Magazine article African Business

Scrutining Corporate Governance Is Crucial in Any Investment: Alternative Investors Looking for Projects That Will Deliver Value Cannot Afford to Ignore the Governance Structures of the Businesses Concerned

Magazine article African Business

Scrutining Corporate Governance Is Crucial in Any Investment: Alternative Investors Looking for Projects That Will Deliver Value Cannot Afford to Ignore the Governance Structures of the Businesses Concerned

Article excerpt

The devil, they say, is in the detail, and when it comes to finding the right businesses or projects to invest in, detail is everything.

Right now, the economic conditions for private equity and alternative investors are improving, with more deal flow and better pipeline visibility. Certainly, it's a rosier picture than a few years ago when the global economy slowed, affecting all of Africa, including the major economies.

The announcement in March that the South African economy had grown by GDP 1.3% in 2017 exceeded the National Treasury's forecast of 1% announced in the February budget speech. For the continent as a whole, the African Development Bank (AfDB) is forecasting aggregate GDP growth of 4.1% in 2018.

This renewed economic growth is encouraging, reflecting Africa's status as the world's fastest urbanising continent. We know there will be something like an additional 187m Africans living in cities by 2025. Africa's urban population is projected to grow by 24m people per year over the coming decades.

Such enormous population growth and rapid urbanisation clearly requires considerable funding to deliver new housing, schools, transport, roads, power and other essential infrastructure.

Securing the best investments

With strong demand for new infrastructure (now estimated to require around $170bn a year for the next decade by the AfDB), one of the biggest challenges for those working in alternative investment is sourcing and securing the best investments that deliver value.

This makes pre-investment scrutiny more important than ever, because the challenge is to recoup primary investment costs while still being able to make attractive returns for investors over the longer term.

A key part of our essential pre-finance due diligence looks specifically at governance structures in existing businesses and also directors' attitudes to the importance of governance. More on attitudes below.

Assessing the risk

As the highly successful businessman and philanthropist Mo Ibrahim points out, Africa has to focus on fixing one problem only--and that is governance. This is why his foundation has a prize for good governance by African leaders and has developed a framework and methodology for measuring governance at a country level.

At OMAI, we invest in greenfield-type infrastructure projects as well as in existing businesses. Before any funding is committed, we ask questions and consider issues at various levels pertaining to governance risk.

For example, on a new large power generation facility or a major new toll road we need to find out if it was tendered by government in an appropriate and legal way. …

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