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DealMakers AFRICA Q2 2024 issue
THORTS
Winds of change for sub-Saharan Africa’s energy industry
By Charles Mmasi, Edwin Baru and Alison Mellon | Bowmans
ESOPs: A comprehensive guide for start-ups
By Njeri Wagacha, Rizichi Kashero-Ondego, Sheilla Mokaya and Wambui Kimamo | Cliffe Dekker Hofmeyr
Africa’s deal-making catalysts in 2024
By Seddik El Fihri | Boston Consulting Group
En Commandite Partnerships: A vehicle worth considering?
By James Moody and Mikayla Barker | PSG Capital
CONTENTS
FROM THE EDITOR'S DESK
During H1 2024, West Africa recorded a third of the continent’s deals (excluding South Africa) – valued at US$3,05 billion – of which 57% were executed in Nigeria, and almost half of which were private equity transactions (pg 4). East Africa’s deal activity was significantly down, year-on year, recording 56 deals (from a previous 80 deals) valued at $177 million ($881,4 million) – a trend also reflected in private equity activity within the region at $135,8 million off 30 transactions ($316,3 million off 50 transactions). Private equity deals in general, however, accounted for over half the transactions recorded in H1, a trend visible over the past four years, highlighting the importance of this alternative investment class in driving M&A across Africa.
What is particularly interesting here is that this has been despite the world’s central banks unleashing the steepest series of interest-rate increases in decades over the past two and a half years, in a drive to tame inflation. In an article published by Ashford Nyatsumba and Michael Denenga, partners at Webber Wentzel, changing domicile trends within the market and the provision of alternative funding sources with conditions have been identified as the drivers of new capital streams in private equity and venture capital markets. As asset managers and investors scout for ideal markets to base their funds, what has become increasingly apparent, they say, is the demand for flexibility in fund structure. In the past, funds were able to raise and close quicky, but more recently, it is taking funds up to two years to reach close due to the highly competitive African fundraising landscape. Currencies in key African markets have also shown significant elasticity in recent years, and exit opportunities have remained limited. Consequently, investors are requesting vehicles designed for flexibility and pivots, ranging from parallel structures to continuation funds and feeder funds to widen their basket of opportunities, with a preference for partnership structures which afford flexibility, tax efficiency and limitation of liability. In addition, the number of family offices allocating capital to private equity and venture capital funds has grown substantially in recent years, representing a vital and growing source of capital for a somewhat constrained market.
The largest deal by value recorded by DealMakers AFRICA for H1 was the disposal by Shell of the Shell Petroleum Development Company of Nigeria to Renaissance Africa Energy Company for $2,4 billion (pg 6). Unsurprisingly, of the top 10 largest deals, with a total value of $3,92 billion, three of the transactions were energy related – two of which were Nigerian, and the third, Zambian – the acquisition of a 34.64% stake in Copperbelt Energy Corporation by private equity entities Affirma Capital, Norfund and KLP.
In this issue of the magazine, we include the third release of the Women in Africa’s M&A and Financial Markets Industry feature. The women profiled in these pages – from Ghana, Kenya, Mauritius, Nigeria, Namibia and Uganda – share their inspiring stories of hard work, resolve and determination.
THORTS
From static to supercharged: legal reforms galvanise sub-Saharan Africa’s energy industry
Charles Mmasi, Edwin Baru and Alison Mellon
The energy sector in sub-Saharan Africa (and related legal frameworks) is experiencing some dynamic changes. It is a tough call to decide where
the most exciting developments are occurring, but a few examples spring to mind.
Mauritius, where the Government has pledged to phase out coal and reach 60% renewable energy by 2030.
Or what about Kenya, which is accelerating the transition to electric vehicles by creating a framework for electric vehicle charging and battery-swapping infrastructure, while pursuing a viable carbon trading and credit market?
On the other hand, there is also Namibia, which is overhauling its energy laws and regulations, and Tanzania, which is dramatically changing the way it
approaches public-private partnerships (PPPs) in the power sector.
Then there is Zambia, which recently launched its first ever integrated resource plan, and where the use of green bonds to finance renewable solar projects is on the rise.
And South Africa too, whose electricity industry has already seen a whirlwind of changes and is gearing up for more change as the country embraces competition in the electricity supply market.
