With presidential elections now behind Nigeria and the economy recovering from 2016’s contraction, Udayan Goyal, co-Managing Partner at Private Equity firm, Apis Partners LLP, in this interview with Business Day’s Lolade Akinmurele, spoke of the firm’s investment plans for Africa’s most populous nation in 2019.
Excerpts:
Q: What has changed since your last visit to Nigeria?
A: I can’t precisely remember the first time I visited Nigeria, but it must have been at least 10 years ago. Since then, the Nigerian economy has evolved with the biggest change being how diversified it has become.
When I started visiting Nigeria, it was a very resource driven economy with little diversification. Since then, a robust ecosystem has emerged comprised of small, mid-sized and large companies, particularly in the financial services space where we invest in. These days, with the growth of financial technology, there is a larger pool of companies Apis can invest in.
However, I think Nigeria is still lagging in terms of financial inclusion. There are only 36 million bank account owners in a country of 200 million people and a bankable adult population of close to 90 million.
Many countries have solved that with the use of mobile money, which has helped ease access to financial services.
There are different ways of tackling financial exclusion, but I believe that the rise of new fintech companies could help to close that gap.
Q: In 2018, Nigeria regressed in terms of financial inclusion. It went from a 44 percent financial inclusion rate to 41 percent, according to the World Bank. What is the solution for Nigeria and what will be the impact of the Central Bank of Nigeria’s regulatory tweak to allow telecommunications companies to move into the mobile money space?
A: I met with a few of the Telco CEOs during my last trip to Lagos and most of them informed me that they are now applying for the new Payment Service Bank license. This is a good development because mobile penetration is high in Nigeria and smart phone penetration, while still low, will likely increase.
Smart phone penetration will increase as mobile data costs decline as seen in other countries and I’m confident that this trend will happen in Nigeria too.
I think the Telcos will play a bigger role but appropriate planning and execution is required for them to achieve success.
There have been challenges in countries with multiple mobile money providers.
For example, Tanzania and many other countries where there isn’t one dominant player, interoperability between the different mobile money platforms has been challenging.
One of the key success factors for Kenya was that Safaricom was a dominant provider when it launched MPesa, with about 85 percent market share when it launched.
As such, it’s very important that the regulators to ensure that platforms are interoperable; otherwise adoption will be low in a fragmented market like Nigeria.
Another challenge the payment service bank could face is the lack of a sustainable economic model.
India is a good example because it also has a similar regulatory regime where companies can apply for a payment bank license. The results have been subpar as running a payment service bank profitably is difficult given they are not allowed to extend credit, which is profitable segment for financial institutions. Due to this restriction on PSBs, it may be that the long-term viability of PSBs may be limited.
It’s been our experiences that some companies move in this space without a considered strategy.
Using the Indian example again, many companies that secured licenses returned them because the economic model wasn’t viable.
Safaricom entered the Indian market and launched MPesa, but didn’t succeed because the economic model didn’t work and because India has a very high penetration of bank accounts and so individuals with bank accounts had no need for a mobile wallet. As a result, adoption was low.
In Nigeria, there is the bank infrastructure and ability to move money between bank accounts relatively cheaply.
So, the question becomes, “What is the economic model for mobile wallet or payment banks and how are these banks going to be profitable?” At the end of the day it’s all about sustainability.
Q: What happened in India? Were the PSBs later allowed to extend credit?
A: Wallets failed in India. PayTM has now become a payment bank and is trying to make wallets viable in the bank environment but ultimately will become a full bank and once it does, is going to extend credit.
One of the things the Indian regulators did was that they made moving money instantly in real time from account to account virtually free- whereas in Nigeria it’s not virtually free. That needs to happen in Nigeria.
I think at the end of 2015, the Reserve Bank of India came up with a regulation that said the KYC for mobile wallets would nearly identical as that for bank accounts. Once the KYC process for wallets becomes the same as for bank accounts, the economic model for wallets starts to dissipate very quickly.
