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Transformative infrastructure investments can have a multiplier effect on African economies

Hisham El-Khazindar, Managing Director and Co-Founder of Citadel Capital, explains how they raised US$234 million for the national railway of Kenya.
Qalaa Holdings | 24.10.2011
The co-founder of Africa’s leading private equity firm tells industry veterans how the firm raised US$234 million for the national railway of Kenya and Uganda despite challenging global financial conditions — a development that should lower transport costs and promote trade in the East African Community

Africa holds unparalleled opportunities for private equity general partners provided they can mobilize both local and international capital. The key is to take a hands-on approach to risk-mitigation, the co-founder of the continent’s largest private equity firm will tell industry leaders at back-to-back conferences this week.

“As we have said here before, Africa is long on opportunities, but short on management expertise and capital,” said Hisham El-Khazindar, Managing Director and Co-Founder of Citadel Capital, which recently announced the raising of US$ 234 million in equity and senior debt from leading international institutions to fully fund a turnaround program for Rift Valley Railways (RVR), the national railway of Kenya and Uganda.

Across Africa, a lack of investment and rail infrastructure means that transport costs are higher than anywhere else in the world. As a result, the cost of overland transport stands at c. 50% of the sales price of goods in landlocked countries such as Uganda, Rwanda and Malawi. Citadel Capital estimates that an efficient rail network could, in time, bring East African transport costs down by as much as 35% due to the operational and fuel efficiency of shipping by rail.

Citadel Capital, the leading private equity firm in Africa and the Middle East with US$ 8.7 billion in investments under control in 15 industries spanning 15 countries, acquired control of 51% of RVR in 2010.

“Working with RVR’s management and our local partners in the railway, we began by formulating a three-point turnaround program backed by a US$ 287 million capital expenditure budget. The planks of the program include upgrade of operational systems (2011-12), rehabilitation of existing assets (2011-2013), and addition of new assets to the fleet (2012 onward).

“We raised US$ 234 million in new equity and debt to fund this turnaround by focusing on the reduction of financing, political and execution risk,” El-Khazindar told participants at the Emerging Markets Private Equity Association’s Private Equity in Africa 2011 conference in London. “By injecting early capital as a general partner, we established our bona fides in the eyes of local stakeholders including the Kenyan and Ugandan governments, which gave us the ability to work out changes to the concession agreements and thereby reduce political risk. Additional early-stage investments by Citadel Capital (well before the final funding package was negotiated) allowed RVR to make important operational changes that made the transaction attractive to sophisticated global investors. Finally, the newly raised funds eliminate the financial risks of the turnaround”.

Early results from this program have been very positive: net ton-kilometers were up 9% year-on-year in the first six months of 2011, and turnaround times improved 27% in the same period. More importantly, accidents per train-kilometer fell 30%, passenger train frequency rose to an average of 16 daily from eight, and RVR added a new passenger route from Nairobi CBD to Athi River.

The US$ 234 million raised for RVR included a US$ 164 million senior debt package backed by African Development Bank (AfDB), International Finance Corporation (IFC), Germany’s KfW, FMO, the ICF Debt Pool, BIO and Kenya’s Equity Bank. Meanwhile, IFC, FMO, DEG, and PROPARCO all subscribed to a US$ 70 million capital increase for Africa Railways, the proceeds from which will be used to fund RVR.

In addition to participating at the EMPEA Africa conference, El-Khazindar addressed EMPEA’s Capital Impact conference, also in London, speaking on a panel discussion on opportunities to “create value through long-term capital.”