Trends to watch on the energy front
These six countries are arguably at the forefront of the latest energy developments in sub-Saharan Africa and, while each jurisdiction has its
own priorities and regulatory approaches, some common trends can be discerned among them.
They include the growing role of PPPs and independent power producers (IPPs), increased interest in the commercial and industrial (C&I) market, and the rise of renewable energy sources.
Paving the way for these and other developments is a raft of new legislation and regulations, some being taken through the law-making process surprisingly swiftly, signalling a sense of urgency in some governments towards achieving energy security.
Charles Mmasi
Edwin Baru
Alison Mellon
In the PPP domain, Tanzania is an interesting example. A key amendment has been made to the Public Private Partnership Act, exempting certain solicited projects from the competitive bidding process. Instead, the change allows the Government to engage directly with individual private parties, which is expected to speed up the execution and delivery of PPP projects.
However, this is subject to strict conditions, urgency being one. Not only must there be an urgent need for the project for the exemption to apply, but the circumstances giving rise to the urgency must not have been foreseeable by the contracting authority. In other words, urgency cannot be manufactured to bypass the
usual tender process.
Moreover, the private party concerned must either own the intellectual property rights to the key approaches or technologies required for the project, or have exclusive rights in respect of the project, with no reasonable alternative or substitute being available.
Kenya, too, is placing increased focus on PPPs in the delivery of energy infrastructure, especially in transmission and generation, where the private sector
can bring expertise, innovation and capital. The country’s Public Private Partnerships Act, which came into effect in 2022, has created PPP processes that are considered
quicker, more flexible and efficient, and less expensive than the previous PPP framework.
Challenges and opportunities for IPPS
Meanwhile, the IPP model is also gaining momentum across the region. In the past 12 months, there has been increased activity in Namibia by IPPs investing in solar projects for industrial use, especially in the mining sector.
Still in Namibia, there has also been an uptick in mergers and acquisitions (M&A) transactions around the acquisition of developers and IPPs, as well as increased
due diligence work in green hydrogen.
In South Africa, where the IPP model was first introduced in 2010, the IPP landscape is in for something of a shakeup. The national utility, Eskom, has implemented its new grid access rules, which change the capacity allocation from ‘first come, first served’ to ‘first ready, first served’.
This creates competitive pressure for the IPPs to complete their projects as soon as possible, but also raises questions about the bankability of the power purchase agreements that had already been signed under the previous regime.
At the same time, South Africa is enjoying an increase in the number of private-to-private IPPs that generate and sell electricity directly to commercial and industrial
customers. Most of these projects involve wheeling through Eskom’s and/ or municipalities’ grids, giving rise to challenges such as the need for bilateral negotiated agreements between the IPPs, the customers and the grid operators, creating considerable contractual complexity.
Other jurisdictions experiencing growth in C&I markets are Kenya, Tanzania and Zambia. The focus has been on solar projects, increasingly financed through green bonds in Zambia’s case.
As for Mauritius, the country is carrying out its ambitious plans to phase out coal and make renewables its dominant sources of electricity within the next five and a half years. The government has already set up several agencies and authorities to achieve these goals, notably the Mauritius Renewable Energy Agency and the Energy Efficiency Management Office.
Like Kenya, Mauritius is in the fast lane when it comes to promoting the use of electric vehicles and reducing carbon emissions. The island has put in place initiatives such as the Solar PV Scheme for Charging Electric Vehicles and the Carbon Neutral Industrial Sector Renewable Energy Scheme. It is also exploring renewable sources beyond solar, such as biomass, hydro and wind.
The winds of change are blowing in the energy industry in sub-Saharan Africa, bringing with them the prospects of industry renewal, sustainable development and
economic growth.
Mmasi and Baru are Partners and Mellon is a Knowledge and Learning Lawyer
in Banking and Finance | Bowmans
Employee Share Ownership Plans (ESOPs): A comprehensive guide for start-ups
THORTS
Njeri Wagacha, Rizichi Kashero-Ondego, Sheilla Mokaya and Wambui Kimamo
Start-ups face fierce competition in terms of attracting and retaining top talent crucial for success, but establishing an Employee Share Ownership Plan (ESOP) can provide a competitive edge to compete with established companies that can afford higher salaries, while conserving resources to grow the company. An ESOP is an employee benefit plan that allows employees to acquire a stake in the company
through shares.
