Mustapha-Maduakor: Nigeria Has Attracted Private Equity and FDI in Recent Years
The Chief Operating Officer, African Private Equity and Venture Capital Association, Abi Mustapha-Maduakor, in this interview with Nosa Alekhuogie and Nume Ekeghe, gave broad insights into private equity trends in Nigeria. Excerpts:
Could you tell us about the African Private Equity and Venture Capital Association (AVCA) and the specific role the association has played in the industry since it started operation?
AVCA is the pan-African industry body responsible for promoting and enabling private investment in Africa. Our primary role is to act as a champion and effective change agent for the industry – connecting, educating, and empowering members and stakeholders with independent industry research, best practice training programmes, and unique networking opportunities. We are a member-supported organisation with over 140 members, spanning private equity (PE) fund managers, institutional investors, direct investors, professional services firms, government institutions, and other associations.
The African private equity industry has seen significant growth in fund raising, deal activity, and exits over the past five years, and AVCA has played a crucial role not only in supporting but also in reporting this development, particularly through our research. In doing so, the association has been active in demystifying misconceptions around private equity investment and driving the cause for more domestic institutional capital in the asset class. Our remit is broad and our goals are focused; as the private equity industry evolves in Africa, our role becomes increasingly important to drive change.
Tell us about the private equity space in Nigeria. As a leading economy in Africa, Nigeria has naturally attracted private equity and foreign direct investment in recent years. Through regulatory developments, tax incentive schemes, and efforts to ensure that Nigeria is more investment-friendly, PE deals in Nigeria are currently at solid levels and the main industry players are actively executing deals and exits. In 2016, Nigeria accounted for approximately 14per cent of private equity deals on the continent, which demonstrates a slight increase since 2015. Despite burgeoning activity in the country, we find that there are a few challenges in the investment space, such as exchange rate fluctuations, relatively high valuations, limited public information, and competing opportunities within deal sizes.
However, through extensive due diligence, robust transactional risk insurance and improvements in fiscal policy clarity, fund managers can mitigate risks and demonstrate to international institutional investors that Nigeria remains a ripe market for investment.
Private equity investments in Nigeria are centered on the evolving consumer story. With a large and growing population, fund managers can capitalise on consumer driven growth sectors when making investments. More specifically, we have seen increasing activity in the FMCG, agriculture, healthcare, education, and real estate sectors. These transactions are often minority stake acquisitions, buyouts, and restructuring. We have also seen an increase in mezzanine financing recently, although investors tend to revert to equity by default to influence company management on a day-to-day basis.
It is worth highlighting that we are seeing growth in the use of technology enabled solutions within consumer sectors. Such organic growth has also translated to an increase in deal activity within financial technology and e-commerce businesses specifically. This trend is further buttressed by some notable examples, such as Adlevo Capital and Alitheia Identity’s 2015 investment in Pagatech Limited, and Helios Investment Partners’ 2010 investment in Interswitch, as well as their partial exit to TA Associates. We have also seen private equity investments in large e-commerce retailers such as Jumia, which has contributed to driving online shopping in Nigeria to around a third of total formal retail. With the huge infrastructural gap in the country, why have private equity firms not been able to take advantage that? There is a lot of opportunity in this space. There are many critical areas such as energy, transport and utilities where we see the need for PE and sustainable pension fund investment in the short-medium term.
We have seen a few transactions take place with the potential to start bridging the infrastructure deficit in Nigeria. For example, African Infrastructure Investment Managers (AIIM) and others invested in the Lekki-Epe expressway which was a major infrastructural development in the Lekki axis area. The telecommunications industry in Nigeria has seen a growth spurt over the past few years accounting for approximately nine per cent of GDP. Investments in telecommunication towers have consequently increased with examples such as Emerging Capital Partners and Investec Asset Management’s investment in IHS Towers, and Helios’ investment in Helios Towers.
In 2016, Synergy Capital Managers also made an investment in Suburban Fiber Company Limited.
What is important for growth in infrastructure investment is the continued development of the right legal and regulatory enabling framework to give private sector investors increased confidence. An AVCA Member, ARM-Harith Infrastructure Investment Limited, recently stated that the infrastructure asset class is “relatively new and perceived to be associated with substantial risk. Many governments, bankers, and fund managers have not closed infrastructure deals, and where they have, their experiences have not always been good.
There is therefore a degree of wariness towards the sector. But when you think that over seventy per cent of the Nigerian population, for example, is under twenty years old, you should realise the need to think in terms of long-term horizons when considering the future workforce – Nigerian pension funds need to provide for the long-term liabilities that will arise from catering for that market. Infrastructure as an asset class fits well into this dynamic – it can provide steady long term, risk-adjusted, and inflation-linked returns.”
