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Private equity stakeholders on investing in high-risk African countries

At a recent private equity conference in Stellenbosch, South Africa – hosted by the Southern African Venture Capital and Private Equity Association – industry stakeholders expressed conflicting views on investing in countries such as the Democratic Republic of Congo (DRC) and Mozambique, which have suffered from political and economic challenges of late.

Colin Rezek, founder of Vantage Capital, said outside South Africa his firm focuses on countries with a strong rule of law, a stable currency and adequate economic growth. He highlighted attractive opportunities in Egypt and Morocco as well as francophone west Africa, where the regional CFA franc currency’s peg to the euro provides a degree of stability.

“I think there is a lot of opportunity in Africa – it is more difficult, it will take longer, but the opportunities are there. So I believe that you just need to be patient, you need to be very diligent, and you need in-country skills to be able to transact in those jurisdictions,” he said.

But there are some “very high-risk” countries that Vantage Capital stays away from. “We won’t look at, right now, Zimbabwe; we won’t look at Mozambique; we won’t look at the DRC. I think you are looking for trouble if you go into those places,” he said.

Mozambique is grappling with large government loans that were taken out without the parliament’s knowledge during the past administration; the DRC is in the midst of political unrest and uncertainty; and Zimbabwe is facing its worst economic turmoil since dollarisation in 2009.

Corporate law firm ENSafrica is also not seeing much deal flow in these territories. “I’ve had a couple of clients who had a look-see, and quickly said to me, ‘No, sorry, that one is not going ahead’,” commented director Lydia Shadrach-Razzino.

“The old problems of Africa are still there – the governance issues, the political issues, the lack of standard legal or legislative frameworks within which to work. It takes a long time to get anything out of the regulators, and the regulators don’t quite sometimes understand exactly what’s within their parameters… So those are the usual problems, and I think that you have to be taking a long-term view when investing there,” she added.

However, Clive Howell, head of private equity at Nedbank, is less concerned about the risks these countries present – provided that companies have a good grip on local market realities.

“One of our investments has exposure to the DRC, Zambia and Mozambique, and we are quite comfortable with that, in the sense that they are on the ground, and doing things with that on-the-ground understanding.”

But, he said due to the tough macro-economic environments in some African countries, governments are trying to squeeze extra revenues and taxes from companies. “There are increasingly more boulders being rolled into your path from a regulatory point of view that makes doing business a little tougher. A bit more patience [and] a bit more perseverance [is] required to get there.”

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