IS AFRICA DONE WITH FOREIGN INVESTMENT BANKS? (LIA vs. Goldman Sachs)
On the 14th of October 2014 Reuters News reported that Goldman Sachs (GS) had successfully fought back against a $1.2 billion claim brought by the Libyan Investment Agency (LIA). The suit brought by LIA the aggrieved party hinged on alleged undue influence and unconscionable bargaining both facilitated by oppressive and overreaching contract terms put in place by GS. Holding in a London courtroom for seven weeks, the High Court Judge Vivien Rose held that both LIA and its attorneys had exaggerated the naiveté of LIA management staff and their inability to understand the risky and speculative nature of the trade they were agreeing to. This just confirmed the assertion by GS that it was neither responsible for the choice of nine derivative trades selected by LIA nor was it GS’s responsibility to ensure that LIA had competent staff who were “sophisticated” enough to understand the risk associated with the trades in question. GS in its defense held that the transaction was an arms length transaction and the loss was as a result of an unforeseen economic depression. GS is reported to have netted $220 million in trade commissions, a big payday by all standards for the American bank.
The past two decades have been characterized by European and American Investment Banks with no apparent physical presence in Africa playing an increasingly significant role in filling the void created by the growing need for and absence of reputable African Investment Banks. Investment Banks play an important role of assisting African governments raise Euro/Dollar bonds to finance their budgets, significant outstanding foreign debt nearing maturity and important large scale infrastructural projects. Same foreign firms have also played a key role in assisting governments and Sovereign Wealth Funds (SWF) invest revenues generated by the sale of primary resources especially crude oil. Not so long ago these forecasted rainy days looked far away into the distant future until recently, when oil prices started taking a tumble from $100 to between $50 and $40 per barrel. This current drop in prices is a result of a supply glut in the market. A supply glut initially created by American and Canadian crude and later from OPEC’s refusal to cut supply to drive prices up.
While the $1.2 billion loss experienced by LIA in no way cripples the LIA whose AUM currently stands at $67 billion, the occurrence has turned out to be a very expensive lapse in judgement by LIA and a dent in the prestige of the Libyan people to be taken advantage of by a foreign bank. It is still common practice for foreign investment banks and advisory firms to be used in Africa. The question is for how long? The answer is deceptively simple and straight forward; until there are reputable advisories and investment banks on the ground capable of effectively addressing the increasing need by governments, sovereign wealth funds and multi national companies.
Africa is currently experiencing a steady return of African born bankers trained at top American and European business schools, endowed with stellar experience and deal making track records drawn from the world’s top banks to fill the void that exists in Africa. Reference here is being made of seasoned bankers looking to gradually build a robust corporate and investment banking industry in Africa. Given that there is more than enough room for foreign and local bankers to operate, there is bound to be an improvement in services offered by investment banks going forward due to increasing competition. The author estimates that It will be another decade before local investment banks can out compete foreign banking giants looking for business opportunities in Africa. The LIA case will no doubt serve as a cautionary tale to those looking to foreign entities for corporate finance needs. Government will be encourage to hire more experienced and trained staff, require foreign banks to partner with competent local firms and also update the bidding requirements/laws in this area.
To better protect their emergency funds, governments and sovereign wealth funds are better off hiring firms (local or foreign) who have their interest at heart, take time to provide full disclosure on product offerings, have strong internal regulations to discourage fraud and bribery as part of their business practice. Firms in contention for such deals must be compelled complete a relative risk assessment of what customer is requesting such that customers are aware of what they are getting into. These requirements in no way excuse governments and SWFs from performing in house due diligence and proper background checks on the firms they intend to do business with. Part of the due diligence process would include a robust chain of approval for significant deals as was the situation in the LIA case.
LIA to conclude, is still not out of the woods as they are scheduled to battle it out in court with Societe Generale (SocGen) a French bank with whom they also had some transactions which resulted in an even bigger loss of $2.1 billion. Should LIA lose this case and a “likely” appeal in the GS case, LIA would have lost a total of $3.3 billion in transactions with two of the “best” known Investment Banks. Do governments in the developed world experience such transaction losses? This author was not able to find one similar that of LIA.
While Africa is definitely not done dealing with European and American bulge bracket Investment Banks, there is no doubt that relationship will be looked into closely and with caution going forward especially from the perspective of African governments and sovereign funds.