Beyond Borders: Diversifying British Business and Finance in Africa – Examining Successes & Setbacks

Inbound and outbound value creation opportunities for UK companies and investors within emerging markets in Africa are plentiful, as the continent boasts abundant natural resources, a large and growing consumer market, and a young and increasingly educated population.

With limited growth opportunities in the UK and Europe compounded by Brexit creating uncertainty around the UK's trade relationships with Europe, diversifying into new markets is becoming increasingly important to British companies, financial sponsors, and institutions. Africa presents a significant and rapidly growing market for UK companies to tap into and help reduce their reliance on traditional domestic markets.

With a population of over 200 million, Nigeria is the largest market in Africa and could grow into the world's third-largest country by 2050 with the right policy and investment framework. The country is rich in natural resources such as oil, gas, and minerals. In addition, its agriculture sector is growing, and there is a significant need for infrastructure development, particularly in the power sector. According to the International Trade Centre, UK exports of goods and services to Nigeria were only worth $2.1 billion in 2020, in comparison to other European states like the Netherlands and Belgium with exports worth $3.3 billion and $2.6 billion respectively. A case could be made that given the rich history and cultural ties between the UK and Nigeria, it would make sense for the two countries to have a stronger trade relationship in comparison to other European nations.

Kenya is one of the most developed and diversified economies in East Africa, with a growing middle class and a thriving entrepreneurial ecosystem. The country's most prominent industries include agriculture, manufacturing, and tourism. According to the Kenyan government, UK direct investments in the country totaled £2.7 billion in 2019.

Ghana is a stable democracy with a diversified economy that is rich in natural resources, including oil, gold, and cocoa. The country has made significant investments in infrastructure and is becoming an increasingly attractive destination for foreign direct investment. According to the Ghana Investment Promotion Centre, the UK was the second-largest source of foreign direct investment in Ghana in 2019, with a total investment of $135.5 million.

Ethiopia is one of the fastest-growing economies in Africa, with an average annual GDP growth rate of 10.3% between 2006 and 2016. The country has made significant investments in infrastructure, particularly in the power sector, and is the largest coffee producer in Africa. According to the International Trade Centre, UK exports of goods and services to Ethiopia were worth $182 million in 2020, in comparison to other European states like Germany and the Netherlands with exports worth $530 million and $196 million respectively.

Rwanda is one of the fastest-growing economies in Africa, with a well-developed and business-friendly regulatory environment. The country has made significant investments in infrastructure and is becoming a hub for technology and innovation. According to the Rwanda Development Board, UK direct investments in the country totaled $223 million in 2019.

South Africa is the second-largest economy in Africa and has a well-developed financial and legal system. The country is rich in natural resources such as gold, diamonds, and platinum, and has a well-established manufacturing sector. According to the International Trade Centre, the UK with $5.6 billion worth of exports in 2020 was largest European exporter to South Africa.

Success Stories Underscore the Thesis

The potential of the African continent as destination for UK companies and investors in search of growth and innovation, is demonstrated by several successful collaborations and expansions in recent years.

Diageo, a UK-based multinational alcoholic beverages company, has been operating in Africa for over 50 years. The company has recently expanded its operations on the continent, including the construction of a new brewery in Kenya and the acquisition of a majority stake in South Africa's United National Breweries. Diageo's efforts to create a diverse and inclusive workforce in Africa were recognized in 2020 when the company was named one of the top 100 most diverse and inclusive companies in the world by Refinitiv.

Standard Chartered Bank Chartered, a UK-based multinational banking and financial services company, has a long history of operating in Africa. In recent years, the bank has expanded its operations on the continent, including the opening of new branches in countries such as Nigeria and Kenya. Standard Chartered has also been collaborating with African fintech startups to provide innovative digital banking solutions to consumers across the continent. The bank played a key role in financing the Mombasa-Nairobi Standard Gauge Railway in Kenya, a major infrastructure project designed to improve transportation and trade across East Africa.

@M-Pesa, a mobile money platform developed by Vodafone and Safaricom PLC, a Kenyan mobile network operator, has been a huge success story in Africa. Since its launch in 2007, M-Pesa has expanded to several African countries and has transformed the way that millions of Africans conduct financial transactions. In 2022, the platform had over 50 million active users in Africa.

CDC Group plc Group, a UK-based development finance institution, has been investing in Africa for over 70 years. The institution has increased its investments on the continent in recent years, with close to £2.2bn in total in African businesses between 2020 and 2021. CDC Group has also been collaborating with African partners to support the growth of local businesses and promote sustainable development in Africa.

