The effect of selected macroeconomic variables on the financial performance of private equity firms in Kenya
Kenya has experienced vibrant activity relating to the acquisition of local firms by Private Equity (PE) and the size of PE transactions. Some notable PE firms are well known and are listed on the NSE, such as Centum Investments and Trancentury Group. A number of PE firms making inroads in Kenya are multinational such as Abraaj Group, Carlyle Sub Saharan Africa Fund and Emerging Capital Partners African Fund. PE as its name suggests, is very reclusive, private and confidential in nature; and the exact information about financial deals are difficult to ascertain. The research objective was to establish the effect of selected macroeconomic variables on the financial performance of PE firms in Kenya. The variables selected were those that were perceived by the researcher and supported by previous empirical studies, to have the highest effect on financial performance of PE firms as measured by Return on investment (ROI). These are inflation rate, GDP growth rate, bank lending rates, exchange rate of dollar versus KSH and systematic risks. ROI was taken to be the dependent variable while inflation, GDP growth rate, bank lending rates, exchange rate and systematic risk were taken to be the independent or predictor variables. The study also considered an error term as a representative of other non key variables which had not been included in the model. The study period ranged from 2005 to 2012 within every quarter of a year, therefore consisting of 32 observations. The data was analyzed using SPSS version 11 for Windows. Multivariate regression model was employed in the study. To further ensure the model’s significance and goodness of fit, an F test and Analysis of Variance (ANOVA) were used. Out of the private equity (PE) firms sampled, the study established that PE firms’ in Kenya ROI was heavily influenced by the selected macroeconomic variables with GDP having the largest influence and systematic risk having the least impact. The computed R2 was established to be of 0.728 which shows there is a positive and strong correlation between the selected macroeconomic variables and ROI. 72.80% of ROI is influenced by the selected variables while 18.2% shows ROI affected by other variables not included in the regression, more specifically the error term. The study also established positive correlation between the dependent and independent variables albeit to varying degrees. Gross domestic product, inflation and banks lending interest rates in that respective order were established to be the macroeconomic factors that had the greatest positive effect on PE firms’ financial performance while exchange rate of the dollar against the Kenya Shilling showed a negative relationship albeit to a small extent. Hence, these macro economic variables should be carefully be considered by all stakeholders in the PE industry. Therefore this study proves, lends credence and confirms the researcher’s theory that the financial performance of PE firms is affected by fundamental macroeconomic factors such as GDP, inflation, currency exchange rate, interest lending rates and market risk. In summary, the aforementioned macroeconomic should be closely monitored and taken to account by PE funds and firms managers since they have an effect on the overall financial performance of PE firms.