Although Nigeria’s problems are well documented, few would deny the country’s potential. The rapid growth of its consumer market over the coming decades will have profound consequences not just for its own economy, but for the global balance of economic power. An academic study published in The Lancet in July predicted Nigeria will have the world’s second-largest population and ninth-largest economy by 2100.
Private equity has taken off to a greater extent there than almost anywhere else in Africa, reflecting the country’s size and the relative sophistication of parts of its economy. Yet the macroeconomic situation has been fragile for several years.
“Nigeria has not experienced growth in per capita terms since the last quarter of 2015,” notes Malte Liewerscheidt, vice-president for West Africa at consultancy Teneo. The availability of foreign exchange is a recurrent concern for investors.
The complex system of managed exchange rates has led to forex restrictions during previous crises, and a shortage of dollars is once again being felt amid the pandemic. The regulatory burden is another source of anguish. In a survey of Nigerian M&A professionals conducted by KPMG in 2018, 86 percent of respondents said tackling legal and regulatory policies had been the biggest challenge in completing their most recent deals.
Covid hits fundraises and exits
Covid has had myriad impacts for fund managers. The uncertainty triggered by the pandemic, which has caused a severe downturn in Nigeria’s oil and gas industry and other key sectors, has made many LPs hesitant to commit to funds. “Our fundraising timelines have realistically been extended for another six to 12 months,” says Adesuwa Okunbo Rhodes, managing partner at Aruwa Capital Management.
The process of closing deals has also been hit by delays, with the change in economic conditions leading parties to reassess the pricing of transactions. Folake Adebowale, partner at Nigerian law firm Udo Udoma & Belo-Osagie, notes deals in which “investors did their numbers based on a pre-covid-19 outlook” only to find that “with the onset of the pandemic and measures put in place to address it, some transaction parties need to renegotiate to ensure that deals remain viable”.
“Our fundraising timelines have realistically been extended for another six to 12 months”
Adesuwa Okunbo Rhodes
Aruwa Capital Management
Paul Kokoricha, partner at the African Capital Alliance, a fund manager that focuses on West Africa, agrees that the economic shock has “created a gap” between sellers and buyers on valuations, and that this has affected their willingness to negotiate: “The question buyers have in their minds is, ‘Why rush, if the coast is not sufficiently clear?’” He adds that travel restrictions have delayed site visits and other due diligence activities, further hampering the exit environment.
Managers adapt to new normal
With commercial investors understandably cautious during the pandemic, tapping into support from development finance institutions will be crucial for Nigerian fund managers. These institutions have been key players in Nigerian private equity for many years, investing more than $4 billion of impact capital since 2015, according to an Impact Investors’ Foundation study, and often supporting first-time managers.
Ron Mincy, another partner at African Capital Alliance, expects DFIs to play an even more crucial role “for the balance of this year, and next year, and probably the year after”. He cites their willingness to take a longer-term view, not least because of their experience of operating in Africa during previous crises. Adebowale has also seen increased activity from social impact investors, which take a similar approach to DFIs.
In the longer term, however, domestic LPs will grow in importance. Nigerian pensions are the fastest-growing category of investor in the country’s private equity industry. Total pension fund assets stood at $27.3 billion in April.
For now, even amid the shocks to key industries, covid-19 is presenting opportunities for managers prepared to react to changing market conditions. “We are prioritising deals in our pipeline in essential sectors that are thriving in this new normal,” says Okunbo Rhodes, listing food, healthcare and tech.
Adebowale sees a healthy volume of opportunistic activity, with international investors still prepared to seize promising opportunities. She expects there to be enough activity to “keep the market interesting and, hopefully, increase diversification”.
The potential of female-focused firms
Aruwa Capital Management seeks to use its investments to benefit women. “Empowering women not only maximises social impact but also actually enhances returns,” says Adesuwa Okunbo Rhodes, its founder and managing partner.
Nigeria’s power structures are dominated by men. Just 19 of the 469 seats in the National Assembly are held by women, and only 14 percent of board members in listed companies are female, according to the most recent data. The practice of ‘gender lens investing’, championed by Okunbo Rhodes, is potentially an important step towards changing this.
Aruwa invests specifically in businesses that provide employment for women or seek to improve women’s lives through their products or services. The firm launched a $20 million fund in October 2019 and announced its first investment in a Nigerian company that manufactures personal hygiene products for babies, girls and women.
Okunbo Rhodes notes Aruwa’s investment criteria are “similar to any growth equity investor – we are looking for strong investment fundamentals first”. And it is not difficult to appreciate the financial rationale behind supporting female entrepreneurs or investing in companies that serve female consumers. A study published in 2015 suggested Nigeria’s GDP would grow by $229 billion by 2025 if women’s economic participation were equal to men’s.
“From a returns perspective, the data shows gender balance within organisations improves profitability, reduces risks, brings diversity of thought and decision-making,” says Okunbo Rhodes. She adds that it is “very easy” to persuade investors that “investing in women, or products that service women, is truly an untapped opportunity”.
Okunbo Rhodes is far from alone in recognising the importance of gender lens investing. There are growing signs the financial services sector is realising the need to back companies that support women. McKinsey reported last year that 14 of Nigeria’s 20 commercial banks have a specific value proposition for women that includes lending.