Sub-Saharan Africa’s trove of precious metals and gems once funded the expansion of colonial empires. Over the past two decades, a new breed of prospector has begun staking claims, this time using capital to unearth profits. Private equity (PE) investors, lured by the potential for rapid growth offered by industries serving Africa’s young, fast growing populations, are beating a path to Nigeria in search of bargains.
Risk has risen, though. Emerging markets turmoil has undone public equity markets around the world. Sub-saharan economies have suffered in particular, as many depend on commodities for their export income. The MSCI Africa (excluding South Africa) stock price index has fallen nearly a fifth this year, trailing far behind the MSCI Frontier Index.
Nigeria, as an oil producer , has not escaped. Gross domestic product growth in 2015 looks likely to be roughly half the six per cent recorded in recent years. Nigeria’s stock market trades at a measly multiple of 8.5 times this year’s estimated earnings, 20 per cent below the rest of Africa.
Those issues will not worry Nigeria’s fans in private equity, who think the country offers low valuations and hidden gems. After several years of increasing amounts of deal making, this year (to September) the upward trend has continued. According to the African Private Equity and Venture Capital Association, Nigerian private equity deals accounted for 22 per cent of all African transactions by value. Compare that with an average of 15 per cent over the previous four years.
“It is definitely an exciting time for African PE generally, but particularly for Nigeria,” says Rajan Rosick, head of new business at Trident Fund Services. His firm handles cash administration for private equity funds, allowing managers to focus on investments and money raising. Since 2009, the amount of Trident’s serviced funds business in Nigeria has jumped tenfold to about $1.2bn. Mr Rosick has seen the largest deals rise from $20m five years ago to $75m.
More money for Nigerian private equity will probably come from the US. Although European firms such as Actis have invested in Africa for decades, US institutions tend to have less experience in the region. Yet some do have expertise and want greater exposure. In May, the New York State Common Retirement Fund set a target for 3 per cent of its $180bn in assets to go to Africa. The fund committed money this year to invest in Nigeria via African Capital Alliance and Helios Investment Partners.
Longer term, other large endowments will probably follow suit. In October, University of Texas Investment Management Company’s chief investment officer, Bruce Zimmerman, suggested that the endowment would look to add to its smallish African investments. Even so, Africa will not come first in line for UTIMC — at $24bn the third-largest US university endowment. It plans to focus first on Latin America in its newly established emerging markets group.
Another source of funds for Nigeria should come from its own people. Nigeria launched pension reforms in 2004 by introducing a national pay-as-you-go system that is now worth $24bn. From the beginning, the National Pension Commission (NPC) has encouraged private equity investment because, according to Chinelo Anohu-Amazu, Director General of the NPC, “the long-term nature of these asset classes perfectly align with the duration of the ensuing pension liabilities”. The NPC initially allowed a maximum of five per cent of its funds to go to private equity. Last year, that limit was doubled.
However, only 0.3 per cent has so far been allocated, partly because of regulations over the kind of private equity funds that are eligible. For example, the NPC requires fund managers to have at least 10 years of experience in private equity. Given how young the industry is in Africa, that requirement rules out a proportion of the available talent pool.
Finding sufficient deals of the right size might be a more pressing issue for foreign investors. Most managers have focused on a few sectors such as financials, fast-moving consumer goods and energy. Still, Helios and Abraaj, which raised funds together worth more than $2bn in the first quarter, have managed to get some deals done. Helios has invested some of its funds in Nigeria, buying into ARM Pensions and the petrol stations of energy company Oando. This year Abraaj has made one Nigerian acquisition, the mattress maker Mouka.
Increased competition does not concern Nigerian pioneers such as Okechukwu Enelamah who founded African Capital Alliance in 1997. If anything, he says, the country “needs more players given the opportunities”.
