DealMakers - Q1 2020
Key considerations for SA companies wanting to make a success of investing abroad
by Charles Douglas
More than a quarter of a century has passed since South African corporates began investing heavily in other African countries, and many of the key considerations for success endure.
Chief among the risks facing South African investors (and South Africans are not alone in this regard) is cultural unfamiliarity or insensitivity – South African investors in particular still attract a ‘big brother’ tag when investing on the continent, and need to be aware of that and tailor their engagements appropriately. Another key issue is a tendency not to do enough properly focused due diligence, contextualised by local conditions.
Lack of familiarity with a new environment is one of the biggest risks facing corporates looking to expand into other jurisdictions – in Africa, or further afield. It is well known that many corporates make assumptions about opportunities in other markets; they tend to think that what works on home soil must work everywhere else, too. That creates a dynamic that makes it hard for them to find traction.
A related issue is that some South African investors are still ‘finding their way’ in terms of how to go about choosing the right local partner in target countries, and to be sure to get the best on-the-ground advice.
Finding the right local partner is a key factor of success
The choice of partner is key to the success of an investment in any jurisdiction; trying to manage an investment remotely, without an appreciation for local dynamics and nuance, is a recipe for failure.
Understanding more about your potential partner is an increasingly important part of preliminary due diligence. When acting for US investors (amongst others), this is an entrenched part of the early process, by virtue of commitments under anti-bribery legislation such as the USA’s FCPA. Typical questions at this stage relate to whether the potential partner is one of those on the list of sanctioned individuals, or a politically-connected person.
Related to this is a clear understanding of the political and regulatory landscape, both current at the time of investment and when looking at longer-term potential trends. Changes in government and policy are a part of life, but they often catch investors off guard. It is part of the local partner’s function to help predict that which is often largely unpredictable.
Equally important is a combination of humility, and engaging the right advisors to conduct the right due diligence, to advise on the lay of the land, and on what may be beyond the horizon. This will not eliminate your risk, but it will go a long way towards mitigating it.
Stakeholder engagement is no longer an afterthought
Another critical success factor when making investments; at home and abroad, is an effective stakeholder engagement and management strategy.
Stakeholder engagement used to be an afterthought; now it is an integral part of the deal plan, going beyond a superficial understanding of who a company’s stakeholders are. It is not enough to know which regulators you need to engage with. You also need to know the key personalities – who they are and their touchpoints. Personalities matter as much as institutions.
Finally, successful investors do not wait until a deal is on the table to start engaging with stakeholders, particularly regulators. Regulators are aided in their decision-making if they are equipped with all relevant information. In many instances, regulators are willing to engage in a very constructive way. Do not wait for a deal to start before engaging them.
Douglas is Co-Head of M&A, Bowmans.