6 Legal Questions Regarding Private Capital Investment in Africa

Ellington Arnold
Manager, U.S.-Africa Business Center, U.S. Chamber of Commerce

Published

March 09, 2023

Africa’s business potential is enormous: the continent is home to a rapidly expanding middle class, burgeoning youth population, and the majority of the world’s arable land. The U.S. Chamber is highlighting how U.S. businesses can better understand investment trends, opportunities, risks, and strategies unique to African markets. With Africa set to become home to 1 in 3 of the world's consumers by the end of the century, America’s small business owners have ample opportunity in tapping into Africa’s tremendous economic potential.

However, expanding overseas isn’t always easy. Small businesses are challenged by lack of information and capital, and barriers to market entry. That’s where Advance with Africa comes in. Through discussions, panels with experts, and interactive Q&As with public and private sector leaders, as well as through online resources, Advance with Africa increases U.S. businesses’ understanding of investment opportunities in African markets. With a focus on engaging small- and medium-sized enterprises and Black- and minority-owned businesses — Advance with Africa is creating equitable growth for businesses, while dispelling myths and transforming the narrative around the continent.

Among the misconceptions Advance with Africa encounters are those around investment. Private capital investment firms can be a vital source of funding for small businesses, as they are often willing to assume more risk than traditional lenders in pursuit of higher returns on their investments. This means that small businesses that may not have a long track record or significant assets to use as collateral may still be able to obtain funding through private capital investment, which can be a key resource to accessing new markets.

Given the importance of investment for any business looking to expand into Africa’s booming growth markets, it is imperative to understand the continent’s private capital investment landscape. That is why Advance with Africa has strong public- and private-sector partners to help businesses understand and better navigate new markets. Among these partners is DLA Piper, a global law firm with offices in over 40 countries, including, through DLA Piper Africa, a presence in 20 African countries alone. To break down some complex topics, I spoke with Kevin Nolan, a Partner at the law firm, to explain investment risks and opportunities that U.S. businesses may encounter in African markets.

Question: How would you respond to U.S. businesses who view investment in Africa to be risky?

Answer: My view on that question is the opposite. It is risky for a U.S. business to have a global strategy that does not intend to invest in Africa. Africa is on track to have a population of 2.5 billion people by 2050. The business opportunities in connection with such growth should have U.S. businesses beginning their process of engaging with Africa now.

Q: What are the biggest misconceptions or myths you must dispel for clients about African markets?

A: The biggest misconception regarding the African markets that I must dispel is that such markets are not sophisticated. There are highly sophisticated markets and market participants in Africa. Those participants are engaging in complicated transactions with service providers that have the capabilities to provide excellent service in connection with such transactions.

Q: What are the most common transactions you see in your work? What drives the demand for those transactions?

A: The most common transactions in my work are investments by Development Finance Institutions (DFIs) into infrastructure funds with an Africa focus. These investors have missions to make a positive impact in such jurisdictions and improving the infrastructure is one of the most tangible ways to have such impact. To the extent better roads, bridges, and related facilities can be improved in Africa, it will set the baseline for future economic growth as businesses will have easier access to receive supplies and deliver products.

Q: What challenges are unique to investing in Africa, and how do you and your clients meet them?

A: One of the challenges that is unique to Africa is the depth of the private funds industry. As I assist my clients with such investments, there are not as many players in that sector of the African market as you would find in the U.S., Europe, and Asia. Also, there are not track records of 20+ years of fund managers delivering consistent returns. Therefore, this raises the risk profile and deters some institutional investors who need such metrics to invest, leaving DFIs as the primary investors in African private investment funds. This has started to change as some institutional investors are starting to view African private investment funds through revised metrics that take into consideration the current landscape of investing on the continent.

Q: What is one key lesson learned or common pitfall you have seen new market entrants make that can either be avoided or mitigated with proper planning?

A: One key lesson for new institutional investors is to try to leverage other experienced institutional investors in connection with the initial investment. Ideally, this enables the new investor to be able to learn certain diligence and investment approaches to the market from such experienced investors as the new investor builds a knowledge base in such a market. An investor going alone into an investment in a new market without the sufficient team experience can end up spending lots of time on process or items that may not be as relevant in such a market. It also may dismay such investors from further investments due to the frustration from such an experience.

Q: Finally, what are key tools and resources that can be used to ensure your clients have a soft landing once they have entered the African market?

A: One key resource for my clients entering the African market is to network with current institutional investors who have made such investments. This can typically be done through their current network or through referrals. There are also conferences on the continent which bring institutional investors together who make such investments. Most of these conferences have low or no conference fees for institutional investors as such conferences are keen to attract capital allocators to their events. Second, a service provider—such as a law firm or accounting firm—with presence on the continent can help a new investor navigate the market to avoid unforced errors in connection with engagements.

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