To continue to be competitive, South African companies need to develop a presence in selected jurisdictions offshore. This enables them to acquire new skills as they interact with foreign competitors on their own turf, says Ian Matthews, executive director of integrated equity and debt company Bravura.
Previously this was an expensive exercise, but the strong rand has provided a window of opportunity that an increasing number of local companies are pursuing. In addition, the minister of finance recently removed the limitations on offshore investments, further facilitating international activities.
"There is a much greater openness on the part of the local authorities to allow South African companies to develop a presence offshore and gain experience in markets other than the traditional African and Southern African markets," says Matthews.
This trend means that corporate finance and advisory houses have to ensure they have the skills to follow their clients into the international arena. To this end, houses are also setting up offshore operations and cutting their teeth on international transactions.
"Because they are increasingly encountering global competitors South African corporations are having to build capabilities offshore and invest capital offshore in order to retain their competitiveness in the South African market and develop skills and strengths offshore as well," says Matthews.
If a company takes this route and looks at such opportunities, adroit corporate structuring and the use of appropriate financial instruments become extremely important. "These factors can ultimately determine the financial success or failure of such projects."
Matthews says debt is often the right route to go, particularly where countries take a `group-wide` approach to funding and investment as regards matters such as tax, legal and regulatory requirements. For example, in the UK a group of companies is treated for tax purposes as a single entity if all the companies are held more than 75% by the parent company.
The use of instruments such as preference share funding, debt funding and even to a certain extent private equity funding may also assist the South African corporate in having a substantially larger exposure to foreign investments than would otherwise be the case.
"Foreign markets tend to have a greater risk appetite than SA, which means that one could look at a greater level of mezzanine and risk funding than one would expect to find in this country. It is not unusual to find in a foreign jurisdiction that debt and quasi-debt instruments make up anything up to 80% of the purchase price of the business. In addition, a substantially advanced company law system, which allows the assets of the company to become collateral in a share acquisition transaction, simplifies the raising of debt based on the acquisition of shares."
Commenting on the regions that South Africans are exploring, Matthews says that in the past South African companies favoured the US or the UK. But in the last few years this has changed and the Far East, in particular China and South East Asia, are now destinations of choice. Australia is another popular target, particularly given SA`s long mining history and the numerous mineral and mining opportunities on that continent.
Matthews advises that corporate governance always remains a key issue for companies to pay particular attention to, especially in light of the number of corporate scandals that continue to make international news.
"Certainly corporate financiers have a role to play in terms of advising their clients to approach each and every transaction in the most appropriate legal and ethical way."
Matthews says companies needn`t focus solely on the larger international houses when selecting a corporate financier or advisor. "Boutiques by definition are focused on providing tailored solutions whereas the larger international houses tend to be product providers."
Furthermore, boutiques access a wide range of counterparties, which gives them the edge when it comes to obtaining more competitive and user-friendly products, Matthews concludes.
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