Economy faces valuation dilemma

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PHILLIMON MHLANGA  

Zimbabwe could lose millions of dollars in investment after potential investors called off deals on the southern African nation citing valuation concerns on the domestic economy and an unstable political environment, several distinguished private equity players have indicated.

Zimbabwe has been lagging behind its regional peers on foreign direct investments with inflows averaging US$500 million over the last decade. Policy inconsistency, an unstable currency and overregulation have often been flagged as the reasons for spooking investors.

Government is also looking for new investors to take over several state-owned parastatals that have been haemorrhaging treasury for years. Insiders say valuation of these loss-making entities has been one of the major sticking points.

Following his ascendancy as head of state in 2017, President Emmerson Mnangagwa promised to overhaul Zimbabwe investment environment and relaxed Indigenisation regulations. But that has not been enough to attract capital.

Investment experts said determining the current worth of businesses in Zimbabwe was a big problem. They argued that most of the valuations were merely thumb-sucking instead of being scientific.

Distinguished private equity experts with significant experience in distressed assets, buy-outs, corporate mergers and acquisitions, who spoke at the Institute of Chartered Accountants of Zimbabwe Winter School held in Sun City, South Africa, said problems or risks of valuating businesses in Zimbabwe, which is important to determine the economic value of a whole business for reasons to either establishing partnerships, sale value, taxation or even divorce proceedings, were prevalent in the economy. But, the likely combined losses were huge for Zimbabwe due to valuation problems.

Former Brainworks Capital finance director and chief operating officer, Walter Kambanji indicated the new signs of scepticism saying there were coming to the fore. Some, he said are inflating billions of dollars and the pace of the jump in valuations is baffling.

“For investors, Zimbabwe is not for the faint-hearted,” Kambanje said.

“Investors make assumptions about growth. Private equity investors turn to be vultures looking to raid some value somewhere. To me, the biggest risk in Zimbabwe at the moment is political risk which remains at the very top. Another top risk is valuation of businesses, which is a daunting task. In the past 10 years and most recently, we had a series of currency changes. The valuation is a contestation at the moment as investors disagree on the value.”

He added:“ Definitely, investment is going to take hair cut because of the political and valuation risks. True value on business is becoming a serious problem. Investors like consistency and want to project. What they don’t want is being swinged and where they are not able to predict the future.”

Another investment analyst Fungai Mugoni,who is a partner at Takura Capital said: “From my experience, investors are people who are rational. They are not looking at a shorter period of less than five years. That’s the kind of capital we are looking at in Zimbabwe to get meaningful returns. But, the biggest issue is valuation of businesses at the moment.”

South African based Siyakha Capital Advisors executive director, Mazvita Muradzika,said it was evident that investors smell the opportunities Zimbabwe brings but are shying away largely due to valuation concerns.

“There is potential in Zimbabwe, because there is room for growth, unlike South Africa which is saturated.  However businesses currently don’t have correct values. It’s quite an issue, which threatens potential investors. Another thing is that exiting is key, investors want to repatriate proceeds, but it’s still an issue,” Mazvita said.

Zimbabwe recently scrapped its 1:1 peg between the local currency and the United States dollar and introduced a formal interbank market, effectively ending the multi-currency system which was introduced 10 years ago to tame inflation.

The introduction of the mono-currency regime, according to analysts has had a severe impact on the economy, and has also caused some serious headaches for the accountancy profession in Zimbabwe.

The Institute of Chartered Accountants of Zimbabwe(ICAZ)’s newly elected president, Fungai Kuipa, warned local accountants saying they should play a bigger role in the development of the economy.

“There are areas where we have fallen short,” Kuipa said at the same conference.

 “We have almost become comfortable with living in uncertain conditions, one might even say volcanic. A number of wild beasts roam freely within our country. Beasts like corruption, low foreign direct investment, foreign currency shortages, fuel and incessant power cuts, timely tackling key accounting and auditing issues.

“There is a school of thought that as an institute we came to the functional  currency party a bit too late , more like the invited guest instead of the host.

“What good does it do us to claim to be the pre-eminent professional body, but fail to deliver? He asked.

“What good does it do us if we are labelled as cowards in some circles and fail to rise to the occasion when required. If there is one thing we understand in this profession, its timely deliverables.

“A key criticism has been the radio silence or the delay in response from this body, with regards to  the wild beasts I have mentioned earlier. This has undoubtedly dampened our standing in terms of value we provide both within and outside our institute. I now challenge members that there is no such time as this to regain our footing and participate at various levels of both the  private and public sectors while speaking to the core values of this institution: responsibility, honesty and integrity. Let us reclaim our relevance,” he said.