SURVEY
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Regulatory uncertainty, particularly when it comes to compliance and integrity issues, ranks as the principal obstacle to M&A activity in Africa in 2016 (86%), followed by operational and security risks (77%) and concerns around the transparency, reliability and completeness of information (74%).
 
“In Africa, regulations are not very reliable, as they keep changing. This region also sees a lot of economic fluctuation, making it risky to invest,” a managing director at a private equity firm in Tanzania comments. “There are security issues, high crime rates and other problems such as data protection issues which make security a challenge,” he adds. A South Africa-based head of finance says: “Business players in Africa have not been well scrutinised for ethical standards and have, in some instances, made changes to records in a sale, which makes transparency and operational risks the biggest concern in M&A deals.”
 
“The region may be doing well, but there are many socioeconomic problems that can affect the market at any given time. Cyber problems and data protection have also surfaced as big issues over the past few years.”
 
Chief strategy officer, Mauritius
 
Most foreign buyers of African companies will come from Europe, according to 41% of those polled, closely followed by the Asia-Pacific region (39%) and then North America (16%). This is a noticeable shift from the previous survey when Europe ranked third behind Asia-Pacific and North America. Only 27% of respondents to the 2014 survey expected Europe to be the most prominent buyer region for African targets.
 
A partner at a law firm in Mozambique says investors from the oil and gas sector in Norway and the UK will be especially active in response to low oil prices.
 
“I am sure many buyers will originate from UK and Norway as the countries have underperforming oil assets in their own countries. Knowing that Africa has regions with scope for improvement in the extraction and exploration processes, they will surely target African businesses,” the partner says. For buyers from the Asia-Pacific region, past success in African M&A transaction will ensure that this region continues to draw interest.
 
In terms of the regions within Africa that will be the most attractive to inbound M&A investors, Southern Africa leads the way, chosen by 58% of investors. East Africa, which only ranked fourth in the previous year’s survey, moves up to second (18%).
 
More attention on East Africa comes as no surprise as consumer growth and increasing trade links between the countries drive forward the bloc’s economy. “East Africa is doing well. They are growing faster than other economies in the region and are forecast to grow very fast in the coming years. Kenya has even outdone South Africa in terms of its growth,” says a managing partner at a law firm in Cameroon.
 
Expansion by Chinese and Indian companies is the main driver for inbound acquisitions (35%).
According to respondents, corporates from these countries have built up experience in African M&A and already have a large presence on the continent.
 
“Indian and Chinese companies expanding globally are primarily entering African markets as the valuations are pretty competitive and the market response to their products is positive,” a managing director in Mauritius says. India has also recently begun to improve relations with Africa at a top government level, which will likely increase cross-border deals into Africa. The improved regulatory environment (16%) also features among the important factors driving inbound deal flow. “The regulatory climate in Africa has improved with more encouragement for foreign players that wish to offer capital to local businesses or set up their own operations. Companies are also willing to take a minority position in deals and are showing flexibility in negotiations,” says a chief financial officer in Botswana.
 
“The Indian government has plans to travel to Africa to improve economic ties as the African markets offer a great opportunity to make a profit based on foreign investment rules and favourable regulations.”
 
Director of finance, Morocco
 
The vast majority of respondents expect private equity activity in Africa to climb in 2016. New buyouts are predicted to increase by all respondents, with 58% of respondents expecting a significant increase.
 
“The level of private equity buyouts in Africa will increase greatly over the next 12 months as there are opportunities available at fair valuations, and the competition is not as high as other regions like Europe and Asia,” a director of finance in Benin says. The outlook for exit activity is also positive, with 87% predicting that exit activity will increase. Only 13% expect exits to remain the same, with none expecting a drop off. A managing director at a PE firm in Ghana says: “Exits will increase as valuations will be good enough to get a profit on sales and firms will want to divest in such conditions as they intend to raise capital to make further acquisitions.”