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14
Mar

The importance of cross border investment in Africa – Interview with Richard Arlove, CEO of Abax Services Mauritius.

In a few sentences, please tell us about abax and the company ethos.

ABAX is an international provider of integrated advisory, corporate and business services, with a special focus on Africa. The firm is headquartered in Mauritius, where Abax Corporate Services Ltd, the Group’s main operating arm, is a duly licensed Management Company regulated by the Financial Services Commission of Mauritius. ABAX also has offices in Abidjan, Dubai, Johannesburg, London, Nairobi and Singapore. Additionally, through our international network of partners, we are also present in many other financial centres and markets. Our key focus is to advise entrepreneurs, multinational corporations and private equity funds how to enhance their enterprise value and investor value through the use of International Financial Centres.

As a multi-disciplinary professional services firm with expertise in structuring and Administration of cross border investments, what do you consider best practice for sustainable growth in Africa using fund and alternative investment vehicle?

Private equity funds tend to have a life-cycle of 8-10 years, after which the funds will ‘exit’ and return investments plus additional returns to investors. In an African context where investments can take longer to mature, the end of the fund’s life cycle is actually when you start to experience sustainable development. Alternative investment vehicles offer something in addition to capital, as private equity investors are active investors. When a private equity investment is made, a partnership is formed and the investor is motivated to work with a company’s management team to create value. Consequently, it can be complex for a firm to maintain a sustainable development if it loses this support 8-10 years after accessing such experience and expertise.

It is pivotal therefore to use tools such as operational improvements, corporate governance enhancements or environmentally friendly renovations, not only to generate significant returns, but also to build better businesses in the long run, leading to numerous knock-on effects including job creation, a broader tax base and sustained economic growth. For that to be effective, there also needs to be a higher focus on bringing structural changes through investments in key sectors such as infrastructure, health or energy, where you tend to have under-investments in Africa. Fortunately, some corporations have taken major initiatives. Blackstone for instance has been investing mainly in energy and infrastructural projects in Africa, with the most notable one being the development of the Bujagali Hydroelectric Dam, a $900 million project in Uganda.

There also needs to be sustainability in terms of societal development. Africa is still perceived globally as a continent drenched in poverty and the continent’s progress is often couched with figures pertaining to economic growth. While economic growth is prevailing across the continent in general, it also matters that the growth is inclusive and broad-based, or else people living in Africa will not feel that they are part of Africa’s promise. Through funds and alternative investment vehicles, large impact investment projects have been launched in Africa, helping to improve the socio-economic conditions in certain regions of Africa while harnessing interesting returns.

Over the last few years we have seen an increased focus from Fund managers on environmental, social and governance (ESG) policies vis a vis their portfolio companies. The ESG policies have been driven mainly by investors in Private Equity Funds. With most PE Funds in Africa backed by DFI’s, who in turn have a duty to report back to key stakeholders, ESG policies have become a key component to secure investor capital in Africa. Some Fund managers have gone a further step to recruit and set up dedicated teams in house to monitor their portfolio companies in respect of compliance with ESG policies.

ESG policies optimisation also contributes positively to the exit valuation, more so in Africa. Further, such policies give potential future buyers an additional comfort that the portfolio companies have an adequate risk mitigating framework.

We note that within the ESG policies, governance tends to be focal point. This is where ABAX is assisting its Fund Managers by reviewing and providing recommendation for their portfolio companies’ operational framework. Some of the governance factor can range from basic review of the board composition; putting in place regular reporting timeline; ensuring financial statements being audited; obtaining accurate information for inclusion by the Fund manager in the Fund investor reporting. Others can be more in depth and may include Board composition; detailed review of internal control environment and providing recommendation for improvement.

The environmental and social side of PE in Africa is a key element of the selection process in respect of the type of portfolio companies the Fund manager will work with. Prior to investment, full due diligence is carried out including the key metrics of ESG with concrete plans and timeline of how to bridge any gap.

Are there any trends in cross-border investments that we should be aware of?

Cross-border investments are now geared more towards longer-term vision and value creation rather than restraining potential returns to limited life cycle vehicles. This subsequently addresses the challenge of maintaining sustainable growth in Africa. Investors have recognized the growth opportunities in Africa beyond natural resources and are increasingly experimenting with alternative investment vehicles that offer longer prospects for return.

Even after identifying a pool of credible business opportunities, the decision to actually conduct the investment might take years. Consequently, many investors are now setting up vehicles that have an extended life cycle of 10-15 years instead of the traditional 7-8 years as this provides sufficient time for their investments to mature. Alternatively, the permanent capital vehicle (PCV) structure is gaining in popularity as well. Its indefinite life cycle eliminates one of the major constraints of typical PE structures: the pressure to ‘exit’ and cash back investments. This also significantly diminishes potential risks, such as investments being affected by macro-economic fluctuations prior to the exit period.

The quest for long-term investments is also achieved through Mergers & Acquisitions, with a record number of 118 deals concluded in the past two years for Africa, amounting to more than USD 15 billion. Interest was particularly high in the financial services and consumer goods sectors but also much spread across other important sectors that are in need of capital injection, such as energy and transportation. Additionally, African companies benefit extensively from introduction to industry specialists, suppliers and customers, while also getting the opportunity for geographical expansion.

Is cross border investment in Africa gaining momentum?

