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Why ESG is here to stay in African investments

14.04.2014James Brice and Markus Reichardt

Africa is still touted as the next investment frontier and the figures bear it out: with over $50 billion foreign investments in 2012 according to UN figures it is the recipient of more foreign direct investment (FDI) than any other continent. Investors appear to view the developed world as over-regulated, and regions such as North Africa or parts of the Middle East too unstable. Africa's economic resurgence has its roots in small but real improvements in governance and transparency, more open societies empowered by social media, and economies leapfrogging directly to new technologies such as the mobile phone as a business tool. More than 720 million Africans have mobile phones and 167 million have access to the internet.

However, due to its low domestic savings rates Africa has to rely on foreign investments to fuel its growth and here two models have presented themselves:

  1. The Chinese 'ask no questions approach' which trades infrastructure investments for access to natural resources; and
  2. The conditional model espoused by the 'West' where investments seem to come with a range of conditions, especially in respect of environmental, social and governance performance.

While some observers have mistakenly framed the two options as a choice between two new forms of colonialism, it is worth looking dispassionately at some of these conditions - particularly those set out in 'global standards' developed by organisations such as the World Bank and the International Finance Corporation (IFC) - the largest source of development assistance in the world and the leading facilitators of infrastructure development funding globally. The most widely accepted of these standards - the 8 IFC Performance Standards and the sector-specific environmental health and safety guidelines supporting them - are remarkably simple in what they seek. In the case of their direct investments (including project and corporate finance provided through financial intermediaries), investors are required to identify and manage business risks and impacts so that development opportunities are enhanced.

Globally more than 500 asset & investment managers managing more than $30 trillion are signatories of investment codes such as Equator Principles which are based upon the IFC Performance standards and require disclosure of environmental & social risks and management responses to such risks. Together these institutions account for nearly 80% of global project finance and they include banks from Nigeria, South Africa, Morocco, Egypt, Togo and China's Industrial Bank.

The traditional Chinese investment model has over the years encountered sufficient and widespread opposition from African civil society in countries such as Namibia, Botswana and Zambia. This has led to social issues being approached more openly with more space given to opportunities for local labour and suppliers. Several surveys are underway by various Chinese-based institutions to measure and understand Africa's opinion of Chinese FDI. Chinese Banks now have to adopt a recently launched Green Credit Policy, and a draft CSR Policy for Outbound Investments in the Extractive Sector is due out in May.

So while it appears that Chinese investors in Africa are starting their ESG journey, this does not imply that 'First World' investors who placed an earlier emphasis on environmental, social and governance (ESG) issues have been more successful. Rather their approach to ESG issues has more often than not resulted in a compliance, "tick the box" approach, resulting in a "do the minimum" level of ESG interest.

This is why it is critical that as Africa continues to grow that project developers and foreign investors are guided by ESG standards towards achieving holistic risk management approaches. All these ESG guidelines are by their very nature generic and encourage interpretation in terms in terms of local context and sectoral expertise. Thus even Africa's biggest development finance institution - the African Development Bank (AfDB) approaches wildlife protection and anti-poaching measures not as measures to appease western sources of capital, but as its head, Donald Kaberuka explains, as part of its basis for sustainable economic growth. The issue, according to Kaberuka, concerns the survival of the ecosystems on which African economies and communities depend for tourism revenues. This makes wildlife protection a key issue for Africa's largest development bank and the projects it considers in pursuit of its mandate.

A project's failure to consider stormwater flow paths in built-up areas during extreme weather events can lead to catastrophic structural failures affecting projects such as shopping centers. Alternatively failure to openly engage with and compensate informal land users of areas being converted to formal farming can lead to consistent community conflict, road blockages and crop sabotage. Failure to explore the use of slightly more expensive but more eco-friendly inputs in a production process can lead to later impacts on cash costs when waste disposal charges or penalties mount. The list of issues to consider is potentially endless and such global ESG standards offer a widely accepted methodology deemed not only as reasonable for risk management purposes but also structurally encourage project proponents to explore more efficient, more sustainable alternatives.

In its search for sustainable economic growth, African communities and institutions must set aside fears of externally-imposed standards. Rather they should take advantage of the proven methodologies such standards, when diligently applied with local context and sectorial expertise, can make on project timelines, project risk profiles and improved economic returns for the investments fuelling Africa's economic resurgence.

James Brice, CEO, & Markus Reichardt, Principal, Environmental Business Strategies Pty Ltd:

Private equity in Africa: Between a rock and a hard place

10.01.2013Gail Mwamba

Private equity investment in Africa has been a hot discussion point in the global financial industry in recent times. This has been spurred by the continent’s mouth-watering growth prospects, and obvious low correlation in the developed world - which has suffered a shortage in growth opportunities.  

This has undoubtedly been good news for private equity fund managers in Africa. The spotlight on the industry means managers are now speaking to a slightly wider investor base, some of which have little knowledge of Africa. 

The discussions are, however, turning out to be more challenging than originally anticipated. A Johannesburg-based fund manager recently shared his surprise at walking into a meeting with a potential US-based investor who was eagerly waiting for him. The investor wanted the manager to show him exactly where he planned to invest the money.  

Educating global investors  

Indeed education must now be embraced as a core part of fundraising for Africa. For inexplicable reasons, some global investors are still grappling with the concept of Africa being a continent with at least 50 countries, with differing dialects, cultures, and therefore styles of doing business. For some even, Africa is one country.  

