Unblocking African deal flow

A new technology platform hopes to streamline mergers and acquisitions in Africa. 

An influx of private equity money and rapid economic growth has driven a surge in African mergers and acquisitions in the continent over the past few years. In the first nine months of 2014 alone, the value of transactions topped $19bn, according to Mergermarket – and yet investor and advisor Sean Obedih found that deals were often hard to arrange.

“It became very clear that the process of acquiring a company in Africa is very difficult largely due to the fact that most owners don’t want to sell – or simply that they lack proper bookkeeping practices,” says Obedih, who set up a small, Africa-focused fund of funds vehicle in 2013.

After being approached by recent MBA graduates Ade Odutayo and Nick Engelking – who were trying to start a fund – Obedih joined them to launch a platform that gives potential investors a “soft landing” into the African M&A market, and which offers African enterprises an outlet to find potential acquirers or partners.

The result, MergersAfrique, aspires to “create a pipeline between the sellers, the buyers and the advisor community,” Obedih says.

Businesses looking to sell their firm can advertise on the site, and investors pursuing African mandates can browse the potential businesses and start conversations at the click of a mouse. The platform will initially focus on mid-market companies in the $5-50m range.

“Those are the ones that are not really using technology at all, everything is still face-to-face negotiations,” Obedih says.

As Dorothy Kelso, head of research and strategy at the African Private Equity and Venture Capital Association, says, investors are increasingly searching out deals in Africa, in some cases making their first forays, and in others looking to exit deals made earlier in the decade.

“M&A activity has benefited from increased recognition of the tremendous opportunities that Africa presents to investors,” she says.

“The continent continues to have relatively strong economic growth by global standards, a general trend towards democratic governance across the continent, a young and growing population and an emerging middle class.”

However, experts warn that the actual process of arranging and finalising deals in Africa can be very high-touch and expensive.

Difficulties obtaining documents, up-to-date company information and relevant business data can make the due diligence process a challenging one for investors.   

“If you were buying a business in Kenya, for example, the due diligence would typically have involved site visits to the premises of the company where you would sit in a room and review various documents,” says Nicholas Hughes, M&A partner at law firm Clifford Chance and a member of its Africa group.

“Whereas, clearly, with the increasing number of overseas investors coming in who have particular diligence requirements and international advisers, they are going to want access to those documents elsewhere to ensure the process is efficient.”

Hughes does warn, however, that technology is unlikely to be a real substitute for on-the-ground contact.

“Fundamentally, private equity is a people business. There is no substitute for teams within the private equity houses spending time getting to know the founder, the management team and the wider market,” he says. “It is always going to be important to be spending time building those personal relationships.”

Information – particularly in standardised forms – can also be hard to come by, says Eduardo Gutierrez, a partner at investment firm Development Partners International, who believes that MergersAfrique could improve access to information for international investors, and to link them with increasingly sophisticated enterprises on the continent.

“There is an ever increasing understanding by African companies of their options in raising capital, understanding the PE investors, institutional investors and there is a level of sophistication around that and the level of options there are is growing quite rapidly,” he says.

However, he adds: “I think one of the problems on the continent is that the information flows are not as efficient as more developed markets. Many projects or companies that are looking for capital don’t often know how to go about it so to have some sort of central platform where capital providers can become aware of things is beneficial.”

Regulatory differences between African jurisdictions can also make doing cross-border deals complex – something that Obedih says MergersAfrique is trying to remedy.

Launched in January, the self-funded platform has instigated deals in Ghana, Togo and Mali so far, with one UK firm already taking a 40% stake in a Kumasi-based manufacturer. The business is also looking to move into infrastructure financing, working with Silicon Valley tech firm Zanbato, which had previously tried to launch an infrastructure marketplace in collaboration with the African Development Bank in 2011. The platform never took off.

The company is working with the Ivorian, Ghanaian and Mozambican governments to advertise infrastructure and agriculture projects when that section of the platform opens in May.

This kind of initiative could be valuable in bringing private capital into a space that has historically been dominated by public sector development financiers, according to Clifford Chance’s Hughes.

“Traditionally, we have seen a major source of financing for infrastructure projects coming from the development finance institutions,” he says.

“That is certainly starting to change though and we are seeing other financial investors interested in those projects. The more you can share the information about the opportunities, the greater prospect there is of bringing in more sources of private capital.”

Obedih hopes that the transparency offered by the platform will begin to improve investor confidence and help them get over the perceptions of risk that dog investments into long-term projects like infrastructure, and into frontier markets more generally.

“We are looking at Africa from a different perspective – we just want to put the processes in place that we see people using here,” he says. “The more information that is made available and the more the process is made smoother, investor confidence will increase.”

Chris Matthews