PERSPECTIVE
Understanding the rules of engagement for
INVESTING IN AFRICA —a dealmaker’s considerations by Rob Bergman, a Corporate Finance principal at Bravura
With the South African economy showing limited growth, and likely to be close to recession this year due to Eskom’s power cuts, South African investors are increasingly looking north of the border for better investment opportunities and returns.
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n Africa, there are fewer companies with established footprints and the potential is significant given its populous and fastgrowing markets. The adjunct to this is that the potential is only significant if investors know and understand the African environment or use advisors who are familiar and experienced in doing deals on the continent. The failure to do so can have a costly negative impact, as evidenced by several of South Africa’s largest multinationals having had to write down the bulk of their investments on the continent. Merger and acquisition pitfalls - Africa is not Africa International investors are cognisant of the fact that regions such as Europe or Asia include different markets that require specific investment strategies. Yet Africa continues to be perceived as a homogenous population group. Reference to a population of one billion inhabitants somewhat recklessly conflates numerous different markets into one. The reality is that similar to Europe and Asia, the continent is characterised by countries with diverse populations that have different consumption preferences and spending patterns and there are clear distinctions between countries and regions from a cultural and social perspective. Deal making needs time Deal making in Africa takes a long time. It can take a few years to source the right deal after having built relationships and established trust. Building up personal relationships requires meetings, dining, discussing and getting to know potential partners, as well as fully understanding the environment the company operates in. Additionally, it takes longer to build and create value. In all probability, the investor may have reached year
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seven or eight after the initial investment before the value is created. Following this, a structured exit would need to be generated which will again take a long period given that the new partner must feel comfortable with the deal and the remaining local partner. Therefore, investing in Africa is a long-term game, at least longer than the standard investment period most (financial) investors are used to. A few dollars a day for Africa’s middle class Africa’s potential is linked to its emerging middle class which is the fastest growing in the world; according to the World Bank, it stands at 350 million (Africa’s overall population is one billion people). Although consumer spending accounts for 50 to 60% of Africa’s economic growth, 85% of Africans live on less than $5.50 per day. This means that the choice of investment is critical and careful consideration must be taken of the product that will be brought to market and whether an existing global product will require adjustment to meet the requirements of the local consumers and their purchase power. In other words, don’t invest in a premium product that costs multiple dollars and expect the volumes that other countries are producing. Selling premium products and large packaging items are more difficult to yield strong results; a local market of 100 million people spending a few dollars a day on food or consumables (i.e. in small packaging) has greater potential. For example, consumable products may require packaging limited to single-use portions and distribution channels might primarily consist of wholesale outlets and informal street vendors rather than retail shopping centres and corner stores. Only a thorough understanding of the particular characteristics of the target country’s consumer markets will deliver sustainable profits. Understanding extends to considering the product’s commercial
