Investor confidence still requires some coaxing, however, and there is an intense focus on robust due diligence – bringing environmental, social and governance (ESG) advisory services into the fore.
Having obtained a wealth of experience in ESG advisory, and specifically within corporate finance markets of the UK, Jenny Cope, Associate: Environmental Services, WSP in Africa, is a specialist advising on ESG aspects of mergers and acquisitions (M&A) and shares her insights here.
“It would be impossible to compare the corporate finance markets of the UK like-for-like with those in Africa as many such markets across Africa are still maturing. However, even when I first arrived in South Africa it quickly became clear to me that there are strong deal-making communities in Africa. There is a strong core of domestic firms and a reasonable number of international financiers who are investing in Africa either from overseas offices or via regional sub-Saharan Africa offices, especially within the financial district hubs of major investment centres.”
“But what was immediately very prevalent is that investors are aware of the potential sensitivities associated with investments into Africa and seek robust due diligence advice as a routine part of investment, which provides incredible opportunities for those in the advisory field,” says Cope.
Setting the scene
Analysts have released their commentary on global M&A activity for the first half of 2019 (H1 2019), and this is demonstrating that the value of M&A deals in Africa in H1 2019 was significantly up from the H1 2018 values, although the volume of deals were down. Indeed, analysis shows that only the African, Middle East and United States regions showed transaction value growth in the period of H1 2019 (against same period for 2018), with all other global regions exhibiting decline in deal values.
The primary source of the increase in Africa comes from the domestic market, with acquiring businesses investing in targets in their own country. This is indicative of domestic investors having sufficient confidence in their ability to manage potential risks, likely obtained as a result of comfort and familiarity in that environment. Scaling up, this indicates that there is investment potential on the continent for those willing to explore these opportunities and, employ mechanisms to manage risks.
Whilst Africa is demonstrating transaction value growth, South Africa, once revered as the gateway to investing into Africa, remains a somewhat depressed market, with transactions primarily centred on market consolidation, corporate restructuring and business rescue.
“South Africa has a diverse and sophisticated corporate finance market. But the prevailing challenges of poor economic growth, policy uncertainty and corporate breaches in governance continue to deter investor confidence. As a result, the local market has been tough, with scarce numbers of large M&A deals being pushed through during 2018 and early 2019,” says Cope.
Cope indicates that systemic challenges of policy uncertainty are not unique to South Africa, with the regulatory environments in other regions across Africa constantly evolving as these markets mature. “What is currently a differentiating factor, however, is that there is economic growth in several Sub-Saharan countries. It may not be sky-high, but there is more growth in countries such as Ghana, Nigeria, Kenya, Rwanda and Uganda than in South Africa at the moment.”
Africa therefore is still viewed as the next big investment market for many foreign governments and multinationals, alike. Economic growth for Sub-Saharan Africa (SSA) is estimated to rebound from 2.3% for 2018 to 2.8% for 2019 – and this growth is in the face of ongoing global uncertainty, as well as domestic issues such as high debt levels, inflation, significant level of fraud, and political uncertainty. “Africa is demonstrating its tenacity and resilience”, says Cope.
Facing the challenges
“Africa has attracted inbound investment for a long time – and there is a massive amount of funds available for investment on the continent. But, to some extent, the private sector has been held back by public sector inefficiencies. This is because the public sector needs to act as an enabler to the private sector to build on existing or first-established infrastructure.” says Cope. “Investments in a country’s infrastructure and industrial sectors help facilitate cross-border deals, the value of which were fairly stagnant during this first half of 2019. And, Africa is still heavily reliant on development finance institutions (DFIs) for infrastructure financing.” adds Cope.
Cope also indicates that amendments to and stricter anti-bribery and anti-corruption laws in some investor countries – such as the UK and the US, for example, and which have long standing trade and investment relationships with African nations – have made investors more cautious in recent years. “This cautiousness does not prevent deals from happening. Rather it has placed more emphasis on the importance that appropriate risk and governance due diligence be undertaken upfront on M&A deals, as investors seek more assurances.”
Focusing on deals through an ESG lens
The broad scope of due diligence required for M&A deals in Africa is similar to developed markets; where financial and legal advisory services are often the first to be prioritised, complimented by tax, insurance, commercial, pensions, human resources (HR), information technology (IT), and ESG – including health and safety, employment conditions, ethics and compliance.
Cope indicates that ESG advisory services commissioned are often deal-dependent – and it hinges on the size of the transaction and its counterparties. “However, the crux is that due diligence must completed thoroughly.”
In recent years WSP has seen an uptick in interest in the firm’s provision of ESG due diligence service – and the firm’s experts have worked with inbound investors based in the US, UK, the EU and Australia, as well as for South African investors investing in other African countries.
In April/May 2018, WSP provided environmental and social due diligence advice to the Carlyle Group for its acquisition of a majority stake in Uganda-based Abacus, one of East Africa’s largest pharmaceutical distributors and the largest manufacturer of parenterals (intravenous fluids, ear, nose and eye drops). Abacus was founded 23-years ago, is headquartered in Kampala and has a network of branches across Uganda, Tanzania, Burundi, Rwanda and Kenya. The deal was the first healthcare investment by Carlyle’s $698m sub-Saharan Africa fund, launched in 2011.
WSP’s deal sheet for the last 12-18 months has been diverse, ranging from petroleum and gas storage infrastructure in Nigeria to financial services in Kenya. The firm has also advised a number of international investors on renewable projects in southern, eastern and western Africa.
Cope indicates that a greater proportion of deals in Africa - than compared to European markets - include specialist ESG due diligence. Concerns around labour legislation and working conditions, corruption and bribery, pollution, critical habitat impacts, and resource management persuade investors to dig into these areas. WSP’s scope of services are specifically designed to identity ESG financial and reputational liabilities, and then design action plans that can be practically implemented to minimise these risks and unlock value over the investment period.
“The challenges we see often relate to timelines of deals; where investing into Africa can be delayed by aspects such as obtaining visas for site inspections, availability of senior management when investing in start-up scale businesses, and general travel logistics,” says Cope. “Also, where deals involve inbound investment there can be cultural expectation-based challenges and global investment standards need to be sensitively explored – to both satisfy the investor and keep the target business open and co-operative.”
“However, as the market analysis is showing, investing into Africa could be a great opportunity, with risks minimised through careful planning. The right advisers to support investors in this space will be those familiar with operating within various African jurisdictions, and who are able to offer innovative solutions to address any complex problem,” concludes Cope.