Private equity remains a popular subject in both anglophone and francophone Africa, but short-term debt financing could have a greater effect in African markets. Financing from lending banks and equity providers comes at a steep cost of 18 to 30 percent.
Mezzanine financing, which is more familiar in Europe and the U.S., will come at a price lower than bank debt and with the business advice and assistance associated with private equity. African business owners are unwilling to give up equity, just like their Western counterparts, and consequentially appreciate the structure of mezzanine financing.
Such mezzanine financing has helped to promulgate private debt markets in Africa, however, largely in anglophone African countries. The francophone African countries (and lusophone African countries) trail their anglophone counterparts when it comes to private debt financing.
This reality is a result of stronger economic growth in Francophone Africa against the backdrop of stalled economic growth in African behemoths, South Africa and Nigeria, and slower growth in East Africa (Kenya and Tanzania).
Investors openly acknowledge that the growth and opportunity, albeit from a smaller base, is in emerging Francophone Africa. Investors and financiers in the African investment space are doing more to understand and transact more in Francophone Africa.
The reality is, however, that many differences and challenges with Francophone Africa are either overstated or simply misunderstood.
The history of some francophone African countries when it comes to politics is hard to ignore. Many of these countries have been pained by civil wars or political conflict. Most notably, the Democratic Republic of Congo (DRC) and Cote d’Ivoire have been embroiled in numerous conflicts in recent years.
An election spectacle ensues in the DRC as many officials and citizens await the next move of President Joseph Kabila while Ivorian President Alassane Ouattara recently dissolved the government amid political infighting.
The political conflict is obviously never positive, but perhaps the end result has the potential to be positive. Regardless, these conflicts are often referenced by individuals within larger international bodies as to why business is tougher in francophone countries. It should be noted that economic growth remains strong in these countries despite the conflict.
Some anglophone Africa advocates have even argued that growth in their countries are troubled more than francophone Africa by corruption and waste (mixed with politics), using South Africa and Nigeria of recent years as examples.
Francophone countries also suffer when international reports are published. Seven of the 10 worst-ranked countries by the United Nations Development Programme (UNDP), in regards to human development, are francophone African states. The last three spots in the report’s ranking are owned by francophone countries—Benin, Niger, and the DRC.
World Bank reports provide similar outputs on doing business in Africa, with many francophone countries lagging in ability to clear imports and collect payments from borrowers.
These type of reports generally provide an opportunity for an unneeded competition between the anglophones and francophones, with many observers overly focusing on the ‘good’ anglophone countries and the ‘bad’ francophone countries.
The reality of the situation is that African investment opportunities are very country and company-specific, such that the generalizations based on language fail to capture the nuisances of investing in African markets while oversimplifying differing results in markets.
British and U.S. lawyers express concerns over the law underwriting private debt markets in francophone Africa. But these concerns should not overshadow the value of the Organization for the Harmonisation of Business Law in Africa (OHADA).
Under this Act, many francophone markets, for example, have seen the introduction of preferred shares, preferred dividend, and double voting rights, among other things. Transfers between the Euro zone and CFA Franc zone were effectively eased under OHADA.
This ease of transfer and currency exchange has been vital to the economic buoyancy of Francophone economies in recent years as other countries encountered economic and currency challenges. Euro investors benefited the most, with currency risk generally avoided in CFA Franc transactions.
Tax regimes have also evolved under OHADA, with many francophone regimes adopting international practice. Even small countries, such as Benin and Togo, have made drastic changes in their tax regions, for example, with exemptions on capital gains.
The changes only further demonstrate the fast maturation of francophone markets and the opportunity for debt investors (and all investors alike). International investors will hopefully see the opportunity more than the challenges. High growth, lower currency risk, and less international players should not be this hard to sell.
Kurt Davis Jr. is an investment banker with private equity experience focused on Africa and the Middle East. He earned an MBA in finance, entrepreneurship and operations from the University of Chicago and J.D. in tax and commercial law at the University of Virginia’s School of Law. He can be reached at kurt.davis.jr@gmail.com.
