[BLOG] Why Corporate Governance should be buzz words in Africa's private equity industry
Private equity investment in African projects has gained recognition as a vehicle for international investors to reap opportunities on the continent. The executive chairperson of Elah Capital, Anesu Machaba, argues in this article that there is need to instil corporate governance and transparency in African portfolio companies.
Africa is increasingly faced with disconcerting disparities in wealth between the haves and the have nots. This has created the proverbial bubble, which when enhanced by the current global economic crisis, is soon to meet its demise. It is common cause that much of Africa including leading economies on the continent - South Africa and Nigeria - are faced with a food crisis evinced by inadequate reserves and increased reliance on imports. However, Africa's problems don't stop there. Governments faced with challenges of administering state affairs have not been able to adequately address all the challenges that pertain to the social and economic woes of their citizens.
Rural urban migration of much of Africa's poor in search of jobs in big cities has not only placed additional pressure on resources, particularly housing and with it water and sanitation; it has also left many rural areas where jobs can be created, desolate. The one track focus on increased participation in industries further up the value chain (which is not entirely negative per se) in an effort to fast track development to match developed economies has left agribusiness, which has an incredible potential to change the wealth of African countries, with very little attention in terms of research and development.
Corporate governance or its lack thereof has contributed to seeing the already little Foreign Direct Investment (FDI) that Africa receives fail to accomplish its desired outcome, and further dwindle as investors see the continent as a region too risky for investment especially in these trying times. Legislative policies that have no sure footing have further contributed to investors' loss of appetite in some parts of Africa where in theory opportunities are attractive, but for the unsound policies. Foreign aid is becoming less reliable and should not be seen as a permanent solution to addressing the needs of the poor, such as the crisis which has plagued Somalia and much of East Africa.
Where governments have failed, private equity can help to bridge the gap or at least steady the ship. The characteristics peculiar to or rather predominate in private equity firms that make them such an attractive solution are: the deliberate focus on creating good corporate governance in portfolio companies; the ability to restructure companies in a way that sustains growth; finding attractive investments where no one else can and maximising the productivity of portfolio companies. All these areas can be leveraged to help address fundamental problems faced by African economies.
Private equity firms are quickly realising the ever increased importance of adding real value to Africa's economies through the efficient structuring of their portfolio companies. The issue here remains one of creating sustainable businesses, which can stand against all internal and external economic pressures. After all, it can be said that where you do business well you can continue to reap more rewards. African governments are appreciating their role in creating tighter regulations to ensure more equitable participation of locals. Such efforts by governments should in no way be despised but rather encouraged because a healthier Africa contributes to a more stable global economy.
At Elah Capital we believe that sound corporate governance should be seen as the key driver to social economic development in Africa, given it's value in creating sustainable businesses and mitigating overall risk of conducting business on the continent. Private equity firms further improve the corporate governance structures of companies owing to their need to create a more robust entity upon exit, particularly in the case of an Initial Public Offering (IPO). The influence that private equity will have in supporting corporate governance is not to be ignored. Given Africa's increased need for investment, the role played by private equity firms can be leveraged to bring about an improved risk profile for the continent. Private equity will be the sounding board for the advancement of good corporate governance in Africa.
Lessons from the past
Why should it be that when Europe sneezes Africa catches a cold? It's time for Africa to assert its own identity and be master of its destiny. The shortcomings of our past should forever be etched in our minds and as such we must look more favourably to initiatives that place wealth in the hands of the majority, as this is the necessary ingredient to creating thriving economies on the continent. Building synergy between investments on the continent is an important strategic tool to harnessing the individual strengths of our economies, and private equity can make this a possibility sooner. With access to vast amounts of capital in the hands of highly experienced and forward thinking executives, it is possible for equity firms to make matters such as South Africa's Broad Based Black Economic Empowerment (BBBEE) their prerogative.
Whilst private equity is not without its flaws; for example where portfolio companies are so highly leveraged that after sale their performance dwindles or where restructuring to remove the inefficiencies brought about by 'redundancies' contributes more to leaving an economy worse off with many more unemployed. These matters, and several others aside, the positives presented by private equity far outweigh the negatives and as such we cannot turn our backs on this potential solution for a continent that for so long has been able to list its problems but less often the solutions to its deep seated issues.
The answer can be found in customisation and cultural awareness. Private equity firms need to be more sensitive to the needs of their environment and adjust accordingly as time and need dictates. The firms which recognise this will undoubtedly be better placed to succeed than those that ignore it.
Where FDI is insufficient, more investment from Africans by development banks, channelled through private equity firms and aimed towards the improvement of our own products and services is what will undergird our development and bring Africa social and economic emancipation.
Anesu Machaba, Executive chairperson of Elah Capital
Elah Capital is a private pan-African investment firm with interests in mining, real estate, construction, telecoms and agribusiness. The firm focuses on creating shareholder wealth and adding value to the communities in which it operates.
This article was originally posted on Sustainable Development Africa Platform