King & Spalding LLP is an international law firm representing a broad array of clients, including half of the Fortune Global 100. With more than 1,100 lawyers in 21 offices across EMEA, Asia and the United States, the firm has handled matters in over 160 countries on six continents. King & Spalding is one of the most active international law firms in Africa and has established itself among the top projects and energy practices Africa-wide.
What are some key considerations and mitigants investors need to factor in before doing business on the continent?
While investors may be comfortable with high-risk, high-reward investments, the macro socio-economic and political situations in certain parts of Africa add a more complicated dimension.
Currency fluctuations can have significant effects on investments
African currencies can be difficult and expensive to source, and devaluation of local currency is a major concern in sectors such as hospitality where earnings are generated in local currency but payments to operators are often required to be in U.S. dollars. Obtaining hedging solutions tailored to the continent from financial institutions is critical.
Political risk is another key factor
Anything from a change in government, resulting in sudden decisions to overhaul laws, contracts or agreements, to a coup, embargo or tariff can have a sudden impact on local companies.
Risks are, of course, part and parcel of investments, especially in emerging markets.
However, some of these additional risks go beyond simply taking a haircut on an investment. They could result in court action with a new government or facing regulators or criminal sanctions in foreign courts. Investors need to ensure that the risks are minimized as much as possible, and this will ultimately come down to a combination of adequate due diligence to identify country- and sector-specific risks and mitigating those risks with suitable commercial and legal structures.
Legal advice tailored to the target country is critical
For example, while there is a perception that having an investment contract governed by English law is a panacea to legal issues that may arise from the investment, this may be of no help where there are practical hurdles in enforcing judgments in the specific African country (Gambia, Namibia, Sierra Leone, etc.) because it is not party to the New York Convention. Understanding local ownership rules, tax and exchange control approvals is critical to identifying the best way to structure the investment.
FCPA/UKBA private equity considerations: what enforcement trends are being seen with regards to PE firms focused on African investments?
As of January 2019, there were 215 African-focused PE firms with 307 offices in 27 different African countries. Ten of these firms had assets under management that exceed US$1 billion. Further, in the past few years, an increasing number of large institutional investors from the U.S. and Western Europe—namely, public pension funds, endowments and insurers—have begun to invest in African PE funds. But anti-corruption concerns loom large in these investments. Transparency International estimates that six of the 10 most corrupt countries in the world are in sub-Saharan Africa. So while the economies of many of these sub-Saharan countries have been marked by significant growth, that growth story continues to be marred by long-standing and systemic corruption. In addition, many of these economies remain cash-based with underdeveloped infrastructures, elevating the risks that companies take when engaging with local partners or other third parties.
Thus, despite financial and socioeconomic success, Africa-focused PE firms remain particularly vulnerable to an anti-corruption enforcement environment that has exhibited a tendency to target investors who profit from corrupt investments.
The combination of increased regulatory oversight of the financial services industry, the explosion of growth in the African PE sector, and the fact that these PE firms primarily invest in countries with high corruption perception indices has the makings of a perfect storm of anti-corruption enforcement activity.
In this environment, proactive measures should be taken by Africa-focused PE firms to ensure that, as an initial matter, their dealings with sovereign wealth funds are UKBA/FCPA compliant. Further, these PE firms should also conduct robust due diligence before and immediately after making investments in these high-risk markets, with further monitoring and related controls and assessments during the life of the investment.
Authors: Nikhil Markanday, Partner, and Florence Mugerwa, Trainee Solicitor