ROB BERGMAN: Rules of engagement
Making the most of investment opportunities in Africa requires a willingness by investors to take a different approach to dealmaking
There are exciting opportunities for dealmaking in Africa and for foreign direct investment on the continent. But don’t expect "rules of engagement" similar to those in developed markets.
For a start, while SA and global investors tend to prefer taking up majority positions when they invest (to ensure control of their interests), these opportunities are elusive in Africa. There is an abundance of family-run businesses on the continent, and these carry great prestige. Because selling these businesses — or even a stake in them — is not generally regarded as a signal of success, foreign companies find it challenging to buy in.
Depending on the jurisdiction, accessing debt funding can also prove difficult. And mezzanine funding — a flexible and popular instrument that shares both debt and equity characteristics — is even harder to come by. For most foreign funders, the risks of macroeconomic, political, security and currency exposure outweigh the benefits.
Securing mezzanine funding is not impossible. But it does require that funding is structured with the insight that comes from engaging with numerous parties and carefully investigating all available funding instruments.
Given limitations around in-country funding, transactions often include parties from different jurisdictions. This requires compliance with legal, tax and exchange control requirements across jurisdictions. Obtaining the necessary approvals for these deals can take several months — during which the parties must be kept around the table and committed to negotiations.
Invariably, investors in Africa put money into companies that earn revenue in local currencies. However, it’s seldom that the business will source all its products and services locally — which means a large portion of its costs could come from yen-, euro-or dollar-denominated imports.
Depending on the jurisdiction, accessing debt funding can prove difficult
Macroeconomic factors such as rising inflation become an exponential investment risk, as the local currency will depreciate. For the investor — as a local currency seller but with a requirement for an international return — there will be deflation of the required return.
Investors must be aware that this is a case of when, rather than if, in African markets. When this happens, the investor can expect at best a stable but often decreasing return — one cannot always outgrow the loss in currency deflation with excess local growth.
The best assets are those that are foreign-currency generating; in other words, products that are exported into the US and the EU. So, when considering investment potential, those looking to hedge their investment should ensure there is already an export component to the business, with a clear line to an interesting export story.
Other do’s and don’ts
Avoid complex structures and investments where individuals not immediately recognisable as shareholders or directors seem to have a say in the business, or where there is government influence. Look out for whether the company is being used for family expenses; these may be difficult to part with post-transaction.
These are aspects one would not usually pick up in a desktop due diligence; an understanding of the local market is necessary.
Also apply caution when buying a business that is part of a group. It is not uncommon for a business to have different sets of accounts, where the intercompany revenue or charge is difficult to understand.
This is especially true in businesses where the product-development or distribution sides are structured as different companies.
For those serious about the long-term gains in Africa, success demands an understanding of the environment, and partnering with the right advisers or in-country stakeholders. Opportunity may be "hidden in plain sight"; it’s a matter of knowing where to find those hidden gems.
• Bergman is a corporate finance principal at investment banking firm Bravura