Over the last few years there has been a growing focus on Africa as international investors increasingly see opportunities in the resource-rich, consumer-driven economies of the world’s second largest continent.
Since the global financial crisis private equity fundraising for Africa has been challenging, however there are signs that the environment is improving. Investors are beginning to re-examine their perception of risk and see Africa as a diversification away from China and India.
Experienced investors on the African continent feel that such perceptions are outdated. Many private equity funds have been active in Africa for years and have developed strong track records in a number of different industry sectors such as telecoms and financial services, benefiting from an uncrowded market.
The debate about the risks of investing in Africa is often too generalized – as if Africa was one country. The reality is that it is a continent of 54 countries, each with its own mix of political, cultural, religious and language factors. The underlying influence of the different legal systems is often linked to the country’s colonial past. These systems are overlaid with local customary or indigenous laws and often incorporate legal concepts from other international jurisdictions.
We also see regional legal developments such as the Organization for the Harmonization of Business Law in Africa (OHADA), adopted by 16 west and central African nations, and the development of the east African economic community with its own legislative body.
Many of the perceived risks are not necessarily particular to Africa. Choosing the right local partner is key. Extensive due diligence on the industry and the individuals involved is essential. If investing in natural resources or infrastructure projects, it is also important to fully assess country and political risk.
Much of private equity investment on the continent involves taking a strategic but not necessarily a controlling stake in a business. This has an impact on the legal structuring and documentation to ensure that the private equity investor retains effective influence on the portfolio company. Monitoring the investment requires active involvement and presence in country. Finding good management is often one of the major challenges.
Many investors are familiar with the black economic empowerment regulatory framework in South Africa, which has an impact on the structuring of transactions. A number of other African countries are also introducing some level of local participation, such as Botswana, Mozambique and Zambia.
This is not necessarily just focused on equity participation. It can include skills development and training, construction and maintenance of related infrastructure as well as corporate social responsibility (CSR) programmes.
Over the last few years much of the investment in Africa has been driven by direct foreign investment. This has meant a growing focus on addressing concerns of corruption, money laundering, environmental issues and CSR principles. As more global investors become involved in Africa, the impact of legislation such as the US Foreign Corrupt Practices Act, the Dodd-Frank Act and more recently the UK Bribery Act is growing.
Mauritius is often chosen as a gateway into Africa (especially sub-Saharan Africa) both by private equity funds and other foreign investors.
South Africa is seeking to compete with Mauritius in terms of making itself attractive as a gateway. Recent legislative measures include the introduction of a headquarter company regime. Under this, many of South Africa’s more onerous tax provisions relating, for example, to transfer pricing, are waived for qualifying companies.
Some tax systems in Africa tend to be relatively unsophisticated in global terms, and certainty with regard to tax treatment can be difficult to attain.
Issues such as whether carried interest and proceeds on the disposal of investments should be taxed at capital gains rates or normal income tax rates (in countries where a distinction exists) are likely to arise. The answers usually need to be found through the application of general principles, in the absence of specific relevant legislation or case law.
African countries tend to impose high levels of withholding tax on cross-border cash flows, including dividends, interest and management or advisory fees. Minimizing these taxes through the use of appropriate tax treaties can present challenges because, with a few exceptions, most African countries have very few tax treaties. Mauritius has deliberately sought to build an attractive treaty network with African countries and has been successful so far.
With appropriate advanced planning and a detailed understanding of the tax playing fields in the target jurisdiction, it is possible to design relatively tax efficient deal structures for African investments.
Robert Appelbaum is head of the South Asia Group at Webber Wentzel where Roddy McKean is head of the Africa Group. Webber Wentzel is one of the leading corporate law firms in Africa and the South African member of ALN, an established group of Africa’s 12 foremost law firms.
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