THE MANAGING DIRECTOR’S NIGHTMARE
Can Africa sell its image to Managing Directors abroad?

MD’S SPEAK OUT SERIES 
Renee Horne – London 13 June 2011

If you want to invest in Africa, first things first, find yourself a good lawyer, in fact two lawyers, one where your company is based and one in the African country where you will plough cash into.  Second, be patient as you will have so many draft agreements, and three you’ll likely talk to at least three different people to lockdown your deal as an entrepreneur.  That’s the advice from Martin Orji, Managing Director of Nex Rubica Capital, who has dealt with more than a dozen countries in Africa, “Oh Africa, there is a lot of excitement there, that’s what you feed into but you have to force through all the difficulties, but I think when we set up shop and when we had to trade in thirteen different countries in Africa it was a nightmare”.  Orji is one of a chain of exclusive interviews that the World Entrepreneur Society (WES) will bring from Managing Directors of Barclays, Delta Economics, Goldman Sachs and much more in the start of the “MD’ Speaks Out” series. The topics will range  from women and social enterprise, which is the less riskier market to go into, what do Managing Directors find as innovative or is it just about profit and not getting into the red?    

AFRICA’S BUSINESS INTRICACIES  

Orji argues that “In Africa, it is a nightmare because you not just dealing with private institutions locally, you dealing with regulators and also on the political side.  So you have to deal with three different levels when getting into the market. It is difficult getting one group to feed into your vision without being threatened by your entry [into the market].  It is a massive learning curve.  It all includes timing, business etiquette and most important legal agreements. Coming into Africa the first thing you have to do is have a good lawyer, not just outside of Africa but locally and when I say a good lawyer this is one that can understand what your business is all about.  One of things you realise quickly is that you need an agreement that does have the right things, says the right things and has the right signatures in the right way or that agreement is just paper. We have been through many agreements where we have torn it up and had to move on.  Put that down as a cost”.  

THE BUSINESS MASTER 

But who really pulls the strings here? Who is the business master, the African entrepreneur or overseas investor? “It is all about global best practice, and bringing that global best practice to the African continent.  You don’t want to sound patronising or anything and say you don’t know how to do business  - we going to teach you”, said Orji.  So, the old rules still apply, that is for investment to come into your country and in turn entrepreneurs benefit, it’s all about cleaning up your act that is good governance and no corruption.  However, WES has had a series of articles of why the Chinese strike it lucky in Africa as they largely stay out of the continent’s politics. Orji argues, “I think they (the Chinese) have been successful but there have been a few difficulties, especially when it comes to capacity building. The big issue with the Chinese is they come in and do whatever they do, they build the roads and they don’t teach anybody how to do it, and then they leave.  But the Chinese model works.  I think Africa with its political history is very weary of governments and groups that come in and say certain things, because they have been down that road. They have had a lot of problems with various countries and investors coming in saying things and not delivering.  There is no surprise that they will be attracted to groups who say we not here to tell you how to run your business, we here to make money and this is purely capitalism at its finest. The Chinese have got it right but there are still some bad examples of them making mistakes.  However, I don’t think any African country is averse to doing business with any European country. It is a give and take, doing your homework, being prepared to engage, see what each other’s needs are and working as equals,” states Orji.  

THE INVESTORS FOOTPRINT

So how big is your company’s footprint in Africa? “The company trades with thirteen countries in Africa, to name a few; they are Morocco, Nigeria, Egypt, Ghana, Kenya, Uganda, Kenya, and Rwanda.  We provide capital into all these countries through the capital markets and through also other products but in general investment into Africa. We are talking about two classes of investment. So on one level we looking at investment at purely from the capital markets, equity trading, debt trading, and then the other is the more FDI cash markets which is more about lending to projects” said Orji.  Where does your company’s money come from and how much are we talking about?  “It is pretty much from North America and Europe, our clients are basically looking at how they can invest their capital, and a lot of these clients will be pension funds and sort endowment groups, asset management groups who look at emerging markets as an investment proposition. So in terms of size and key destinations, the largest contribution from our pool would be Nigeria, South Africa, Egypt, followed by Kenya.  And they represent about sixty to seventy percent of the flows of what investors or where investors want to go. We looking at tens too billions we looking at for example Alliance and Bernstein which has 250 billion US dollars, one of the largest US assets managers, if you take one percent of that, do the maths that’s how much goes into Africa possibly a lot of zeros”.

FINANCE WHO?

The loans you were talking about whom are you assisting, government or entrepreneurs? “Projects, what you have, is that Africa needs to grow, when it comes to infrastructure that is where the potential is until infrastructure gets to a certain level will private business be able to achieve its full potential. Project finance is not cheap and it is not an immediate event so you don’t see it coming up immediately, you probably won’t get your returns in 18 months. If you look at West Africa, that’s where the problems are in terms of infrastructure, South Africa there’s massive infrastructure in any case”.  So what is the difference when you look at Africa’s regions, in terms of investment? Orji states that “The difference is if you look at regions obviously South Africa is quite advanced when it comes to infrastructure and project finance activity because it has been going on for a while.  If we look at East Africa it is not as advanced as the payback for an investor isn’t as good, there isn’t enough incentive to go there however East Africa has been able to maintain their infrastructure to  a certain degree, they are slightly better than West Africa. Private banks will lend to projects that have some government involvement you might of heard of the whole PPP, public private partnership which seems to be the best model to support infrastructure finance working in West Africa and Africa as a whole.   The problem being is that most African countries have IMF attachments and these preconditions don’t allow them to go to the market to actually get a ten year or eleven year facility”.

SME’s THE NEW BUZZWORD

In the United States, the argument prevails that the backbone of the economy is Small Medium Enterprises (SMEs). SMEs create more employment, what is your view? “I agree, some banks are looking at this, I mean if you can track a company from start up to listed on the stock exchange and in Africa we have seen businesses start from scratch and in less than ten years become billion dollar businesses, now there is definitely an opportunity there, but it is still early days especially when it comes to SME banking in parts of Africa.” argues Orji. Would your institution see any prospects to become involved in SME banking? “Oh definitely, but the difference with SME’s is always about credit administration that’s the major problem.  How do you handle individuals that have no collateral normally, so whatever model you have to use within the SME approach you would have to be prepared for a high loss rate but at the same time know that you may make money.” So that’s the word from MD’s speak out, the question is, do MD’s make the right decisions when it comes to investment, SMEs and ultimately the best business choice for their company? Join us next week in our series, when an “MD Speaks Out’ on social enterprise, as always feel free to murmur, grumble, gripe at these MD positions in our forum.