Factors Determining the Development of the Tanzanian Private Equity Market

Abstract

The global private equity industry has experienced continuous growth in the last decade, and we have witnessed an even stronger growth in East Africa. However, Tanzania has not been following these trends, and despite theexceptional economic growthof the country,itlags behind in attracting private equity deals. This research aims to provide an understanding of the underlying reasons for the low private equity activity by studying potential factors affecting the development of the private equity market in Tanzania. The primary research question seeks to explain the factors and the way they affect private equity allocation decisions. The secondary objective of this study is to highlight the policy implications specific to Tanzania that could make the country more attractive for private equity investments. This research aims to complement the underdevelopedacademic literature on private equity activity in Tanzania, where we build on the framework presented by Groh, Liecthenstein, Lieser, & Biesinger, (2018)to rank a country’s attractiveness for private equity investors. A qualitative approach was utilized to find the relative importanceof the factors, assigned by actual private equity investors. The main findings from this study, guided by thetheoretical framework,are that tax rates, availability of debt, exit opportunities, quality of legal enforcement, education and human capital, and deal opportunities are the most important factors that contribute to explaining the development of the Tanzanian private equity market. In addition, two new factors,political stability and investor’s perception of a country,emerged during the research andwere also considered as important allocation criteria for private equity investors. The results of this study indicate that there are five key areas in need of improvement; legal system, tax system, administrative burdens, education system, and infrastructure. It was suggested that an increased effort from the policymakers to focus on, and improve these areas could increase the country’s attractiveness for private equity investors.