K2 Intelligence examines some lessons learnt in developing and frontier markets
Sub-Saharan Africa is one of a number of promising, but sometimes risky, investment destinations. It is providing opportunities across primary and, increasingly, secondary and tertiary industries.
Despite overall soft emerging market performance, across parts of Africa investment appetite remains healthy, albeit with an increasing appreciation of the predictable – and the less common – pitfalls.
Africa is a fascinating place to operate and this year alone we have supported:
- Hedge fund and private equity investments in Angola, Namibia, South Africa, Mozambique, Cameroon and the Democratic Republic of the Congo (DRC).
- Disputes and asset seizures in South Africa, Ghana and Senegal.
- Investigations into corruption in the DRC, Guinea, Nigeria and Zambia.
The pressure to bribe can be intense, but don’t do it
Consequently, we thought it useful to provide a checklist of precautions to bear in mind when expanding in Africa and other rapidly evolving markets:
1. Assess who is really in control. K2 Intelligence has seen the military, shadowy relatives, the Mafia and brother of a president behind commercial partnerships – few of them worked out terribly well.
2. Examine licences and how they were obtained by developing a full paper trail locally to guard against accepting a scan of a forgery.
3. Can your partner legally operate where you would like to go? If not, bribing officials might keep them in place for a while, but that will quickly become your problem in law.
4. Get on the ground. Proactive local engagement has a significant positive impact and personal relationships are essential.
5. Ensure your advisers do the same. Don’t let them remote-control projects from London – local interaction equals better results.
6. The pressure to bribe can be intense, but don’t do it. It’s illegal; it will bite you one day and it’s near-impossible to stop once you start.
7. Review independent references of former employees, business partners, litigants – not just those of the counterparty.
8. Analyse agents’ contract sizes. You don’t want to rely on a specific local agent only to learn the hard way that they are out of their depth.
9. Be continually thoughtful about regime stability. Cancelled contracts and expropriation are rarer today, but still happen.
10. Understand what you’re not being told by the prospective partner. How do they influence and negotiate? What other interests do they have?
11. Where you have a dispute, assess the chances of success in unfamiliar surroundings or at least the prospects of an elegant exit.
12. Familiarise yourself with the competition. Who is the market leader and why? Have they stronger, perhaps suspicious, relationships with people that make things happen?
13. Check the assets from different angles with various specialists to be sure you’re actually buying what you think you’re buying.
14. Review the management team. What other deals have they been involved in? Have any of their prior businesses gone awry? Is there a past pattern of fraud or corruption involving them or the companies they’ve worked for?
15. Evaluate internal controls. Does the investment have adequate controls or policies to stop bribery or other insider behaviour that could cause your reputation harm? Does the culture reflect the attitudes taken towards compliance?
16. Don’t do this by numbers. Fraud, corruption and ill-informed investments happen everywhere, not just in frontier markets. If it’s a big bet, have a proper look at it and don’t just tick the boxes.
Should you have any queries, please contact Hugh Petre or Mungo Soggot, heads of our board advisory and Africa practices at www.k2intelligence.com