Actis is a private equity firm that invests in growth markets across Africa, Asia, and Latin America. The firm has had several successful investments in Africa, including its investment in Azura Power, an independent power producer in Nigeria. Actis helped to finance and develop the power plant, which now provides electricity to millions of Nigerians.

Helios Investment Partners is a private equity firm that focuses on investing in Africa. The firm has had several successful investments in the region, including its investment in Interswitch, a Nigerian payment processing company. Helios helped to finance Interswitch's expansion into new markets, and the company is now one of the leading payment processing companies in Africa.

These success stories demonstrate that with careful research and due diligence, there are significant opportunities for growth and innovation on the African continent. UK companies and investors that are willing to invest in Africa and collaborate with local partners can create a positive impact on the continent while achieving business success.

Setbacks Provide Valuable Lessons for Future Explorations

However, as with any business venture, there are risks and challenges that need to be taken into consideration. Lessons learned from experiences of UK companies previously in Africa can guide future investors and help them navigate the unique challenges and opportunities that the African market presents. By heeding these lessons, UK companies can increase their chances of success and minimize potential risks when entering the African market.

Barclays is one of the UK companies that had previously invested heavily in Africa, including buying a majority stake in Absa Group, a South African financial services company, as it expanded its operations across the continent. However, with pressure from its shareholders to focus on its core markets in Europe and the US, and to simplify its business, Barclays announced that it would cut back its presence in Africa as part of a strategic review. In 2018, the bank sold its African operations to Absa Group Limited, citing concerns over profitability and tougher regulatory requirements. The lesson learned here is that long-term profitability and sustainability must be carefully considered when expanding into Africa. Also, short-term decisions based on shareholder pressure can lead to missed opportunities and a lack of return on investment.

In 2007, Vodafone acquired a controlling stake in Ghana Telecom, Ghana's largest mobile operator. However, the acquisition proved difficult to manage, with issues arising around the integration of Vodafone's systems and processes with those of the Ghanaian company. This resulted in a decline in the quality of service, leading to customer dissatisfaction and loss of market share. Vodafone later agreed to  sell its stake in Ghana Telecom to the Ghanaian government at a loss. The lesson learned here is that a clear, comprehensive integration plan based on credible operational due diligence is just as essential as deal structuring when conducting cross-border M&A transactions, especially into emerging markets. Cultural differences and a lack of local knowledge can also become significant challenges if integration teams are unprepared.

Lonmin Plc, a UK-based mining company, had operations in South Africa and experienced a number of setbacks, including a protracted labor dispute that led to the deaths of 34 miners. The incident, referred to as the Marikana massacre, damaged the company's reputation and contributed to its financial struggles. In 2018, the company was acquired by Sibanye-Stillwater, a South African mining company. The lesson learned here is that the natural resource extraction sectors in Africa can be challenging, with issues around labor relations, safety, and regulatory compliance. UK companies operating in these sectors should be prepared to engage in constructive dialogue with local communities, build strong relationships with a broad base of stakeholders, and operate in a socially responsible manner.

In 2017, Shoprite, a South African retail company that operates in several African countries, partnered with Steinhoff, a UK-based multinational retailer, to create Africa's largest retail conglomerate. However, the partnership failed in 2020 when Steinhoff was hit by an accounting scandal that led to a sharp drop in its share price. Shoprite subsequently terminated the partnership, with the two companies entering into legal proceedings. The lesson learned here is that conducting thorough due diligence on potential partners and carefully considering the risks and implications of partnerships and collaborations is essential for both parties. Both the developed and emerging market companies have an obligation to their shareholders to protect their interests.

De Beers, a UK-based diamond mining company, has a significant presence in Africa, with mines in Botswana, Namibia, and South Africa. The company has faced criticism for its impact on local communities and the environment, including allegations of forced resettlement, pollution, and human rights abuses. In recent years, De Beers has made efforts to improve its social and environmental practices, including establishing partnerships with local communities and investing in renewable energy. The lesson learned here is that foreign companies operating in Africa need to be aware of the social and environmental impact of their operations and take steps to mitigate any negative effects. This can include engaging with local communities, establishing sustainable supply chains, and investing in renewable energy and other environmentally friendly practices. Building a positive reputation and maintaining good relationships with stakeholders is essential for long-term success in the region.

In Conclusion

Creating value via exploration of the Africa markets can be challenging, but many UK companies have been successful in doing so. To avoid failure, consider the long-term sustainability and profitability of your expansion and/or investment plans, conduct thorough due diligence on potential partners, have a solid integration and/or operational plan in place, be committed for the long term, understand the local market, build strong relationships with local communities, and operate in a socially responsible manner. By taking these steps, UK companies and financial sponsors can position themselves for success in the complex and rapidly evolving emerging markets.