Business rescue has a big role to play in encouraging new investment into Africa, says EY.
This is because, although private equity firms have raised over $25 billion for investment into Africa, only half of this amount has actually been committed.
Jim Deiotte, EY Africa tax leader, says this gap – of $12.5 million – is because investors are scared of the downside of investing in the continent.
Although they can see the upside potential in Africa, they cannot quantify the downside, says Deiotte. He asked a panel of restructuring specialists, at a plenary session of the annual EY Africa Tax Conference in Sandton, how this way of thinking can be changed 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.
In South Africa, companies now – thanks to the amendment Companies Act – have the option of entering business rescue instead of being liquidated. The process allows them to reorganise and restructure under a business rescue practitioner.
Deiotte points out SA’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.
In a similar way, the Francophone Africa region benefits from improved and a more clear and consistent framework across 17 countries, says EY.
This has led to business rescue being used increasingly, notes Eric Nguessan, EY tax director in Côte d’Ivoire.
At the company’s tax convention, panelists made it clear that a critical element in using business rescue to save companies largely depends on the maturity of the business environment, says EY.
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 it was well understood in the United States that companies had distinct life cycles, and 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.
However, bankruptcies are decreasing in SA. According to Trading Economics, bankruptcies in South Africa dropped from 190 companies in July 2015 to 177 in August.
The research company, which uses figures drawn from Statistics SA, says bankruptcies in averaged 239.46 between 1980 until 2015, reaching an all time high of 511 in August of 2000 and a record low of 63 in May of 1988.
Michael Dorn, MP of global restructuring specialist AlixPartners adds “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 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,” notes Appelbaum.