As Africa's economies continue to grow and the region continues to provide an opportunity beyond the eurozone volatility, investors are asking how they can best invest in the asset-rich continent. But one key mistake is in the question itself.
Many people talk about Africa as if it’s one country, not 53 individual nations each with separate legal and regulatory regimes.
Speaking at IFLR's inaugural Africa Forum on May 31, Amol Prabhu, director legal IBD emerging markets at Barclays said the real skill was making sure one identifies which countries are real opportunities. "It is also about having the sensitivity to understand that, within those countries, there are different rates of development, different histories and different focus, depending on natural resources and so on,” he said.
The legal aspects and structure of the packages become much more important in emerging markets, than in US high yield, for example, because investors can take these points for granted in the US.
Another major point for all African deals is that there is sometimes no law at all on certain points of a transaction, or the applicable law is very vague. This problem is compounded when international counsel get two different answers from local counsel on how to interpret the law.
“These issues are crucial to giving advice to clients and structuring the transaction in the right way,” said Prabhu. “You have to be very careful and focused on the information you’re getting and the analysis you’re doing.”
Beware of bad precedents
Panellists at the Forum said dangers can arise when investors rely heavily on precedents in Africa.
The issue arises if parties take shortcuts when they do deals. This will get taken forwards in all future deals.
Parties tend to refer back to one deal where someone got something they should never have got. This results in something that is completely off market becoming market standard. Deal makers have got to be careful they keep to the standards.
The deals often highlight conflicts between an international process of doing a deal versus a local process involving local regulators.
“A lot of these questions are a case of first impressions to the local counsel,” said Melissa Butler of White & Case in London.
Butler spoke of the need to have the right financials and internal controls and openness to disclosure.
“The number one issue we’ve seen so far with being able to get to the market is financial disclosure,” said Butler.
The issue is that these countries are not used to the high levels of disclosure to 144A level. This is compounded when coupled with a culture that may not be as transparent.
Another key challenge is that there is often a perception that countries in Africa don’t have transparent corporate structures and audit committees.
“The one thing about emerging markets generally is an inability for some to separate the company from the country,” said Butler. “If the country is associated with bribery and corruption, then no matter how robust the corporate governance is in a company, they are going to be tainted with that reputation.”