Even though M&A deal flow in Africa has remained steady
in the past few years, there are still some obstacles parties
need to overcome to close a transaction, according to
panellists at IFLR’s Africa Forum in London last
An estimated $100 billion is needed to spearhead growth on
the continent, but just under half of that amount has been
spent so far. And while participation of local finance and
banks in financing projects and infrastructure is key,
international companies and capital also need to be mobilised.
This opens a host of issues that corporates and financial
institutions alike need to consider when carrying out African
"Buyers and sellers need to think about the human risk first
– who do we have on the ground that knows the market
– and about the potential for developing long-term
relationships," Simon Nasta, general counsel at FBN Bank told
delegates. "A key issue to bear in mind is also the exit
strategy, and matters such as credit risk, portfolio risk and
According to Mark Storrie, senior underwriter for emerging
markets M&A at AIG, Africa should not be seen as a
single territory but as 54 different markets, each with their
own specific risks and legal/regulatory landscape to navigate.
In addition, in areas such as anti-bribery and corruption
(ABC), it will be necessary to consider extra-territorial
legislation such as the US FCPA and the UK Bribery Act.
As such, there are many acquisitions and infrastructure
projects that fail because the parties cannot agree on the
allocation of risk in the relevant jurisdiction, particularly
where a buyer is entering into an unfamiliar territory.
- M&A activity in Africa has risen steadily but
obstacles remain – issues outlined at
IFLR’s Africa forum last week include the human
risk, credit risk, portfolio risk and economic
- Resource nationalism is also a problem with local
governments unilaterally gaining additional control over a
country’s resources, to the detriment of foreign
buyers or investors;
- But the private insurance market has stepped in
to provide an alternative third party to have a recourse
against in the event a transaction goes off the
One of those risks is so-called natural resource nationalism
– whereby a government implements a strategy to gain
additional control over a country’s resources -
which can manifest itself in several ways: changes in codes
overseeing a specific sector (mining for example), changes in
tax regimes or in equity stakes in a project or company, all to
the benefit of the government. The insurance market has had to
adapt to this growing transactional risk.
It’s now also possible to get cover for
political risk (terrorism or strikes for instance) in most
African countries. But the requirement in many francophone
countries that have adopted the Conférence
Interafricaine des Marchés d'Assurances (Cima) code
to have 50% of the insurance cover sourced onshore can be
The Cima code may have been implemented to develop the local
African insurance market, but concerns remain as to the
creditworthiness of some insurers, as well as to their ability
to pay in the event a claim is lodged.
"As a party to a transaction, you can get some stability
provisions included in contracts," noted
Norton Rose Fulbright partner Christophe Asselineau. "Or
more commonly you can now find compensation-based mechanisms in
the event something happens."
He added that in some cases, the private insurance market
has stepped in to provide an alternative third party to have a
recourse against in the event a transaction goes off the rails.
While 10 years ago the range of products available and risks
covered were both quite narrow, they have evolved to cover a
range of transactional risks which have emerged when doing
business in Africa.
"While participation of
local finance and banks in financing projects and
infrastructure is key, international companies and
capital also need to be mobilised"
According to figures provided by Storrie, nearly 20% of
deals that AIG has insured globally between 2011 and 2015 have
resulted in a claim, up from 14% for the period to 2014. Of
those, discounting small claims, more than half involved a
claim in excess of $1 million.
"This may be due to a greater willingness to claim against a
third party insurer than another transaction party," he said,
noting that "private equity clients in particular may be
unwilling to claim against the management warrantors, who they
are relying upon to run the target business".
However, amid growing due diligence and ongoing
formalisation of best practices, there is still a sense that
business standards aren’t necessarily as high in
some African jurisdictions than in other countries. Nasta said:
"In most of what we do, we take practices in London as the
highest standard and apply them across all the jurisdictions we
According to Asselineau, it’s sometimes
difficult to ascertain what the law is in some countries. "For
instance, it may be the case that in some jurisdictions, the
Official Journal outlining new legislation is not published,"
he said. "So you have to carry out extensive research to find
out what the legal framework is as it’s not
IFLR Africa forum 2017 - key takeaways
Africa needs creative finance