DealMakers AFRICA Q1 2019

New scramble for Africa:

Structuring for business success

by Deepa Vallabh

Home to the fastest-growing middle class in the world, Africa is predicted to have a larger workforce than both China and India by the year 2034. Consequently, both public and private stakeholders from around the world are increasingly working towards strengthening their ties with the continent – a surge in foreign interest that has been aptly dubbed “the new scramble for Africa” in the most recent edition of The Economist.  


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This scramble is perhaps most evident from a diplomatic perspective, considering that the continent saw over 320 new embassies opening over the six-year period between 2010 and 2016. However, greater interest in strengthening ties from a military and commercial perspective has also become increasingly apparent – particularly from emerging economic giants such as China and India.


With foreign involvement in Africa reaching unprecedented levels, the continent is undeniably ripe with investment opportunity. Effectively realising the fruits of these opportunities, however, will demand a relatively high tolerance for risk and require the strategic navigation of several key challenges.


Leading these challenges is the high level of uncertainty that continues to plague many African countries. Associated risks such as political and social instability, a lack of infrastructure, major regulatory barriers and the lack of a skilled labour force, will therefore need to be mitigated by investors in order to obtain the potentially high rewards at stake.


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Among these rewards is the prospect of high returns. According to the Overseas Private Investment Corporation and United Nations Conference on Trade and Development, Africa offers the highest return on direct foreign investment in the world.


African investments can however be extremely complex. This is because they are regulated by unique agreements and arrangements between the parties involved and are subject to country-specific regulatory approvals, which can lead to difficulties if not properly understood.


In order to ensure maximum efficiency and minimal risk when making such an investment, it is important that investors gain a thorough understanding of the regulatory and compliance processes that are involved. This includes being well-educated on the various options and structures that are available and how to minimise risk and increase efficiency in each structure.


Foreign investors wishing to invest in Africa have a number of options available to them, including the purchase of shares, the purchase of assets, or a merger. In the case of an equity purchase, given that an existing company is being invested in, extensive due diligence, well drafted warranties and indemnities are required. This process is not as simple as purchasing a newly formed company, as investors will now also need to access shareholder agreements and amended constitutional documents.


Asset purchases are generally easier as investors will not need to review a significant amount of historical data. There is, however, still a need for extensive warranties and potentially, interim support agreements with the sellers.


Lastly, for merger transactions, substantial due diligence is required and regulatory approval is critical given the extensive level of negotiation that takes place in determining the terms of the deal.


In terms of investment structures, joint ventures (JVs) are typically utilised when entering the African market, as they can be structured informally and therefore allow for greater flexibility. They are governed by JV agreements, which allow for negotiating power and flexibility, in comparison to more formally regulated and legislated structures.


There are three common forms of JV structures, namely the Private Joint Venture Company, the Partnership and the Unincorporated Joint Venture. It is important to remember that each of these structures also has its own pros and cons, which should be carefully considered on a case-by-case basis.


Investors should utilise an extensive due diligence process to understand regulatory and sector specific requirements for the countries in which they wish to operate. Legal counsel with extensive Africa expertise is critical when investing into Africa, in order to ensure minimising of risk.


Vallabh is the Head of Cross-Border M&A in Africa & Asia at Cliffe Dekker Hofmeyr.