Private equity: Debate about risks in Africa too generalised
Over the last few years, there has been a growing focus on Africa as international investors increasingly see the opportunities in resource-rich, consumer-driven economies of the second largest continent in the world.
During the global economic crisis, much of Africa (outside South Africa) remained relatively unscathed. GDP figures for many economies on the continent have remained remarkably robust.
Since the global financial crisis, private equity fundraising for Africa has been challenging, however, there are signs that the fundraising environment is improving. Investors are beginning to re-examine their perception of risk and see Africa as a diversification away from China and India. However the funds raised for Africa compared to Asian markets still remain relatively modest because of investors’ perceptions that African risks are higher than other emerging markets.
Experienced investors on the African continent feel that such perceptions are outdated. Many private equity funds have been active in Africa for years and have developed strong track records in a number of different industry sectors such as telecoms and the financial services sectors, benefiting from an un-crowded market.
We now see a growing recognition of African opportunities from a broad range of funds ranging from Pan-African funds, South African based GP’s, country or regionally focused funds in the larger markets in West and East Africa.
The debate about the risks of investing in Africa is often too generalised – as if Africa was one country. The reality is that it is a continent of 54 countries each with its own mix of political, cultural, religious and language factors. There are many different legal systems in place. The underlying influence in those systems is often linked to the country’s colonial past. One sees the influence of common law in East and some parts of West Africa, civil law in Francophone Africa, Lusophone Africa and North Africa as well as Roman Dutch law in Southern Africa. These systems are overlaid with local customary or indigenous laws and often incorporate legal concepts from other international jurisdictions.
We also see regional legal developments such as the harmonisation of business laws in the sixteen countries in the OHADA (a system of business laws and implementing institutions adopted by sixteen West and Central African nations) region and the development of the East African economic community with its own legislative body.
Many of the perceived risks are not necessarily particular to Africa. However there are some fundamental “must haves” when considering any investment. Choosing the right local partner is key. Extensive due diligence on the industry, and on individuals’ position and reputation in the local business community through the use of risk consultancy advisers is essential. If one is investing in natural resources or infrastructure projects, it is also important to fully assess country and political risk and to evaluate the impact of regime change.
Much of private equity investment on the continent involves taking a strategic but not necessarily a controlling stake in a business. This has an impact on the legal structuring and documentation of any investment to ensure that the private equity investor retains effective influence on the portfolio company. Monitoring the investment on an ongoing basis requires active involvement and presence in country. Given the size of the continent and the lack of direct flights between countries, this presents its own challenges. Finding good management is often seen as one of the major challenges. So far the predicted return of many well educated and trained executives from the diaspora has not yet lived up to expectations. Exit is also seen as a challenge. Despite a growing number of stock exchanges in Africa, liquidity is low.
Many investors are familiar with the black economic empowerment regulatory framework in South Africa which has an impact on the structuring of transactions. However a number of other African countries are also introducing some level of local participation or citizen empowerment such as Botswana, Mozambique and Zambia. This is not necessarily just focused on equity participation. It can take many forms including skills development and training, construction and maintenance of related infrastructure as well as CSR programmes.
Zimbabwe of course has introduced its own indigenisation regulatory programme which is continually modified making it hard to give definitive advice.