Due diligence in Africa: Finding a new normal?

Africa appears to have weathered the covid-19 pandemic more effectively than other regions – the IMF expects GDP to contract by 3 percent in sub-Saharan Africa in 2020, compared with 5.8 percent in advanced economies. But for private equity investors on the continent, the pandemic has nevertheless brought severe disruption – and nowhere more so than to due diligence activities.

Risk management in Africa, to a greater extent than in much of the world, is an on-the-ground activity. Reliable information from official sources is difficult to access – corporate records, where available at all, have to be retrieved on site in the majority of African countries. Fund managers in Africa therefore routinely emphasise their local presence, and indeed institutional investors insist GPs demonstrate their understanding of local risk factors.

Angela Miller-May, chief investment officer of the Chicago Teachers’ Pension Fund, told Private Equity International in September that “knowledge of geographical culture” is a key consideration for selecting managers in Africa.

“We believe it’s very important to be local,” agrees Paul Boynton, joint-chief executive of Old Mutual Alternative Investments. OMAI has offices in Abidjan, Lagos and Nairobi, as well as Johannesburg. Boynton says this “local knowledge and local ability to assess risks and read the temperature” is a crucial part of OMAI’s approach to due diligence.

Covid brings a rethink. The need for a physical presence meant that due diligence activities almost ground to a halt across Africa in the early stages of the pandemic, when lockdowns and travel restrictions were most severe. Substituting face-to-face meetings or even site visits with video conferencing is a risky strategy in large parts of the continent, where internet connections are slow and unreliable.

Disruption to due diligence activities has had myriad impacts throughout the lifecycle of Africa-focused funds. Runa Alam, chief executive of Development Partners International, warns that “covid-19 is interrupting new fundraising in instances where the ‘on-the-ground’ due diligence has not been able to take place yet”. Equally, the difficulty of carrying out site visits has impeded firms from completing new investments and from finalising exits from portfolio companies.

Fund managers have had to adapt to drastic changes in the operating environment. A survey published by the Global Impact Investing Network in July found that firms are increasingly turning to partnerships, both with co-investors and with local service providers, to mitigate their due diligence challenges. Some 34 percent of investors surveyed said they had already used other investors’ due diligence documentation, and another 39 percent said they would be willing to do so.

Meanwhile, the services of local consultants who can carry out checks on investment targets have been crucial in allowing deals to proceed during the pandemic. “We have been relying a lot on the people who we have on the ground,” says Francisco Machado, vice-president of investments at Vital Capital, an Africa-focused impact fund manager. “We are relying more (and spending quite a bit more resources) on local due diligence – individuals who we believe have a strong track record who can support us as our eyes and ears on the ground.”