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Control Risks

Political risk to continue dominance on key consideration for deal-making in Africa

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As Nigeria draws nearer to 2019 elections, indications have emerged that political risk will remain a major concern for dealmakers in Africa in 2018.

This was revealed in a recent report, Resourceful dealmaking: Outlook for M&A in Africa, published by Mergermarket in collaboration with specialist risk consultancy Control Risks.

Only last week Tuesday, the Central Bank of Nigeria’s (CBN) Governor, Dr. Godwin Emefiele announced shortly after the Monetary Policy Committee (MPC) meeting that one of the considerable factors that forced the Committee members to retain all rates is the risk of anticipated heavy spending characteristic of election year in Nigeria.

Business Hilights recalls that Control Risks is a specialist global risk consultancy that helps to create secure, compliant and resilient organisations in an age of ever-changing risk. Working across disciplines, technologies and geographies, everything the company does is based on the belief that taking risks is essential to every client’s success.

There has been a dramatic fall in M&A activity, with declines of 25% in volume and 26% in value in the first half of 2017, compared with a relatively buoyant 2016.

According to senior political risk consultant at Control Risks, Imad Mesdoua, “The drop-off signifies growing investor anxiety surrounding governance issues and weaker economic signals across key African markets. Specifically, political risk and transparency concerns have become the principal obstacles to successful acquisition in Africa. Ethical and compliance considerations are another major factor clouding the outlook for potential investors.”

Key findings of the report show that political uncertainty and relatively weak economic fundamentals have negatively affected M&A activity in Africa. A fall-off in deals was seen in the first half of 2017 compared with a relatively buoyant 2016.

Political risk will be a major obstacle to dealmaking in Africa over the next 12 months, according to 84% of respondents. Other risk factors include transparency concerns and completeness of information, which ranked joint first alongside political risk (84%), as well as compliance and integrity issues (80%).

Almost three-quarters (72%) of respondents say that getting caught up in a regulatory or criminal investigation is one of the highest risks in relation to a target company’s ethics and compliance standards.

Good news though for South Africa, Zimbabwe and Angola: greater political stability and a more favourable economic and business environment are expected to boost M&A activity in the coming year.

72% of respondents are pursuing co-investment strategies in Africa as a means of allocating risk more effectively.

Mesdoua continues “Political risk will continue to pose a major challenge to M&A activity on the continent as several large markets such as Nigeria undertake difficult elections and unpopular reforms to improve their economic outlooks. However, the political uncertainty and weak macroeconomic situation that accounted for fewer deals in Africa’s largest markets in 2017 look set to ease over the coming year as countries such as South Africa, Zimbabwe and Angola begin to stabilise.”

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