Business rescue has a big role to play in encouraging new investment into Africa

Jim Deiotte, EY Africa Tax Leader.

Private equity firms have raised over $25 billion for investment into Africa, but only half has actually been committed. Jim Deiotte, EY Africa Tax Leader, believes that this gap can be attributed to the fact that while investors can see the upside potential in Africa, they cannot quantify the downside. He asked a panel of restructuring specialists at a plenary session of the annual EY Africa Tax Conference in Sandton, how we could change this way of thinking to unlock the investment that Africa needs to unlock its potential.

“The unexpressed fear of the downside risk in Africa could, I believe, be allayed if it was better understood that many African jurisdictions have the regulatory framework to enable companies to be saved rather than just liquidated,” says Deiotte.

Deiotte points out that South Africa’s business rescue legislation is like that of the United States and other developed nations. General Motors and Chrysler both recently restructured and avoided liquidation and have emerged stronger and more competitive. In the same way, the once-bankrupt City of Detroit was able to recapitalise. Today Detroit is attracting new investors and talented people, and is thus undergoing something of a renaissance.

Similarly, we see that the Francophone Africa region, too, benefits from improved and a more clear and consistent framework across 17 countries. As a result, business rescue is used and growing in use, says Eric Nguessan, EY Tax Director in Côte d’Ivoire.

The panellists made it clear that a critical element in using business rescue to save companies largely depends on the maturity of the business environment. Juan Santambrogio, a restructuring specialist at EY USA, who has been involved with the restructuring of the City of Detroit for the past four years, said that it was well understood in the United States that companies had distinct life cycles, and that restructuring was necessary to help them reset their strategies and operations to embark on a new growth curve.

By contrast, South African business is less mature, seeing the need for restructuring as a mark of failure. Being involved in business rescue would be seen as unacceptable, possibly the end of one’s career, observed the panel.

Michael Dorn, Managing Director of AlixPartners, a global restructuring specialist, noted that, “Companies tend to wait too long to act, lessening their ability to remain in control of the process.”

Webber Wentzel’s Robert Appelbaum agreed, saying that he advocated initiating conversations with stakeholders early enough even to avoid going into business rescue. Isaac Mazaba, CEO of Zambia-based Liquid Telecom, said his research showed that by asking the right questions, companies can sometimes identify a looming crisis several years ahead.

The key to successful business rescue, all the panellists agreed, was to convince all the stakeholders that the process would work. “You have to be straight, and deliver on what you promise,” said Dorn. “Communication is also critical,” concluded Appelbaum.