We continue to engage with our members to develop a comprehensive view on this subject. What in your view can the government do to get private equity firms to invest in infrastructure? When it comes to infrastructure investing, it is important for Government and the privatesector to be aligned. An enabling business environment will naturally lead to increased capital deployment, whether this is adjusting electricity tariffs to induce more investment in the power sector, or structuring projects to suit the needs of investors and ensure that the proposed structures are appropriate for their risk-return profile. Facilitating increased investment will depend on an open and transparent business environment. Across the continent, we have seen fiscal measures being used to encourage institutional investor investment in private equity funds. Such methods can be applied to funds that focus on investing in infrastructure as a means of galvanising investment in this sector.
Is there any specific legislation that needs to be enacted or amended to drive thus? The investment climate in Nigeria has improved over the past few years. We are seeing increasing transactions in the infrastructure space due to legislative reforms and the government’s commitment to including private sector in financing the infrastructure needs in the country. As with other countries, an on-going dialogue between policy makers and private sector stakeholders is critical to drive increased investment and economic growth. What is encouraging is the tremendous effort being made by the Nigerian Government to diversify its economy. The National Economic Recovery Growth Plan set a target of US$30 trillion in infrastructure investment over the next thirty years, which provides ample opportunity for the private sector to play a role herein. This will, of course, rely on a favorable underlying legal and regulatory framework, and mobilising domestic capital, particularly sovereign capital and pension funds.
Has there been any significant inflow of investments into Nigeria in recent times? Investment inflows into the country have risen in the short-term. They almost doubled between Q1 and Q2, growing to US$1.79 billion. FDI also increased over the same period. Between 2011 and H1 2017, Africa-focused PE firms have closed funds totaling US$23.7 billion. Over the past few years, a significant amount of capital has been raised targeting West Africa, including Nigeria. For example, in H1 2017, Sahel Capital closed Fund IV Agricultural Finance in Nigeria (FAFIN) at US$65.9 million. Also, Verod Capital Management closed Verod Capital Growth Fund II at US$115 million in 2016. Finally, African Capital Alliance closed Capital Alliance Private Equity IV at US$570 million in 2016. At the same time, a considerable number of fund managers are currently fundraising and targeting opportunities in Nigeria. For example, CardinalStone Capital Advisors are currently fundraising for CCA Growth Fund, targeting opportunities across a variety of sectors in Nigeria.
Do you think the country is on the right path towards attracting foreign investors into the economy? Investor confidence is rising following the recent US$14.1 billion combined FX deals from the I&E FX Window and the CBN’s weekly dollar interventions, and since April, the CBN has injected almost US$6.5 billion into the economy. It is, however, important to be realistic concerning foreign investors’ perceived risks for Nigeria and Africa, and this will be a litmus test for the region and continent over the coming years as more businesses emerge that need private capital investment.
In private equity specifically, two of the perceived risks identified by international institutional investors around investing in fund managers in Nigeria are exchange rate fluctuations and proceeds repatriation (2016 AVCA Limited Partner Survey). As implementation of the FX liquidity policy continues, we are positive that foreign investor confidence will continue to increase and we expect to see steady investments in the country in the short to medium term.
What is the future of private equity in Nigeria and Africa? The future is exciting, both in Nigeria and on a pan-African level. Last year saw a record number of exits achieved by PE firms in Africa (48), with a record number of PE firms achieving exits (31) and a significant uptick in sales to PE and other financial buyers, indicating growing confidence in the increasing maturity of the African PE industry. Yes, there are still macro-economic obstacles in Nigeria, but we expect PE deals to increase because the country is an established investment hub with potential for growth and a need for considerable capital injection. With a pre-recession GDP growth rate of above seven per cent, a rapidly expanding consumer class, and the deregulation, privatisation, and restructuring of strategic sectors, there are many opportunities to make the most of.
When thinking about Africa, PE firms need to understand the risks in a complex region of over fifty nations to advise clients and maximise returns in a sustainable fashion. As the continent welcomes more peace and political stability, investors will see excellent long-term prospects. For fund raising, those funds that can demonstrate a real track record of understanding and investing in Africa will continue to attract funds from limited partners. Experienced GPs tracking less high-profile markets, such as Côte d’Ivoire, Ethiopia and Tanzania, are now building strong track record and generating outsize returns. You also have institutions such as CDC with increased funding that will be looking to invest in countries like Nigeria where they already have a good track record. It is becoming more widely recognised that technology – fintech in particular – will continue to attract investment as Africa looks to this as an enabler (rather than a disrupter) to leapfrog existing bottlenecks. In general, there is a lot going and it is an interesting and exciting time for AVCA, the industry, and the continent generally.