As such, some global investors need to be educated on the different political systems across the continent. Fund managers often find themselves having to say: “No, we do not think that the Arab Spring will spread to Sub-Saharan Africa, as that is more of a Middle East and North African affair. The dynamics are not the same.”  

It is therefore of no surprise that the bulk of the fundraising discussions get nowhere. After expensive and long fundraising trips abroad, many return home with promises of “We will look into this further and get back to you. Don’t call us, we’ll call you.”  

Tapping local capital  

Needless to say, there should be less dependency on global investors, as Africa is well endowed with wealthy pension funds, insurance companies and private individuals.  So why does not Africa follow the footsteps of Brazil for example, which has done exceptionally well in raising funds from its local institutions?  

The short answer is, raising funds this way is a tumultuous journey. Those that have succeeded have done so after a lot of longwinded discussions, with managers again finding themselves in the role of education providers.  For this group of investors however, the lessons tend to be more around the basics of the private equity asset class, since knowledge of this investment vehicle is still not very widespread in Africa.  

The bulk of local pension funds have also been struggling with government regulations that limit investment into the asset class, or discourage investment in funds that would be allocated in part, outside their home countries.   However, some say fund managers are also to blame for their struggles to raise money locally. When setting up their funds, a good number rush to structure their vehicles to suit non-African based investors, totally ignoring the recommendations of local institutions. By the time managers think of raising money locally, it is too late – as the fund structures would have already been fixed by then.  

Navigating governmental challenges  

Furthermore, a good number of African governments have a lot of work to do to encourage the growth of the asset class. South Africa has been at the forefront with efforts to reform, followed by Rwanda, Botswana, Namibia and Nigeria. However the bulk of governments in Sub-Saharan Africa are yet to muster the political will to make it easier for local institutions to partake in private equity. For some reason, a number still rely quite heavily on financing from donors and development finance institutions (DFIs).  

The reluctance to grow beyond DFI funding seems to stem from a lack of adequate knowledge of private equity operations – and again we find a new type of actors with a need for training. The murky knowledge of the asset class is reflected in a recent statement made by a vice president of a Southern African country: “We do not want private equity investors, because they are speculators. We want investment from the development finance institutions.”  

Needless to say, such mutterings are worrisome. Firstly, private equity capital follows a long-term investment strategy, which makes it difficult to be speculative. Investors tend to hold companies for at least four years, and in Africa, even longer. During this holding period, managers work very hard to add value to the company, as they would be looking to exit with a profit.  

The statement by the vice president also indicates a lack of awareness that DFIs are actually the backers of most private equity funds in Africa. DFIs invest in private equity funds in order to develop robust capital markets. DFIs are structured to be the initial risk takers, and are not meant to be the primary investors in any one country in the long-term.   

Overcoming deal-making woes  

In addition to fundraising challenges, managers also have to deal with deal-making woes. Fund managers find themselves struggling to close deals, particularly for the much sought-after deals of more than $50 million. Deal-making this year has been less than spectacular, with a dismal number of mid- to large-cap deals transacted. Small-cap investors seem to have had more success, but even they struggled to convince entrepreneurs to abandon their majority stake.  

The bulk of the problems can be attributed to competition between financial and strategic buyers. Increasingly, competition has been coming from large global companies, looking to tap into Africa for growth. As these purchases are strategic for them, they are usually prepared prepared to pay higher prices for acquisitions. Local companies have also been quite competitive, case in point being the group Tiger Brands of South Africa, which recently acquired 63.5% of Dangote Flour Mills.  

Perhaps managers seeking large deals should go back to their roots and consider how Celtel was created – a company which continues to be the foster child of private equity in Africa. As opposed to waiting for a readily created platform, maybe managers need to roll up their sleeves and look at creating businesses from scratch.  

A good example of a company born this way is Helios, which created a Pan-Africa telecommunications tower-sharing platform Helios Towers Africa.  

Fund Managers also bemoan the fact that they have to spend a lot of time educating entrepreneurs on the workings of private equity, before they can convince their prospects to share with them fairly. The challenge does not seem to be that entrepreneurs do not know what private equity is, but that a number do not fully understand what needs to be in place to accommodate private equity funding. Managers estimate that over 90% of the companies they look at are not ready for investment.  

Creating a strong foundation  

There is no doubt that the lack of publications on African financial industries means that the broader entrepreneurial base is less educated on the asset class. A number still look to bank loans to finance their growth. One wonders if there should not be a broader strategy by governments and investors to develop a strong information support system, which will not only educate the pension funds and private investors, but also the entrepreneurs.   

Needless to say, developed countries have proved that a strong information support platform is central to the efficiency of a financial industry. This creates a platform of informed industry participants that fund managers can tap for both funds and deals.  

This will also allow a conduit for global financial journalists to accurately report on the continent, educating global investors that are less familiar with Africa. Until then, fund managers seem to have to continue to live between a rock and a hard place:  having to educate investors and governments on one hand, and entrepreneurs on the other.    

Gail Mwamba is the managing editor of Private Equity Africa, a UK-based financial publication that covers private equity fund and institutional investing in Africa. (  

Her academic background includes a Masters in Business Administration in Finance (MBA Fin), specializing in financial risk management and Mergers and Acquisitions (M&A). Her financial journalism career includes roles at specialist financial publications covering private equity, structured products, FX and risk across Europe, Asia and the US.  She has also covered key topics for Africa-focused publications such The Financial Times This is Africa and the Africa Investor.



What do renowned economists, financial sector practitioners, academics, and activists think about current issues of financial sector development in Africa? Find out on the blog - and share your point of view with us!


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