Important facts often forgotten as to SA’s attractiveness to investment
In 2018 the country received $7.1bn of foreign direct investment, 53% of the flows into Sub-Saharan Africa
As an investment destination, SA is often characterised as an emerging market that has challenging structural issues. Those are often portrayed as complex, or severe to the point of being insurmountable.
In reality, structurally SA is more favourable when compared to its emerging and frontier-market peers, supported by the resilience and strength of key public institutions such as the courts, and the continued national focus to achieve good governance.
In 2018 SA received $7.1bn of foreign direct investment (FDI), up from $1.3bn in the previous year, in sectors encompassing mining, petroleum refinery, food processing, information and communication technologies and renewable energy. This represented 53% of the total FDI inflows into Sub-Saharan Africa.
The underpin for FDI remains the attractiveness of the investment opportunities in SA, the ease and clarity of doing business, and limited bureaucracy when undertaking substantive cross-border transactions, especially with countries with which SA has established business links. Indeed, these are the hallmarks of an investment destination of choice for international investors looking for high equity returns and positive yields.
The recent transaction in which a consortium of investors acquired 100% of Clover Industries unpacks an important difference of viewpoints about the attractiveness of South African companies.
The consortium, which included international companies, comprised Central Bottling Company, IncuBev, Ploughshare Investments, Khulasande Capital and Clover’s executive management. They acquired Clover at a substantial premium to the traded share price a day before the first cautionary announcement was made in respect of the transaction.
The transaction received resounding support, with Clover shareholders providing irrevocable undertakings of support. The international partners in the consortium, who are invested across Africa, Europe and Asia, brought to the fore important facts that are often forgotten given the negativity that has become the norm in relation to the South African narrative.
The Clover transaction highlighted the fact that South African companies have significant value when comparing their business models and growth platforms against international peers. Clover has a heritage spanning more than a century, with a strong ambient distribution chain and a valuable consumer brand in the South African market.
Furthermore, it has the potential to expand the reach of its brands beyond the formal market into untapped informal distribution networks where the majority of South Africans live. This unique and positive viewpoint from international investors, who were able to see an attractive market in the country’s informal urbanised population, creates a compelling rationale for local business to re-evaluate their assumptions.
Generally, business confidence is driven by healthy political systems, forward-looking economic policy and trustworthy public and corporate governance structures. SA has largely displayed consistency in these key areas.
But in recent years a weaker economy, high-profile corruption at state-owned enterprises, corporate malfeasance and failures among accounting and audit firms have tarnished business in SA. This has led to general corporate conservatism, slowed capital expenditure programmes and reduced M&A activity. In addition, SA’s business confidence has dropped to levels on par with those during the recession in 2009.
Other emerging markets have had similar challenges, where a crisis of confidence has impeded local investments that are necessary to sustain economic growth. But crises do not define a country’s perpetual and continuing structural integrity. They do, however, feed into a systematic conservatism within both the public and private sectors.
But at some point, out of will rather than reason, that must end. The resultant capital outflows and a reduction of asset prices have led to South African companies becoming generally more attractive and a prime target for international investors seeing through the cycle.
The buyout of Clover (and the impending Pioneer Foods buyout by PepsiCo) therefore offer important lessons.
First, there should be a thorough inspection and analysis of industry and sector dynamics in which investors are interested, in spite of the “noise”.
Second, there are many valuable local companies that are performing well and should receive more appropriate valuations, both in public and private markets.
Third, it is important to allow foreign investors to invest, as they bring in differing perspectives and assessments of opportunities.
A lingering thought is that for the most part SA’s corporate sector will remain robust and attractive for investors who have an astute eye for opportunity and are willing to ignore the current dynamics and focus on the fundamentals. It is also time for South Africans to invest in ourselves.
• Hamunakwadi and Nagar are corporate finance transactors at Rand Merchant Bank