Africa: Charting a legal course

PEI: How would you characterise the appetite for investing in sub-Saharan Africa?

SB: If you look at the data available, it suggests that the focus on Africa from both PE and strategics/trade investors has increased in the last 12 to 18 months. There are many more funds being raised, not only Africa-regional funds, but also global PE players are now raising either Africa-specific funds or global funds that can invest in Africa.

We’re also seeing more interest from strategic investors in Africa. In the past this has been from telecoms operators and oil and gas companies, but we’re now seeing greater interest in African businesses from other more consumer-facing companies, such as FMCG companies, insurers, healthcare and education providers, both from Europe and the US. All this increases competition in the region investing in businesses and assets.

PEI: What’s drawing private equity funds to the region?

SB: The higher growth rates and returns that are potentially achievable in emerging markets are attractive to PE. The multiples on entry tend to be lower, the opportunities for growth – both of the underlying economy and of the businesses – tend to be higher, and therefore your ability to maximise your returns is enhanced if you get it right. The counter-balance to that is the increased risk profile of investing in emerging markets – if you get it wrong you can have more downside risk.

Another reason for PE houses and strategics becoming more active in the region is the increase in secondary MBOs – a sort of second wave of investment. Five to 10 years ago you had a lot of initial investment in Africa from emerging market PE houses, such as Actis and Abraaj/Aureos etc. They’re now in exit mode for a number of those assets. If you’re a PE house looking to invest in Africa, then doing a secondary MBO from an existing PE house is often perceived as a way of investing in Africa without some of the risks inherent in a primary investment. You’re buying a business that’s been under the ownership and control of a PE house for five to seven years, which has had good governance and international standards imposed on it for a period, and has had an opportunity to iron out any issues.

There is also the increasing stability and liquidity of certain local stock exchanges, which is in some cases providing a viable alternative or dual track possibility for exit, along with the more customary private sale route – all of which is helpful for PE investing.

PEI: What regulatory issues do PE firms face when acquiring a business in sub-Saharan Africa?

SB: You may have foreign ownership controls determining what percentage ownership you can hold. You will have local government or regulatory consents or permits, whether it be central bank approvals, ministry of finance approvals, industry approvals or other. You may also have foreign exchange controls, which will need to be factored into your tax structuring analysis regarding repatriation of cash out of the jurisdiction up through the PE structure. And you may want to structure to take advantage of any available bilateral investment treaty protection as well.

Depending on the size of the business you’re buying or indeed your interests elsewhere in the region you may have antitrust/competition consents required when entering into a transaction. If it’s a listed asset, you’ll also have local listing rules to contend with, and if there are GDRs – global depository receipts – you’ll have to think about that as well.

From a due diligence perspective, you will also need to look at anti-bribery and corruption compliance, FCPA-type issues.

The other consideration from a legal/regulatory structuring point of view is not just can you undertake the transaction, but can you enforce the arrangements you’re going to put in place – in particular your shareholders agreement and management arrangements – locally, or do you need to structure them so that you enforce them outside of the jurisdiction?

PEI: Is it harder to invest in sub-Saha-ran Africa than, say, a European country?

SB: The main difference is that there isn’t really any sort of harmonisation, either informally or formally, across sub-Saharan Africa in terms of how each country deals with these issues. They each have their own rules and regulations in relation to their own stock exchanges, their own foreign exchange controls, their own foreign ownership restrictions, their own business licensing, their own tax laws, their own settlement procedures.

Because of EU harmonisation, while laws are different in each jurisdiction in Europe, they are all being dealt with within a broad framework of harmonisation. You have to take into account local requirements, but they generally aren’t dramatically different from doing business elsewhere in Europe. Equally because of the EU being an open market, you tend not to have restrictions on foreign ownership of assets, other than in relation to certain sensitive sectors.

In Africa each jurisdiction is different. Some have very developed rules and practice, others not so much, and therefore there isn’t the same degree of certainty or conformity when doing business, particularly cross border.

The other issue is the legality of certain provisions under local law and regulation (such as drag rights or call options) and the relative enforceability of contractual provisions locally. This can differ markedly between jurisdictions.

PEI: Lots of PE funds in the region operate a buy-and-build strategy or seek to expand their portfolio companies into different countries. What are the potential regulatory issues there?

SB: In each jurisdiction you’ve got different regulatory environments, different licensing you’ll need to run the business, different consent and approval regimes. Different requirements as to governance, for example, whether you have to have a majority of local directors on the board. So you start off with one business within a hub and then have to make sure that in each jurisdiction you go into you continue to comply both with the laws and regulations of the jurisdictions you’re currently in and with the new laws and regulations, some of which may be conflicting.

You can’t do this as a half-way house. You’re either in a highly-regulated business and you accept you are and you buy into it whole-heartedly – the banking industry is a clear example of an industry in which you need to be regulated locally in each jurisdiction and take that very seriously – or you try and find businesses that have less regulation locally in order to allow you to expand more easily. Consumer goods and retail businesses are good examples of businesses which generally have less regulation, but they still have some, for example around import restrictions.

A second hurdle is infrastructure. It’s no coincidence that industries that rely on electronic infrastructure, such as banking, financial services, IT, telecoms, have found it easier to expand cross-jurisdictionally than industries that rely on physical infrastructure and networks, such as retail.

PEI: Is sub-Saharan Africa welcoming to PE investment?

SB: Yes. There is a real entrepreneurial spirit in sub-Saharan Africa. You have a lot of local businessmen with a real energy and dynamism to grow their businesses. They are passionate and proud about the businesses they have, but without the access to capital needed to develop them further or the international expertise to know how to expand them across jurisdictions and take them to the next stage in their evolution. That’s the market in which private equity can really bring its expertise to bear. PE houses don’t have huge on-the-ground presences in Africa, so they will rely heavily on local management. But what they do have is access to the capital, expertise, good governance and industry experts necessary to grow the businesses and realise their potential, and that’s what they will provide. That’s something that would be difficult to replicate locally without access to PE.