in Kenya. “That’s also how we were able to expand rapidly on the back of the significant equity that he had built in the market, such that we had first choice on prime real estate sites,” says Kavuma.
With Catalyst’s investment and stewardship, Goodlife grew from eight pharmacies with 95 people on staff to 32 locations with a staff of 260. “Pharmacy is the anchor of Goodlife’s product offerings, but we’ve also leveraged the retail format to drive sales in related products, including health and beauty products,” Kavuma says. Several Goodlife branches also have a doctor on staff to provide a one-stop solution for customers: exam, diagnosis, and treatment, all in one.
Kavuma admits that while discussions had been underway with Getonga for several years, a minority investment in the pharmacy to support the ongoing business was previously challenging. “While the health sector and the company’s leadership position in pharmacy had always been compelling, the business was subscale with internal capacity constraints, as compared with our focus on mid-market businesses,” Kavuma says. “But in the aftermath of the tragic event at Westgate, the site of their largest store, the business faced significant operational and financial pressure that facilitated discussions about a transformational control transaction, with the infusion of management and financial resources that would substantially and fundamentally scale the business. This was the premise under which the investment opportunity became a reality.”
Catalyst effectively undertook a transformative makeover of the business — as with a renovation, remodeling, and remarketing of a property — and built on the solid original structure to relaunch better and bigger. It paid off. When Catalyast sold its majority shares in Goodlife to another investment company in 2016, after just two years of partnership, Catalyst had made more than two times its investment.
Kavuma’s personal passion for this work gives Catalyst startup energy, combined with the grounding of a leadership team whose members have decades of experience in private equity.
Investing in East Africa
Kavuma moved back to East Africa in 2004 with Actis Capital LLP, an emerging markets private equity investment firm. “I’d spent most of my career trying to find a way to get back to East Africa and to focus on this region and be relevant in this market,” says Kavuma, who was born in New York City to Ugandan parents and spent his childhood in England, Ethiopia, and Kenya before returning to the United States for college. He had Actis write into his contract that he would be based in East Africa within two years of having joined the firm in London in 2003.
Six years into Kavuma’s tenure as the head of East Africa private equity (first in London, then in Nairobi), Actis started focusing on investments in the realm of $100 million rather than the $20 million range that Kavuma felt was most relevant in the market. Actis “was growing very fast, becoming a global player, an emerging markets player,” Kavuma says. But he wasn’t interested in moving to South Africa or Nigeria to cut deals of that size. Mid-range appealed to him, from the standpoint of the needs of businesses in the East Africa region as well as for the kind of impact he felt he could have and the returns that could be generated.
“With the large-cap firms, yes, there’s a need for capital, but they have many sources,” Kavuma says. “The large deals are often intermediated by investment bankers: Multiple investors are invited to participate in a competitive process, with limited opportunity for engagement among entrepreneurs and managers with respect to their strategic aspirations.” But Kavuma wanted to be more instrumental in companies’ expansion, and more hands on. In 2008 he started soliciting investments for a private equity fund, with a first-round goal of $100 million — and attracted $125 million. He launched Catalyst Principal Partners in December 2010.
“We’re not venture capitalists, and we’re also not impact investors per se, although we invest in emerging businesses and support dynamic entrepreneurs and managers with the aim of building regional champions of scale, Kavuma says. “And we firmly believe we have a tremendous positive impact on the companies and on the communities in which we operate.”
“We invest in emerging businesses and support dynamic entrepreneurs and managers with the aim of building regional champions of scale.” — Paul Kavuma, MBA ’93
He and his investment team seek out businesses that already have a track record where Catalyst can add value to take a company to the next level. “We work with owners who have already invested significant capital in their business, in an environment where banks are conservative, with limited available risk capital. These owners want to expand into new lines, new segments, and into new markets across the region.” Catalyst is well positioned to support the growth of these businesses as an active partner, Kavuma says.
