Relationships in an Investment Chain
Relationships between actors in an investment chain are important to understand. They can help you identify which actors have the greatest influence over the business managing the project.
At each point in the investment chain, negotiations take place and decisions are made between actors. For example, when a private equity fund decides to invest in a parent company, a negotiation takes place, sometimes publicly, but often behind closed doors. During this negotiation, a relationship is established between the two actors within the chain. The investor might decide how much to invest, and whether to attach any conditions to that investment.
External factors will also shape these relationships and the decisions made by each actor in an investment chain. For example, a country’s laws and policies will affect how much tax the business has to pay, which will affect its profit, and therefore influence an investor’s decision about how much to invest and for how long.
At the upstream end of the chain, the relationships between investors, lenders and parent companies or the business are usually formally agreed and then set out in contracts. These contracts are usually not made publicly available. This is justified for reasons of commercial confidentiality – to safeguard sensitive information that competitors might use for their own advantage.
The relationships established between the business and governments at the midstream part of the chain, such as tax incentives and the terms of land leases or ownership, are also typically formalised through written contracts. Agreements around land use with local communities may be either formal or informal. If communities don’t have formal ownership or use rights, they may be ignored altogether in agreements, a common cause of land conflict.
At the downstream end, the nature of the relationship between the business and buyers varies depending on the product being sold, the size of the transaction, the size of the buyer and the business, and a number of market forces that exist both nationally and internationally.
Where contracts and formal agreements do exist, they are sometimes made publicly available – but this varies from place to place and project to project. Laws and policies in both host countries (where the investment is taking place) and home countries (where the investor or parent company is based) can play an important role in determining what information is made publicly available.
For example, the home country may require that all land leases or investment contracts are made available through a public registry. When legal agreements are publicly available, they provide a very important source of information about the relationship between actors on the investment chain.
The diagram below gives a real-life example of an investment chain for a project in Sierra Leone – a sugarcane plantation, ethanol distillery and biomass power plant producing ethanol and electricity. Ethanol is primarily for export to the European market. Electricity will be fed into the national grid.