Private Equity investment in Africa is not a new phenomenon, but the continent has certainly been receiving much more than the scant attention of previous decades. Capital commitments have exponentially increased compared to a decade ago, clearly showing that Africa is a destination of choice for investors looking upon exciting opportunities outside of the developed and mature markets to maximize their return on investment. Capital investment into the continent surged to US$128 billion in 2016, creating 188,400 new African jobs, a 68% increase from the previous year.

What are the key challenges are for cross border investment in Africa?

There are still persistent challenges in terms of governance, infrastructure, geopolitical fragmentation, bureaucratic bottlenecks and human skills, thus making the deal processes longer to materialize. Based on Mo Ibrahim’s corporate governance index, governance level (out of 100) has only increased from 49 to 50 since 2006. The index showcases Africa’s slow progress in that respect but also that there is much improvement to be made.

Capital flow restrictions between African countries and the rest of the world represent another major challenge. Many countries are reluctant to open up their economy, and most of the continent’s financial systems are underdeveloped, making it difficult for capital to flow. The lengthy bank application procedures or paperwork process are highly detrimental to the private equity industry.

The shortage of management skills in Africa is oftentimes problematic as well. In Europe for instance, a mid-market deal would consist of backing the right management team. However, it is more challenging to find that level of expertise in Africa than in Europe, which is why after identifying credible business opportunities, PE investors need to bring in that expertise to make the growth happen or develop the internal skills in the targeted company. After all, private equity requires not only an extensive network on the ground but also technical skills that have to be deployed to achieve desired results for investors.

Another major aspect of the challenging business environment is the need for reliable infrastructure. Tarred roads, electricity, water, transportation, and so on, are in short supply which means, for example, that the cost of transportation can be profoundly higher in the African business environment than elsewhere. This can be explained by Africa’s leapfrog situation, whereby progression is made on a disruptive rather than a progressive basis. Many countries have experienced successful but drastic transitions from landline to mobile or traditional wire infrastructure to solar energy.

Nevertheless, on the whole, Africa is definitely getting better, with increasing democratization and less corruption. Key policy makers should henceforth pave the way for Africa to position itself as a dominant economic force.

What in your opinion are the risks and rewards of investing in Africa?

The risks will vary from macro-economic uncertainties down to the investment decisions. Among the principal risks to be highlighted is the political climate. African governments range from capitalistic democracies to authoritarian dictatorships. With unrest come crime and corruption, which are endemic to Africa’s poorer countries but which affect even the most developed countries on the continent. This means that scalability of the investment may be limited to specific countries and cross border expansion in Africa may be difficult.

Investment decisions are affected accordingly. If secure investments are limited to a handful of African countries, this leads to increasing competition, which drives asset prices up. The alternative for investors is to identify opportunities in emerging markets, like Cote D’Ivoire or Ethiopia over traditionally secure locations such as South Africa and Kenya. The investment risks in that instance would be backing small companies and start-up, which have a high probability of not being operational in 2-3 years down the road.

Although technology is becoming ever more prevalent in many corners of the continent, the acceptance of technology as a pathway to driving business is still lagging behind. Many African businesspeople still prefer deals be done in person. Internet penetration and infrastructure can also be an impediment to doing business. Another important factor to consider is the role of unions in African business. A failure to understand how unions and labor laws are ingrained into the culture of many African nations can have disastrous consequences for business owners and investors.

On the other hand, investing in Africa can be very rewarding. Africa is known for its vast supply of natural resources. But Africa has another vast resource — its people. Africa has vast opportunities for workforce development, particularly in the area of unskilled or minimally skilled labor. Employment opportunities for members of the unskilled and lower- income groups of African society are turning these groups into consumers of previously inaccessible and unaffordable goods. But the African middle class is growing, and as more people benefit from foreign investment in the form of job creation and access to previously unattainable luxury goods, the middle class has the potential to boom in much the same way it did in the U.S. and Europe during the early and mid-20th century. The potential for consumer spending in Africa is incredible. There are also many new business opportunities driven by the entrepreneurship spirit of Africans, such as solar energy, agribusiness, education, internet access, smartphones, real estate, SME financing, payment solutions, and retail.

Ultimately, the rewards go far beyond returns attached to the investment. More importantly, investors are leaving their footprint on Africa, through the creation of employment, improving the social environment and triggering economic growth.

What are some of the advantages of using Mauritius as a platform for investment into Africa and Asia?

In essence, Mauritius provides investors with a platform that mitigates to a large extent some risks and challenges previously discussed, in terms of ease of doing business, economic and political uncertainty, management skills, and availability of a bilingual and educated workforce, trained in financial services and corporate governance. Though the alternative investment industry is booming in Africa, investments are still concentrated in some countries while other countries that face macro-economic uncertainties are commonly left behind. By using the Mauritian route, investors have the opportunity to tap into business opportunities without being unduly affected by the economic and political risks prevalent in Africa.

Mauritius is notably known for its robust regulatory framework, economic performance, structuring possibilities and ease of doing business, being first on a number of Africa’s key economic indices. The fact that there is no exchange control coupled with a tax friendly environment and a developed capital market and banking environment also makes a major difference in the equation. Mauritius’ geographical location between Asia and Africa positions it as a strategic gateway for investments across the two continents. Asia is showcasing increasing interest to invest in Africa, and corporate structuring firms in Mauritius like ABAX have the right cultural sensitivity to advise on the best practice for value creation.

Why are events like the pensIon funds and alternative investment conference important to the industry?

It is an opportunity for all major key players to meet in one and same place. As much as this is important for networking, it also enables an exchange of ideas and allows participants to keep track of latest developments affecting the industry. Such a conference also allows people to pick up leads which can result in some making transactions.

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