African diamonds: challenges, risks and opportunities in the African emerging markets

March 2017  |  SPECIAL REPORT: EMERGING MARKETS – OPPORTUNITIES AND RISK MANAGEMENT

Financier Worldwide Magazine

March 2017 Issue


Recently, Africa has emerged as a hot topic in emerging markets. With the potential for significant growth and an abundance of natural resources, coupled with multiple risks and challenges, why would Africa not be a buzzword in today’s marketplace?

The key to uncovering Africa’s potential, and discovering the hidden value it has to offer, lies in unlocking the opportunities for investment, as well as the potential joint venture opportunities of partnering with foreign businesses across the continent. There are many challenges in this regard, almost all of which relate, in some way or another, to uncertainty and instability.

Uncertainty and instability causes hesitation with regard to closing any potential transactions. This uncertainty arises in multiple ways, none more pertinent, however, than the fluctuation of commodity prices. The decline in oil prices in particular has led to less investment being made available to close deals. The oil price decline has significantly affected the oil-producing countries of North Africa and has resulted in poor growth in those regions. Political and social instability also continues to plague African markets and has recently been a major factor in deciding whether credit ratings of African countries are to be downgraded, which, in turn, results in lower investor confidence. Policy uncertainty is also a factor behind hesitancy to invest and enter into deals within Africa. These uncertainty issues increase the complexity of cross-border transactions in Africa and require advisers to provide intricate solutions.

Despite the challenges faced by companies looking to do business in Africa, the forecasts and predictions for the African region are promising. A recent report from McKinsey and Company suggests that by 2034 the region will have a larger workforce than China and India. Statistics and forecasts also indicate that Africa is, and will continue to remain, the world’s fastest urbanising region. Couple these statistics with the abundance of resources contained in Africa, as well as with the projections from the International Monetary Fund which state that the African region will be the second fastest growing region in the world between 2017 and 2020, and you have a marketplace that is difficult to ignore and where investment opportunities will continue to increase, despite political and social setbacks.

Opportunities arise in all forms in Africa and one such opportunity is the region’s rapid urbanisation. Urbanisation will lead to an increase in household consumption, business expenditure and manufacturing output, with McKinsey and Company reporting that household consumption is expected to grow, especially in developing countries such as Nigeria and South Africa, at 3.8 percent a year, reaching $2.1 trillion by 2025. Furthermore, Africa has the potential to double its manufacturing output from $500bn in 2016 to $930bn in 2025. These growth forecasts come with a caveat, however, as they are based on companies and manufacturers taking full advantage of the opportunities that lie before them and acting decisively when these opportunities arise. The demand for business is strong within almost all sectors of the African marketplace and there is a need for businesses to fill the many niches that are available to them within the continent.

How does one overcome the challenges, meet the growing potential that Africa has to offer and unlock the investment opportunity available in the region? One solution is for companies wishing to invest in Africa to tailor their offerings to suit the smaller businesses that are prevalent throughout the continent. Small businesses are key to the African economy; however, they create a large possibility of consolidation and expansion. Bigger companies need to look for the niches available in African countries that are currently filled by smaller businesses. Outside of South Africa there are no companies in Africa that fit the Fortune 500 criteria. Africa has only 60 percent of the number of large companies that one would expect in comparison to other regions. This shows that there are multiple opportunities for bigger companies to partner and work with smaller companies in order to expand and take full advantage of Africa’s growth potential. The integration of local businesses and the tailoring of business to local offerings will enable local markets to grow and expand.

A second possibility is for larger companies to expand domestically and first meet domestic demand by setting up distribution and supply chains. Domestic investment will help build talent pools which will enhance domestic growth and allow for cross-border transferability. This domestic growth will enhance cross-border expansion of business through the growing labour force of the region.

Companies wishing to invest and grow within Africa should try to negate the policy uncertainty that arises within the region by cooperating with governments and state owned enterprises and companies. Governments should focus on infrastructure development, in particular electricity and connectivity, and businesses should assist governments in achieving these goals as expansion relies on infrastructure. Policies should be used to increase foreign investment and free up restrictions on trade between African countries as this would increase cross-border deals.

The intricacy required in terms of African deals means that African law firms need to ensure that they are knowledgeable of all facets of the deals on which they are advising, have strong project management skills and are able to find solutions which include conducting more comprehensive due diligence investigations outside of the usual methodology of reviewing the target information, which is often lacking. Sector knowledge and knowledge of the local business culture is also key to ensuring success.

The global mergers and acquisitions market is predicted to grow from $3 trillion in 2016 to $3.4 trillion in 2017. This growth, and the predicted growth of the African region, means that there is widespread opportunity for companies to invest and grow across Africa. Use of the continent’s copious resources and growing labour force, and finding solutions which take into account the nuances of doing business in Africa, could result in the discovery of Africa’s hidden value.

 

Deepa Vallabh is a director and Nick Wright is an associate at Cliffe Dekker Hofmeyr. Ms Vallabh can be contacted on +27 (0)11 562 1188 or by email: deepa.vallabh@cdhlegal.com. Mr Wright can be contacted on +27 (0) 11 562 1703 or by email: nick.wright@cdhlegal.com.

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