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When Nigeria-based private equity firm, Sahel Capital said last June that it planned to invest $20 million in targeted agriculture value chain alone in 2017, it served as further indication of the growing private equity interest in Africa’s largest economy. In this interview with BusinessDay’s Lolade Akinmurele, Abi Mustapha-Maduakor, Chief Operating Officer at the African Private Equity and Venture Capital Association (AVCA), who has several years of financial services experience in investment management, accountancy, and treasury, spoke of the drivers of confidence in Nigeria and future trends to expect.
What has defined the Private Equity (PE) landscape in Nigeria since the commodity price rout in 2014 and what is about to change with the economy’s narrow exit from recession?
Despite macro-economic challenges in Nigeria over the past few years, the private equity (PE) industry has remained robust. The financial services, industrial, consumer, real estate, agriculture, technology and health sectors have received increased interest, and since 2014, US$6.1 billion has been deployed in Nigeria across various sectors.
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 14% 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.
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What doubts do PE investors have about Nigeria’s Investors and Exporters window?
There have been challenges in the recent past with sourcing foreign exchange (FX) to make repatriations following a reduction in FX earning from crude oil, but this has certainly eased. The key positive change for PE investors is the ability to convert any capital brought into Nigeria for investment into Naira at a market-determined exchange rate because the applicable rate is no longer tied to a CBN determined rate. 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.
Exits by PE firms in Africa hit an all-time high of 48 exits in 2016 (compared to 44 in 2015). The largest numbers of exits are in South Africa, with 44% of total exits in Africa.
What has been the trend for Nigeria and what factors have shaped investors perception of the country?
In 2016 exits in West Africa – dominated by Nigeria and Ghana – accounted for 25% of total exits after a slowdown in the previous year. The trend for Nigeria has been one of consistent strength. In both 2015 and 2016, exits in Nigeria accounted for 67% of exits in West Africa. Whilst recent macroeconomic and currency turbulence has created headwinds for the economy, the number of exits in Nigeria from 2014-2016 rose by 20% compared to 2011-2013, underscoring the strength of the regional investor landscape. As an example, Helios Investment Partners made a successful exit from HTN Towers in 2016, and Actis sold its majority shareholding investment in Mouka Limited, the Nigerian mattress brand, to The Abraaj Group in 2015.
On a pan-African level, we 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.
Which sector of the Nigerian economy accounted for the most PE presence in 2016 and which sectors have featured on the list of most attractive sectors for PE over time? Also add the sectors to watch in the years ahead.
In 2016, Financials and Energy were the most active sectors in Nigeria by deal count. From 2011 to H1 2017, Financials, Consumer Discretionary, and Consumer Staples were the most active sectors in Nigeria by deal count, whilst Telecommunication Services, Utilities and Energy were the sectors with the largest total deal value over this period. To add more color, Telecoms has attracted a large share of PE investment by value because of the significant capital outlays needed to expand telecoms towers businesses across different countries. The towers businesses account for most of the value of the Telecoms sector. One example would be the investment of Emerging Capital Partners into IHS Holding Limited.
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.
Nigeria’s spending deficit is at a 9-year high, what role can private capital play in financing the country’s infrastructure needs given the strain on the public purse?
The private sector has a big role to play in helping finance Nigeria’s infrastructure needs. Alignment with the Federal Government is key, particularly in working to ensure there is increased scope for private sector participation and improved transparency across the board in concession negotiations and contract awards. Only through public-private sector partnerships can the infrastructure gaps be narrowed as government revenues remain strained and can barely cover recurrent expenditure.
An enabling business environment will also 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 galvanizing investment in this sector.
What does 2017 hold for private equity in Nigeria and the continent at large?
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 7%, 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 50 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.
Recently, we have also observed interest from international fund managers, such as TA Associates, who acquired a stake in Interswitch from Helios Investment Partners, as well as GreenWish Partners, who have made Nigeria a priority country for renewable energy projects. Additionally, 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.
