by Scott Nelson

Video: Opportunities in Africa

Hunt for ideal investment destinations

The factors that determine into which jurisdiction capital flows, are clearly a function of multiple influences – not least clearly the robustness of the destination economy and its prospects for growth. 

However, there are other equally imperative issues that can influence such decisions, which are borne more from the applicable legal/regulatory framework than the allure of meaningful economic returns.

Much is often said in an African context of the various geographies around the continent which are, or are perceived to be, the ‘gateways’ or the ‘springboards’ or the ‘launch pads’ by or through which investors seek to flow their capital in. South Africa has for some time been, and clearly remains, a country in this class – but is by no means the only one. 

Significant competition in this regard can clearly be seen on a number of fronts, with Kenya and Nigeria being particularly relevant and whose stature as economies and relative rates of growth are clearly allowing them to very much ‘nip at the heels’ of Africa’s largest economy, and increasingly close the large gap that once existed.

Another relevant consideration to bear in mind is whether foreign inbound investment is focused on investment opportunity in a single jurisdiction (often the hallmark of the approach of the development finance institutions with a particular infrastructure focus) or whether it is rather to acquire, fund or grow an enterprise that operates across multiple jurisdictions – often referred to as platform-based investment, and very much the approach of many of the Africa-focused private equity funds that are prevalent on the continent. 

This approach carries the dual benefits of both the attractiveness of a scalable business as a driver of returns, and the avoidance of excessive country concentration risk – significantly mitigating exposure to disproportionate levels of EBITDA (earnings before interest, taxes, depreciation and amortisation) generated from any one jurisdiction.

Whether investment is destined for one or a number of potential destinations (where the gateway approach is clearly of most relevance), the desirability of the plethora of countries now voraciously seeking foreign capital in many respects depends on the functionality of the core institutions and the dependability of, and reliability on, the organs of the state that will be so essential in creating a stable and ‘investor-friendly’ environment. 

With very few countries on the continent having effective and liquid capital markets, but simultaneously having a growing need for investment to fund essential infrastructure and other enterprise-based needs in the country, focusing on the creation of such an environment has become of the highest priority. 

It is clearly safe to say, however, that while there have been significant improvements in this area in many countries, there is still a long way to go to address some of the concerns set out below, and it is the view of the author that the race to the ‘top of the podium’ on all of these issues will be won by those countries that make their national integrity an issue of the highest priority and ensure those legal, regulatory and institutional aspects of state which are so critical to the foreign investment community are truly something of which to be proud.

Robustness of property rights, the rule of law/independence of the judiciary, and the efficiency and dependability of the legal system, the burden of government regulation, transparency and trust of government and politicians, the strength of audit and financial reporting standards, the soundness of banks and financial institutions, and the regulation of financial markets are all of the greatest importance to ensuring a country is one that stands the greatest possible chance of attracting the greatest possible amount of investment. 

Layering over the top of all of this is the spectre of corruption, which has the ability not only to cause devastating harm to a country internally, but also to effectively render it ‘off limits’ to the international financial community at large.

As noted above, many African countries have made tremendous strides in this area and there have been impressive and demonstrable improvements over recent years. There is still much room for improvement, however, including in South Africa itself. The prize is very significant and, like many things in life, you can only ever really hope to get out of any endeavour a return commensurate with the effort that you are prepared to put in.

Scott Nelson – Executive and Head of ENS Africa

 

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