ESOPs take different forms, ranging from a share option plan – where a portion of a company’s shares are granted to the employees as fully paid at a future date
and on meeting certain criteria – to phantom share schemes, where a company provides benefits that mirror ownership of shares without any legal transfer of shares.
This article discusses the considerations when setting up an ESOP, and the benefits to start-ups.
IMPORTANT CONSIDERATIONS
Vesting
There are two critical dates when establishing ESOPs: the grant date and the vesting date. These determine the relevant date for the determination of the market
value of the shares in a company. The grant date is when the company gives the option of the shares to the employees, while the vesting date is when an employee
acquires the full benefit of the shares upon meeting specified conditions.
The vesting period is the time between when an employee is granted the right to purchase and when the employee can actually buy the shares. A vesting schedule outlines when employees can exercise the option to purchase shares. This can take the form of ‘cliff’ vesting, where full ownership happens after several years, or a milestone or ‘graded’ vesting, which allows for gradual accumulation of ownership over time, such as a certain percentage after two years and then for subsequent years until the shares are fully vested in the employee.
Regulations
In Kenya, there are no specific regulations for ESOPs. However, the Capital Markets Authority’s (Collective Investment Schemes) Regulations, 2001 (Regulations) require public entities establishing an ESOP to be structured as a unit trust with a comprehensive trust deed and rules. As best practice, private companies aim to meet the standards required by the Regulations. A private company must, however, ensure that an ESOP is allowed by the company’s memorandum of association and approved by the board and shareholders.
It is also important to note, when structuring an ESOP, that the Finance Act 2023 grants relief for start-up employees, as they do not have to pay tax immediately on the shares acquired under an ESOP.
Njeri Wagacha
Rizichi Kashero-Ondego
Sheilla Mokaya
Wambui Kimamo
Tax is due when the employee gains a financial benefit, either at the vesting or exercising stage. The benefit is determined
by the market value of the shares on the earliest of (i) five years after the award of the shares; (ii) the disposal of the shares by the employee; or (iii) cessation of
employment.
To benefit from this relief, the start-up must have been incorporated in Kenya for less than five years, have an annual turnover below KES 100,000,000, and not offer management or training services or have been formed after restructuring an existing entity.
Exiting employees
Generally, when an employee leaves before the shares have vested, any unvested option lapses. However, the scheme can provide partial vesting based on the length of employment or other specified criteria, taking into consideration the circumstances of the employee’s departure.
The ESOP can outline ‘good leaver’ provisions; that is, where an employee leaves because of serious illness, retirement, or resignation due to relocation, the employee may still be entitled to the full value of the vested shares. In the case of unvested
shares, the employee may be granted the right to exercise the option in the future. In the alternative, a ‘bad leaver’ provision covers situations where an employee is
terminated for misconduct or fails to meet performance standards, whereby the employee will be subject to a reduced value or no value at all for their vested options.
Termination
A company may terminate an ESOP scheme due to financial difficulty, a change in industry affecting the business, or based on a merger or acquisition. Terminating the ESOP must comply with regulatory requirements and the scheme establishing instruments, especially when it comes to the valuation of the shares. Common methods include full or partial distribution of benefits to participants, allowing them to exercise their rights within a specified timeframe, especially considering the tax implications for the employees. Alternatively, the ESOP scheme can provide that all
shares are fully vested to the participants of the scheme on termination, or the company can propose a freeze of the ESOP for a certain period until a change in
circumstances.
ADVANTAGES AND DISADVANTAGES
Advantages
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Financial conservation: offering ownership stakes in lieu of high salaries conserves financial resources by offering a flexible compensation structure without straining cash flow.
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Employee retention: gradual ownership helps retain top talent, ensuring continuity and stability
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Morale and alignment: an ownership mindset encourages a collaborative and inclusive workplace culture.
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Increased productivity: ownership incentives motivate employees to dedicate themselves fully to the company’s success, leading to higher productivity and improved performance outcomes.
Disadvantages
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Dilution of ownership: issuing equity to employees dilutes the ownership stake of founders and investors, potentially restricting control over strategic decisions. A phantom share scheme would be preferable, as it does not grant legal ownership of shares.
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Share price fluctuations: higher share prices are dependent on the company’s performance. ESOPs are beneficial to employees of companies that produce predictable and consistent financial results. This might be difficult for start-ups, making the ESOP less beneficial for retaining employees.