Adil Popat, CEO of the Kenya-based Simba Corporation, says the meticulous approach Kavuma and his team take with their deals and their regional focus were major draws as his family business looked to diversify their portfolio. “We were very keen to invest with him and Catalyst in areas where we would not normally invest,” Popat says, mentioning in particular fast-moving consumer goods (like packaged foods and beverages and over-the-counter pharmaceuticals). Simba Corp was an early investor during Catalyst’s first round of fundraising and has committed to the second round as well.
“Africa is a volatile environment, and the more portfolio approach you have is, I think, a positive,” Popat says. “If one business doesn’t do well and one does very well, you can join together and have a stable return.” Popat’s company invested in Catalyst after a negative experience with another private equity fund that was managed from New York and Chicago. “If you’re going to invest in Africa — and I believe this very strongly — you need an African partner. You need someone on the ground who knows the nuances of the businesses, knows the personalities on the ground.”
That was a driving vision behind Kavuma’s decision to build Catalyst. Private equity was still a new concept in East Africa. “There were one or two firms doing it but mostly based outside and parachuting into the market,” Kavuma says. “So we felt we could be a pioneer, a homegrown enterprise with people from the region, and do it locally to international standards.”
He was up against skepticism from business owners and potential investors. “Ten or a dozen years ago, when I first had those conversations, people were very suspicious. ‘This is my business. Who are you? Have you heard I’m broke? Why are you approaching me?’ A lot of suspicion.” Kavuma says. “The more success stories there are, the more adoption there’ll be for this innovative form of funding. So it’s a process.”
Still, much of the financing for Kavuma’s fund comes from international institutional investors, representing about 85 percent of Catalyst’s first fund. He expects the second round will still have an international investor weighting, although with greater regional participation, including from local pension funds and high-net-worth investors. (They raised about 60 percent of their $175 million target in a first close in March 2017.) A key hindrance for local fundraising has been a Kenyan regulation that until recently placed time-consuming restrictions on pension fund managers’ ability to invest in private equity funds. Kavuma played an active role in advocating for reforms and in June 2016 achieved an important victory. Under the new regulations, up to 10 percent of a pension fund’s investment capital can now be invested in private equity, without going through a deterring array of protocols.
Catalyst’s office on Nairobi’s Riverside Drive, with its brightly painted walls hung with East African art, feels a long way from where it started with Kavuma on his laptop in a shared office space, trying to build momentum behind his vision to fill what he saw as a critical gap.
Starting Catalyst “was a big leap, clearly, but I had leapt before. It goes back to Cornell. As part of my business school courses, I took an entrepreneurship class taught by Professor [David] BenDaniel, who was fantastic.” — Paul Kavuma, MBA ’93
Asked about the gamble of starting his own private equity fund — during the financial crisis, no less — Kavuma points to his earliest experience with a company that he dreamed up with a fellow Johnson graduate. Starting Catalyst “was a big leap, clearly, but I had leapt before,” Kavuma says. “It goes back to Cornell. As part of my business school courses, I took an entrepreneurship class taught by Professor [David] BenDaniel, who was fantastic.”
Kavuma and classmate, Joseph Sabga, MBA ’93, drew up the business plan for a virtual reality café where patrons could play video games that immersed them in another world. But, this was 1992. “Our professor said it was a great idea but not believable. Not likely to happen,” Kavuma says. He recalls they received a B on the paper as a result. He and Sabga graduated and joined consulting firms.
A couple of years later, Kavuma and Sabga found they were still developing the concept for the venture. They left their well-paid jobs and moved to Miami where they launched Virtua Café. The company thrived for about five years, but without enough innovation yet in virtual reality technology, the games became dated in an environment where the quality and sophistication of video games were evolving rapidly. Professor BenDaniel “probably had a point,” Sabga says. “As virtual reality is coming to the forefront these days, I sometimes contemplate about just how far ahead of the curve we were thinking back then.”
They sold the company and the expensive virtual reality machines. Kavuma moved to London to become an investment banker. “We didn’t make much money out of it, to be honest,” Kavuma says. “But it was a fantastic experience.”