The Africa investment opportunity has seen a rise in South African corporate law firms, like Cliffe Dekker Hofmeyr (CDH), partnering with their clients in African countries or leveraging collaborative network partnerships with in-country law firms.
An important yardstick to determine the health of foreign investment interest in Africa, is the amount of cross-border merger and acquisition (M&A) activity. According to a McKinsey Global Institute report, between 2010 and 2015, over 5000 individual foreign direct investment (FDI) deals took place in Africa. The continent is on an upward trajectory in terms of the volume of M&A deals, with cross-border transactions accounting for 36% of the total M&A volume in 2016.
To capitalise on investment opportunities in the rest of Africa, we have seen South African Development Finance Institutions (DFIs) amend their mandate to be able to invest in Africa. In the past few years institutions such as the Development Bank of South Africa , Public Investment Corporation (PIC) and the Industrial Development Corporation (IDC) have expanded their investment mandates to no longer being limited to South Africa. That in itself shows there is confidence and opportunities for investors to do business in Africa and this also has the potential to enhance trade and economic growth on the continent
With most investment opportunities, there are many challenges facing investors on the continent. While there has been progress in the political situation in various jurisdictions over the past couple of years, there remains a risk from a political stability point of view.
Apart from the political landscape, there is also a legal risk involved which may impact on an investor’s future ability to exit their investments or enforce their rights. The complexity of certain sectors creates an abundance of laws and regulatory roadblocks which creates an additional challenge for investors which may require the assistance of a local partner (which in itself entails further risk appraisal of that local partner). Sectors such as the banking, telecommunications, insurance, oil and gas; and mining and property sectors may be overregulated. This is due to some sectors having additional sector specific legislation in addition to applicable national legislation and in some cases, regional regulations which are triggered when cross-border transactions are concluded.
From a security point of view, particularly for lenders, there are challenges relating to local registrations that are not always accurate or reliable and the guarantees may need to be carefully structured. The security element may need to be carefully structured in such a way that by the time investors want to enforce their rights, they are able to get the desired results.
The supply of currency, or lack thereof, also poses a further risk for investors. There are countries that insist on US Dollars as the main currency for a transaction, yet have shortages of the greenback, like in Mozambique. If the desired transaction currency is US Dollars and there is a severe lack of this currency, the ability to get a loan repaid in US Dollars becomes a challenge.
In light of these risks, whether political or legal, there has been an attempt to put mitigation strategies in place through the involvement of export credit agencies and DFIs in various transactions. Their participation has proven to be critical and, to a certain extent, has had an influence as they use their connections to take a transaction to a bankable stage.
The result of having the DFIs involved is the de-risking of the project and enabling private sector investors and commercial banks to fund the equity gap. However, investors have to be mindful that where there is co-investments in the same project between the DFIs and the banks, there is always commercial tensions due to different investment objectives. These commercial tensions must be managed well in order for the transaction to go through.
This is why it is essential for potential investors to have an experienced legal team to enable them to identify issues at an early stage of the proposed transaction. Far above doing the normal due diligence, investors need legal counsel that has the expertise in the desired area and, in some instances, the technical team that can provide technical support particularly in relation to infrastructure projects. It is essential to have someone on the ground who understands the legal and political landscape and what it really takes to work in that country. This way, investors will know of any potential stumbling blocks that could derail the investment.
Investors also need an effective strategy that will address corruption and bribery issues. Corruption has always been a concern for investors looking to invest in the African continent. However, lenders or potential investors look for an opportunity and want to seize the moment. Having identified the opportunity, they also put measures in place to mitigate potential risks. For example, some lenders prefer English law to be the overarching law that governs any potential transaction because it comes with automatic anti-bribery and corruption legislation which have extra-territorial reach, such as the UK Bribery Act of 2010. This particular legislation catches bribes offered or given to any person (whether public official or private person). To commit the offence of bribing another person under the Bribery Act, the briber must intend to bring about or to reward improper performance of a function or activity. This is determined by an objective standard, as set out in section 5(1) of the Bribery Act