Striking the right balance between ESOP compensation and cash compensation is essential to ensure employees can meet their immediate financial needs while still being incentivised by the ownership opportunity. Therefore, founders need to be clear on the aim of the ESOP based on their industry, and carefully consider the structure that will benefit both the entity and the employees.
Wagacha is a Partner, Kashero–Ondego a Senior Associate, Mokaya an Associate and Kimamo an Intern I CDH Kenya
THORTS
Africa’s deal-making catalysts in 2024
Seddik El Fihri
Mergers and Acquisitions (M&A) activity is a key indicator of economic health, and we believe that the M&A climate in Africa could be influenced by five major mega-trends in the coming years.
The first of these mega-trends is the increasingly important role that technology, including Generative Artificial Intelligence and digital transformation, will play. Supported by rapidly accelerating smartphone penetration, these new tools will facilitate a faster exchange of ideas and business opportunities.
This segues into the second trend, which is known as “Generation Alpha” – people born after 2010 – and speaks to the fact that Africa has a young population and a growing middle-class.
Seddik El Fihri
For organisations looking for growth markets, the African continent will largely fuel the global population growth in the coming decades, representing a huge opportunity for corporate development.
The rise of the green economy and the just energy transition is a third driver of transactions. There is currently a US$214 billion annual investment gap to meet Africa’s climate funding needs, and this will provide a range of opportunities for energy infrastructure from solar, wind, hydrogen and gas.
The fourth trend is geopolitics, as the world shifts from a Western-dominated economy to one where the likes of China and India play increasingly more important roles in the global political and economic spheres. Blessed with natural resources, Africa has been a focal point for countries looking for access to key minerals – including those involved in the fields of electric vehicles and battery
storage businesses.
Further, we can expect the relocalisation trend to continue to gather pace as global supply chains are adapted to meet the demand for these new industries and trade routes.
On top of this, Africa has also sought to take its destiny into its own hands through the conclusion of a variety of trade deals, including the African Continental
Free Trade Area (AfCFTA), which aims to stimulate regional trade. By shifting from an extractive economy, to one which focuses on value-adding activities, we can expect to see sectors like pharmaceuticals and agri-processing attract investment.
The fifth trend is the rise of public-private partnerships (PPPs) on the back of a rapidly evolving global debt environment, which has been influenced by elevated interest rates and inflation. African countries are struggling to pursue their investment agenda and deal with their public debt. These countries are now exploring
PPPs for funding infrastructure initiatives. Examples of these include railway projects connecting East Africa and the development of ports in East and Southern Africa.
To better understand the level of M&A activity, one of the exciting new innovations introduced by Boston Consulting Group (BCG) is the M&A Sentiment Index* which provides a valuable snapshot into deal activity across the globe.
The M&A Sentiment Index provides a monthly update on dealmakers’ willingness to engage in mergers, acquisitions and divestitures over roughly the next six months. Based on current data, it indicates a mixed outlook for dealmaking activity through the end of 2024. The current index value of 78 is below the ten year average of 100, but the market has recovered significantly from the low point of 62 in November 2023.
North America remains the centre of attention for dealmaking activity with 61% of transactions, while Europe has reported a healthy 23% increase, compared with the
first 6 months of 2023; the UK, Sweden, Spain and the Czech Republic are all enjoying a robust 2024.
While the African market has faced numerous challenges, there are signs that activity is starting to pick up again, with some large transactions capturing the imagination and signifying a shift in confidence.
In South Africa, Canal+ France SA has made a $2,6 billion bid for broadcast operator MultiChoice, while Nigeria has seen Renaissance invest in the Shell Petroleum
Development assets in a deal worth $2,4 billion.
While smaller in scale, other interesting deals include the Carlyle Group bidding for the Energean Egyptian portfolio, the Saham Group investing in the Société Générale
Marocaine de Banques SA business in Morocco, and Hennessy Capital investing in Namib Minerals.
As investment confidence returns, this is resulting in further commitments to exploration activity, which may unlock more transaction opportunities.
The recent $49 billion bid from BHP for Anglo American highlights that there is appetite for big deals, and the provision for Anglo American to divest from its South
African assets was an interesting element to the transaction.
