South Africa’s largest pharmaceutical manufacturer, Aspen Pharmacare, may have announced a relatively tepid set of annual results for the year ended 30 June 2019, but the anticipation of a reduced debt load freeing up cash flows pushed its share price up 12% the day after its results announcement.
USA: a new investment agency to re-engage with Africa
The new U.S. International Development Finance Corporation's Articles of Association removes major obstacles to the country’s participation in the private equity industry in Africa.
The new institution, which also aims to strengthen American influence on the continent, officially opens in October
David Bohigian, acting CEO of Overseas Private Investment Corporation (OPIC), talking with the Pan-African press on 13 August in Washington, unveiled the strategy of the Development Finance Corporation (DFC), which will combine OPIC and the U.S. Agency for International Development’s Credit Authority.
The DFC introduces major changes in American development finance operations on the African continent.
- As Bohigian pointed out, the agency “will make equity investments, which will be particularly useful in private equity funds across the continent”.
Currently, OPIC, created in 1971, only provides loans and risk insurance.
- According to JA estimates, direct loans accounted for 58% of the $5.8-billion OPIC invested in sub-Saharan Africa at the end of September 2018, compared with 30% in insurance, and only 12% ($700-million) in loans to investment funds (such as Emerging Capital Partners, Phatisa Group, African Capital Alliance)
- The total portfolio of this agency reached $22.8bn in 2018, with a roughly similar distribution.
Bringing agencies closer to their investments
The exclusive use of debt had forced private equity firms to create specialised vehicles and various specific provisions to obtain OPIC financing.
This prevented the American institution from participating in joint operations with its European counterparts such as French Development Agency’s PROPARCO, Germany’s DEG, and Belgium’s BIO, the leading donors of private equity funds in Africa.
- “Equity participation [in investment funds] brings agencies closer to their investments, giving them a place at the table to influence corporate strategy or managerial change,” stressed Devex, the media platform for development institutions, back in October 2016.
In 2013, OPIC lent $150m to the Paris-based investment fund manager Amethis, for its first African fund. Amethis did not renew the loan, which closed in June, stating at the time that it sought a simpler structure with only fund investors.
Despite the recent tumble of African currencies (Nigeria, Egypt, Angola, South Africa), African private equity remains attractive, while rates on the US debt market remain low.
- “We have analysed our investments over the past 30 years, and particularly over the past decade, and they would have been more successful as equity investments than debt securities,” Bohigian acknowledged.
Reactivating American influence in Africa
In addition to the financial argument, a geopolitical interpretation of the creation of Development Finance Corporation is also possible. “For some time now, the Americans have wanted to reactivate their influence in Africa and catch up, especially in terms of influence. In my opinion, this is the main motivation,” said Jean-Sébastien Bergasse, a partner in Amethis.
Major reforms introduced through the new DFC supports this view. OPIC could only support projects with “a significant link with the American private sector”. This restriction has been removed.
- “There are many worthwhile projects around the world that are taking place where American investors and fund managers may have a limited interest,” Bohigian said. A veteran private equity investor involved in the industry for more than 15 years, he said lifting this restriction “and the ability to invest equity will help expand our ability to create stable companies in Africa and around the world”.
Economic and commercial battle against China
The new development institution’s action is also part of the broader economic and trade battle led by the USA against China. Without naming Beijing, the OPIC boss mentioned five criteria for financing development: respect for sovereignty, the use of local workers, environmental protection, transparency, and the fight against corruption and the sustainability of the projects carried out.
- “What will be different with DFC is that, in the first place, we will have a mandate of $60bn [compared to a ceiling of $30bn for OPIC], which, above all, will help attract private sector capital that should represent hundreds of billions of dollars of investment in Africa,” said Bohigian.
“The angle of differentiating oneself from the Chinese – considered predatory – by being responsible investors can bring something comparable to PROPARCO and DEG,” Bergasse admitted, but, he warned, “it now remains to be seen how ambitious the DFC project is, knowing that in the end, the USA knows little about the African continent.”
This article was first published in Jeune Afrique.