Private equity (PE) has solidified its position on the cutting edge of the Nigerian economy in recent years, taking stakes in technology, mobile and electronic payments infrastructure, and e-commerce. Local firms have also been especially active in the real estate and consumer goods markets. Developments have sought to strengthen the PE segment.
On The Move
First, in 2010 Nigeria’s National Pension Commission (PENCOM) allowed pension fund managers to invest up to 5% of funds under management in PE. By early 2016 PENCOM began considering increasing the limit to 10%. Second, in 2013 the Securities and Exchange Commission instituted a minimum capital requirement of N1bn ($3.2m) for new registrants, which is intended to encourage larger volumes of PE capital to flow into the economy.
Notable investments in recent years have included $14m in pharmaceuticals and beverages producer Nigerian-German Chemicals by the Mauritius-based Advanced Finance and Investment Group in December 2014, and a $147m investment in retail banker Diamond Bank by Washington, DC-based PE firm Carlyle Group in November 2014. Nigeria has been the leader in attracting PE investment in Africa. According to a 2015 report by consultancy EY, Nigeria accounted for 31.4% of total PE investment in Africa between 2009 and 2014.
However, PE investments slowed considerably in 2015 and are expected to remain low throughout 2016. In 2015 PE investors, like much of the international community, were reluctant to invest new funds in the economy due to uncertainty surrounding the election. Investments in 2016 are expected to remain weak due to uncertainty related to the currency and the broader macroeconomic direction. As the bulk of PE investment originates offshore, this segment of the capital markets is especially sensitive to currency risk. In addition, compared to bank financing, which commonly extends for up to five to seven years, PE investments are long term in nature, usually spanning only two to three years. Outside investors are reluctant to bring capital into the country without certainty that they will be able to repatriate those funds later. While foreign investors are the most sensitive to shifts in the currency, domestic investors are also affected. Domestic private equity funds are often denominated in US dollars, rather than naira, creating an inherent currency risk even when no capital crosses borders.
Nevertheless, PE investment is likely to forge ahead, although it will avoid sectors of the economy with relatively high currency risk, such as those that are heavily dependent on imports. Echoing the sentiments of the government, areas of import substitution will likely garner more attention. Likewise, companies and industries that are able to source their raw materials and intermediate goods locally may also be attractive targets. The only question is the length of time investors can hold on to uncommitted capital before they must return the funds to their investors. According to a 2016 EY report, exit activity across Africa hit record levels in 2015, with Nigeria accounting for 10% of the continent’s PE exits in 2014 and 2015. By comparison, South Africa represented 39% of the African total in the same period.
As the weaker economy takes its toll on an expanding number of companies in Nigeria, the PE funds that will be best positioned to prosper are those that specialise in or can shift focus to turnaround stories. Generally speaking, PE is not necessarily the cheapest form of funding because it requires that companies transfer equity and comes with restrictions. Nevertheless, the demand by corporations for PE funding is expected to remain strong in 2016. In the current environment struggling firms are reluctant to take on more debt, making PE funds more attractive. As the economy works to find its footing and banks build buffers, PE companies could be in line to benefit.