The recovery in valuations is bringing buyers and sellers closer together. Large transactions, such as the MultiChoice deal and the BHP bid for Anglo, showcase that
executives are getting around the table and discussing opportunities. For bourse operators such as the JSE – the most advanced of the stock markets in Africa – this
is encouraging, as they have a number of businesses trading on un-demanding price to earnings multiples. There are numerous world-class assets across a variety of
sectors, including financial services, telecommunications and resources which are all trading at discounts to their developed market peers, but these assets will attract
investor interest as confidence returns.
Despite the risks and opportunities in a fast-changing environment, we believe that the aforementioned factors, combined with a more favourable interest rate
environment and growing business confidence, could drive increased investor interest in the African continent.
El Fihri is Managing Director and Partner | Boston Consulting Group, Casablanca
*https://www.bcg.com/collections/publications/m-and-a-sentiment-index
En Commandite Partnerships: A vehicle worth considering?
THORTS
James Moody and Mikayla Barker
Structure Overview
South Africa is often referred to as the business gateway to the African continent due to its strategic location, advanced infrastructure, diverse economy, regulatory environment and skilled workforce. Parties looking to set up an investment structure in South Africa to tap into this market generally have a choice between: (i) incorporating a limited liability private company; or (ii) setting up a partnership, with the latter rising in prominence over the past decade.
The two main categories of partnerships are general (en nom collectif) and extraordinary partnerships. Extraordinary partnerships can further be divided into anonymous and en commandite partnerships (ECPs), with both sub-categories possessing unique characteristics, and catering to different business needs and strategic goals. This article will focus on the role ECPs can play in unlocking capital in South Africa for deployment into Africa.
En Commandite Partnerships
ECPs are carried on by two or more partners, comprising (i) a general or managing partner (GP) which is the named partner, responsible for the management of the partnership; and (ii) one or more limited partners (also known as commanditarian or en commandite partners), whose name(s) is/are not disclosed (LPs). LPs are, generally, silent partners who contribute a fixed sum of money to the partnership, on condition that they receive a share of the profit (to the extent that there is a profit); but in the event of loss, they are liable to their co-partners only to the extent of the fixed amount of their agreed capital contribution.
James Moody
Mikayla Barker
ECPs are widely used in South Africa, due to their unique ability to combine the expertise and management skill of GPs with the capital and limited liability of LPs.
Entrepreneurs can utilise ECPs to attract passive investors looking to generate returns without being actively involved in the management of the business, and who wish to remain anonymous. In return for their investment, the passive investors can leverage off the expertise of the general or managing partner to help generate economic returns.
Considerations before creating an ECP
While offering numerous benefits, ECPs also pose some potential drawbacks. Understanding these differentiators is crucial for investors when deciding on the appropriate structure to pursue. The table below highlights some of the benefits and potential drawbacks associated with ECPs.
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Fund set up as a limited liability partnership (ECP), but can also be set up as a trust.
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GP Co sets up the fund (with GP Co having potential empowerment credentials if required to benefit using flow-through principle).
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Manco appointed by the GP Co as the investment adviser to the Fund. LP appoints an investment committee (IC) to approve investment decisions.
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Investors are LPs to the Fund. Investors contribute capital or assets to the Fund.
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GP Co is the GP, and the vehicle earns the carried interest (which is essentially the profit share for the GP’s performance). The carried interest is then distributed to Manco, to the extent that Manco is a shareholder in GP Co.
ECPs play a key role in corporate finance by providing a flexible structure for capital raising, profit-sharing and risk management, with a reduced administrative burden. In practice, it has been seen that some investors have recently favoured the conversion of partnerships into permanent capital vehicles (PCVs), allowing an unlimited time horizon for investment and realisation without pressure to realise assets within a certain period.
In the current landscape, LPs continue to benefit from tax efficiency, risk mitigation, and access to specialised expertise. This makes ECPs a valuable tool for businesses seeking capital for strategic initiatives and growth.
By leveraging the advantages of ECPs effectively, businesses can navigate the complexities and demands of the modern business environment while generating value for various stakeholders.
A trusted advisor with relevant practical experience, such as PSG Capital, is a crucial link in helping entrepreneurs and investors navigate the permutations of an ECP structure to ultimately maximise utility for all parties involved.
Moody and Barker are Corporate Financiers | PSG Capital
1 Comprehensive Guide To Dividends Tax (Issue 4), p 50, SARS.
