Private Equity in Africa: Is It More Difficult and How Can the Lawyers Help?
In 2014, PE funds invested US$8.1bn in African businesses. When measured against the US$1.5bn worth of PE investments made in Africa during 2009, this is a major increase that approaches the highs last seen in 2007. It is clear that Africa is today attracting special, renewed focus from major PE funds that are searching for the next frontier of growth in the recovery from the global economic crisis. This development ties in with positive narratives and real changes to Africa’s economic and political climate and will be viewed warmly by investors and African investees alike.
We expect that this positive trend will continue throughout 2015, and that the volume and scale of transactions on the continent will continue to rise. This is potentially good news for professionals who provide advisory services to the parties involved in PE transactions, including investment bankers, accountants, placement agents (specialists who assist in fund raising and provide advice and access to potential investors in private equity funds) and lawyers. The news is only potentially good news for professional advisers because of certain perceptions about doing business in Africa that can have the effect of decreasing rather than maintaining or increasing the extent of adviser involvement when measured against that ordinarily encountered on transactions in more developed markets.
These perceptions have to do with Africa being viewed as a continent made up of “difficult jurisdictions” and therefore giving rise to risk factors that prevent rather than facilitate transactions. From a lawyer’s perspective, on some transactions we have seen investors adopt an “adviser-lite” approach on the basis that the scope for lawyers to mitigate against certain transaction risks is limited vis-à-vis what are perceived to be more significant risks. The idea seems to be that transacting in African jurisdictions is so difficult that simply getting the deal done is so costly and so unlikely as to warrant scaling back on adviser expenses that would be valueless in the event that a transaction fails or becomes litigious.
Is the adviser-lite approach advisable? That probably depends on the quality of the adviser, but in our experience it is almost always regretted in the end. Good, commercially-minded lawyers are able to help their clients understand transaction risks and mitigate them appropriately in a cost-effective manner. It has been our experience that many of the common risks faced by investors can be mitigated by experienced cross-border counsel to a degree that is commercially acceptable to sophisticated PE clients. This is because lawyers who have actual experience of directing transactions between parties of disparate sophistication across borders in Africa, with all of the complexity that goes with that, are able to draw on tools to document protections against some of the risks that are associated with so-called “difficult jurisdictions”. These risks include, amongst other things, risks relating to political stability (or lack thereof), currency issues, local partner requirements and unfamiliarity with/distrust of the local legal framework. Certain current events and some of our experiences on the continent help to illustrate the value add of legal support on PE transactions in “difficult jurisdictions”.
Firstly, in Nigeria, uncertainty surrounding the recent general election has been compounded by the security threat posed by Boko Haram and the currency risk associated with the Naira. In addition to normal PE investor protections and amongst other things, we advised a PE investor to document specific protections by ensuring that:
- the target’s corporate structure was externalised in so far as practicable to tax-friendly Mauritius;
- • the agreements’ financial mechanics in relation to the investment amount prevented value loss through currency devaluation; and
- the agreements were conditional upon the state of the political climate and the target company taking out political risk cover to the investor’s satisfaction.
Secondly, in many jurisdictions, legislated requirements make local partnerships compulsory (and sometimes nonlegal reasons can make them desirable). This presents difficulty to deal-makers who are required to design their transaction structures with this in mind. We have been able to advise investors in recent Zambian transactions of these requirements in advance. By taking relevant structuring considerations into account upfront, our clients have been able to make accurate commercial appraisals of proposed transactions at the earliest possible stages.
Outside of specific jurisdictional knowledge, the experiences that a cross-border lawyer in Africa is exposed to on a daily basis foster an approach to negotiations and drafting that is somewhat unique. One example of this is the problem that is presented by relative differences in sophistication between offshore financial investors and African investees. While often incredibly successful, local African business frequently have only limited experiences interacting with highly resourced and well advised counterparties. This is a situation we encounter fairly regularly in our practice. It is of course critical that all transactions are transacted on the basis of consensus, and there is a risk in the case described above that during interactions some things will be lost in translation or not fully understood by either party. Crossborder lawyers tend to develop unique communication skills in order to guard against this risk and these skills come in handy where meetings are limited by virtue of the parties having to travel the great differences that Africa demands.
If Africa is to build on its growing magnetism for PE funds and go on to draw a greater proportion of all PE investments globally, it still has some way to go. In 2014, emerging market investees were able to contest between themselves for only 20 percent of all PE investments globally. It is our view that appropriately experienced advisers are a critical component to the success of PE transactions. For the reasons set out above, we believe that lawyers have an important role to play and we would hope to be able to contribute to the continued rise of PE across the continent.
About the authors
Gabriel Meyer is a Director at Norton Rose
Simon Thompson is an Associate Designate at Norton Rose Fulbright