Unlocking the potential and achieving sustainable returns on African investments is hinged on two things: painstaking due diligence and thinking local, writes Jubril Enakele.
Never mind that the Eiffel Tower didn’t belong to him, Victor Lustig sold it — twice. Fortunately, in the time since then, the economies of the Western world have largely developed more advanced due diligence and risk assessment practices. These practices have given companies and businesses the ability to better understand, anticipate and manage risk. This has, in turn, heightened investor confidence in markets supported by the systematic checks, which prevent — to a large extent — the sort of crippling losses that are inimical to economic growth.
However, the West is saturated. Nearly all of the remaining high growth and high impact investment opportunities left to be explored lie in Africa, Asia and South America. Indeed, many of the very best of these opportunities are in African countries like Nigeria, with inadequate risk indices. Despite this, the potential is nonetheless real, vast, and cannot be so easily written off. Unlocking this potential and achieving sustainable returns on investment is hinged on two things: understanding the local political and socio-economic context and conducting exhaustive due diligence.
The potential opportunities available on the continent have been magnified by the fact that all but one African country have signed the African Continental Free Trade Agreement (AfCFTA), which — among other things — aims to boost intra-African trade from 16% to 60% by 2022 and attract $4trillion in investments and consumer spending.
The investor community will be a key beneficiary of this agreement. With greater access to cheaper inputs, integrated markets and lower tariffs, investments in the continent are poised to become cheaper and more rewarding. Working with financial and legal transaction advisors who possess a combination of best-in-class execution experience, deep local relationships and extensive on-ground networks is especially important for foreign firms looking into Africa as well as existing African firms interested in taking advantage of AfCFTA and expanding intra-Africa.
Early engagement of the right financial and legal transaction advisors can also be beneficial to smaller African firms interested in positioning their companies as take-over targets or local partners for larger firms expanding within the continent. Africa’s free trade area takes shape and the rest of the world looks to boost economic ties with the continent, it is imperative that the steps taken to limit reputational and financial risk reflect responsible business conduct. Understanding local context is key — yet, by itself, it is not enough.
Around the time Paga, one of Nigeria’s biggest mobile money operators, entered the market, financial service inclusion levels were poor, but mobile penetration levels were encouraging. In understanding the business case and making the decision to invest, some of Paga’s early foreign investors conducted several months of due diligence, gaining an understanding of the local Nigerian context.
Today, the company has processed 57 million transactions worth $3.6m. In 2018, Nigeria accounted for 29% of the total VC deals on the African continent. There is evidently a growing eagerness to buy into the Nigerian promise. Nigeria payment company Paystack and Paga are only a few of the recent successful capital raise stories. With them are several other companies who are actively seeking Western and regional funds to leverage the potential in Nigeria’s nascent industries and doing so in a way that drives socio-economic inclusion.
Africa is filled with opportunities like these, with specific, unique challenges. However, companies operating in Nigeria do so in an environment with inadequate infrastructure, processes and systems, and this can affect everything, from capital raises to the cost of financing and timeline for deliverables. Nevertheless, the potential returns are undeniable and writing off the country entirely would not be an investor’s best strategy.
Often overlooked is the fact that, unlike in the early years, there is greater local capital market expertise within the continent, and more proactive development of due diligence practices. These are encouraging signs, particularly in light of the historic difficulty in accessing foreign capital required for business expansion. Without being too prescriptive: to invest in Nigeria, or in Africa, act global, think local.
Work with local partners who have a track record of integrity, who understand the local environment and can identify pitfalls that an outsider wouldn’t. Your approach should be a combination of an intentional study of the nuances within the local markets and a rigorous examination of intended beneficiaries or business partners within the market.
Local partners will also help you navigate new cultures, interpret local nuances and avoid faux pas caused by a lack of familiarity with cultural aspects that may be very different from what you are used to. Although often overlooked, this can be one of the greatest determinants of relationship building and, by extension, positive business outcomes.
On a recent transaction, a foreign advisor walked into a first meeting with elderly industry heavyweights. Immediately, he greeted them by their first names, rushed through his presentation displaying a bullish disposition which, while perhaps acceptable within some cultures or environments, was ill-received by the team he was presenting to.
Some planning and foresight might have revealed that we are often more nuanced in our conversations, take time to build trust and prefer to observe protocol in unfamiliar situations, retaining great formality and, by extension, respect.
Africa rising is a narrative that has gained traction in recent times, and for good reason too. The continent is writing its success story, one investment at a time. To be a veritable part of it, act global, think local.
Jubril Enakele is the Chief Executive of Iron Capital, an Africa-based, Africa-focused investment banking firm with a track record of delivering best-in-class transaction execution across Sub-Saharan Africa.