Investors cannot fail to recognise the wealth of opportunity that Africa offers. The continent has all the ingredients that make for an attractive landscape for investment, in particular high GDP growth and vast mineral resources, under-pinned by historical under-development, a fast-growing youthful middle class and diversification within regional economies.

However, a legacy of political instability, poor infrastructure, fraud and corruption is suggestive of the obstacles to be overcome by those looking to do deals in this continent.

Specialists from our corporate practice have considered the factors improving investment conditions in Africa and have analysed the key challenges and risks still faced when carrying out African M&A deals.

Improving investment conditions

  • Higher rates of return - African GDP growth is forecast to accelerate to 6% in 2014, in sharp contrast to the figure of 2.2% predicted for advanced countries
  • Peaceful operating environment - although significant uncertainties remain in many African countries, a recent decline in political turmoil and strengthening institutions mean the  general picture is one of gradual improvements
  • Diversification - energy, mining and utilities continues to be Africa's largest sector for M&A activity, however in recent years the consumer sector, TMT and financial services have all witnessed dramatic increases in M&A activity
  • Privatisation - the wave of privatisation programmes announced in recent months will add opportunities to the pipeline for the years to come
  • Population - increasing population size combined with economic growth mean that Africa's purchasing power will continue to grow as its youthful middle class rises

Challenges and risks

  • Complexity - Africa is made up of 54 countries, each with a different legal and political system and unique mixture of native and European languages
  • Logistical difficulties - internet access, distributing large volumes of documents, ability to hold conference calls, language skills, travel
  • Regulation - local content, foreign exchange, merger control and environmental regulation mean there is plenty to consider, a challenge often compounded by a lack of legal clarity, certainty and local experience
  • Government interference - changes of control usually trigger the need to obtain government consent which may necessitate more complex deal structures
  • Bribery and corruption risk - a historical combination of a high degree of influence enjoyed by public officials over significant foreign investment, a lower level of transparency and little prosecution of wrongdoing has made bribery and corruption a significant issue
  • Disputes – difficulties in enforcing judgments and rules on governing law and jurisdiction clauses in legal contracts mean detailed due diligence must be carried out on this aspect

A combination of sophisticated due diligence, experienced advice and careful negotiation can often enable investors to overcome these difficulties.

Moreover, efforts to synchronise fundamental features of the legal landscape such as the Organisation for the Harmonisation of Business Law in Africa's regime on the taking and enforcement of security to support debt finance and the Common Market for Eastern and Southern Africa's regional merger control regime for M&A activity, are steps towards greater clarity and accessibility of the applicable law in these areas.