Quality assets in post-lockdown liquidity crunch
In the early days of lockdowns, M&A activity mostly focused on saving or exiting existing deals, and several potential transactions were pulled or put on hold. This phase is now mostly complete, although some transactions remain in dispute for reasons relating to force majeure or material adverse change impacts.
For the rest, the focus has turned to rebuilding. For many companies, some of them quality businesses pushed into survival mode, this means seeking emergency funding and potentially new capital or ownership.
For example, in Kenya, we expect that valuations will continue to decrease possibly making targets more attractive to strategic investors and PE funds. On the other hand, there may be several exits or possibly second round funding in relation to existing PE investments.
Geopolitics as an FDI driver
We believe that African economies may benefit from resumed geopolitical competition for influence on the continent.
China was the first country to move through COVID-19 and Africa remains on its radar. While naturally more cautious, Japan is likely to re-ignite its Africa mission as soon as it feels it is safe to do so. South Korea has handled COVID-19 very effectively so it may be well placed to seek opportunities further afield. Although not traditionally a rich source of FDI for Africa, we have seen relatively high levels of interest from Australia during lockdown.
Other traditional sources such as the UK and Europe are still likely to feature, with the EU unveiling a proposal for a comprehensive Africa strategy. The US is still an important source of FDI, although it remains to be seen what will become of US-Africa policy after the US elections.
Green shoots in COVID-19-influenced industries
COVID-19 has brought certain industries into sharper focus.
On the growth side, healthcare and pharmaceuticals have surged amid the pandemic. To unlock opportunities in this space, there is an urgent need for governments, regulators and business to embrace technology and invest in medical supply chains. In addition, given that there is no single bank offering services across Africa, opportunities are there for the taking in the fintech, particularly mobile money, space.
Industry consolidation, coordination and reorganisation
It goes without saying that the stronger players within industries are more likely to survive, and the weaker might become the subject of consolidation or takeover attempts.
We have seen an increase in industry organisation and association, aided in part by relaxations in competition rules relating to peer collaboration aimed at fighting the pandemic. In addition, we can expect the wave of portfolio and balance sheet restructurings to continue for some time, and, with that, an increase in foreign divestments.
ESG, sustainability and impact
The pandemic has brought issues of social responsibility into sharper focus.
As the pandemic subsides, we can expect a greater focus on ‘governance activism’ – as companies face heightened scrutiny of corporate governance, and an increase in campaigns by special interest groups and NGOs.
In addition, impact investing, including profit with purpose, will become increasingly mainstream, not only for societal purposes, but because of a growing recognition that companies that studiously address ESG and related measures, tend to outperform those that do not.
Local policies and politics, public interest and foreign investment reviews
Before COVID-19, cross-border investment had been shrinking or stagnating relative to world GDP amid rising nationalism and trade protectionism, as well as a tendency towards more interventionist approaches. The Tanzanian mining sector is a case in point.
Many countries have either tightened or introduced new foreign investment rules. For example, South Africa has recently introduced foreign investment reviews for transactions involving foreign acquiring firms that seek to acquire businesses or assets in sectors that are designated as strategically important to national security interests.
Intra-African trade
Prior to the pandemic, there was increasing momentum around the African Continental Free Trade Area (AfCFTA) agreement, which the pandemic has hampered. The result is an increased focus on domestic rather than international trade and the potential for a reorganisation of value chains along regional lines.
Policymakers should look to maintain momentum for the implementation of AfCFTA and use available trade facilitation measures to counter rising trade costs and to limit the economic and human impact of the pandemic.
Our view
There will always be winners and losers in a situation like the one we are currently facing and, while certain trends are apparent, there is a multitude of factors that influence levels of deal activity across important African economic destinations.
We think there is still some distance to travel on the road to recovery from the pandemic, but have seen some developments that are cause for optimism.