Basically, the government wanted everybody to have a bank account and then use the bank account as the primary method of moving money around. This makes perfect sense but you need to have the right infrastructure to do that. So, I think that the way that market has moved is what we call a bank-driven market and I think that’s where that market will end up. In Nigeria, there’s an opportunity to do that but the cost basis for banks in Nigeria is designed for servicing low income customers. That’s why the Telcos need to build infrastructure that allows them to service low-income customers and by doing so, improve financial inclusion. I think to do that successfully, you also need to build a credit product for the payment banks because that creates the right revenue streams to allow for long term sustainability.
At the moment, MPesa is not sustainable in the long term because the cost of moving money in MPesa isn’t cheap. There’s a cost but because MPesa has become ubiquitous and everyone has it, they put up with the cost of moving money. Airtel in Kenya teamed up with Equity Bank to try launch an alternative to MPesa and create competition that would bring the cost down. However, I think that if you build the infrastructure, the cost start relatively low right from the beginning, the adoption rate would be high. Then, you can have companies such as Branch, Tala in Kenya and others that will start to offer credit to consumers. As soon as you offer credit to consumers, you build healthy financial ecosystem.
Q: What happens if the banks lobby to ensure that PSBs are not able to grant loans?
A: This is an interesting point. I wonder if the banks would lobby against PSBs being allowed to grant loans.
I’m not sure if banks are interested in customers below a certain income level. The cost of serving the customers move small amounts here and there may not be attractive to the banks. I’m not sure they’ll be interested in serving this segment given that they get so much business already from Corporates and the more affluent demographic in Nigeria.
Q: Can the allure of attracting low cost funds spur the banks to target the underserved market?
A: True. However, I think that’s more on the deposit side. The truth is that there is an interesting situation here because Nigeria is a country with relatively high interest rates compared to other markets and that means that one of the things banks make money from is investment income which in many markets you don’t make money from anymore as interest rates are super low because in most markets you make money on the asset side, not from liabilities like deposits.
I do agree that some banks will be interested in mobilising cheap deposits that reduce their cost of funding. However, what I’ve seen in other markets is that as you add more liquidity to the system, the real value added is on the asset side not on the liability side. That’s because liabilities would become very commoditized from that perspective so a GTB or an Access bank or a Diamond Bank would focus much more on the asset side than on the liability side over time because they can always attract deposits given the level with interest rates here.
Q: You seem very passionate about financial inclusion in Nigeria, why is it that you have not invested in any of the fast growing fintech companies here as you have done in Kenya, India etc.
A: We have four companies with operations in Nigeria, though they are not headquartered here. One is a microfinance bank, which is in ten countries across Africa including Nigeria. The company has a national MFB license in Nigeria, and we hope to expand our presence across the country in the medium term.
Q: When did you get the license
A: The unit license was received in 2011 and the national license in 2016.
The second company is Transfast which is one of the largest money transfer companies in the world and Nigeria is a very important corridor that accounts for a good chunk of payments, particularly from the USA. The company is one of the biggest facilitators of remittance payments which are very important for economic growth.
The third company is Direct Pay Online (DPO). It is now the largest online payment platform in Africa and it is currently entering West Africa, Nigeria and in Ghana. DPO has applied for a PSSP license with the Central Bank and is going through the process. We expect the Central Bank to meet the company’s local subsidiary, One Payment Limited, within the next few weeks.
Finally, we have Green Light Planet (GLP) which is the largest off-grid solar financing company in the world and it has a big operation in Nigeria.
This is a very important financial inclusion tool. People often ask us why is solar an important financial inclusion tool. The reason is that in many parts of Africa, people often have limited access to grid power so traditionally people have used kerosene lamps which are dangerous and relatively expensive given the cost of kerosene.
So, what GLP does is it provides solar devices with battery packs that can power three or four lights. That’s the only basic product and there many other products. The basic product can be bought outright or GLP can give it to the user in exchange for a deposit, then the user makes daily payments under a leasing arrangement.
Many people in rural communities have never enjoyed access to affordable financial services but they are now doing that by leasing a piece of equipment that helps light up their house and the battery pack also allows them to charge their phones; which are also important tools for financial inclusion.
For most of the beneficiaries, it is the first time they’re effectively receiving a loan to buy a piece of equipment they use in their house and by repaying the loan, which is within 180 days, they create a credit history which provides for further loan opportunities. Also, once they’ve paid in full for the equipment, they can use that same piece of equipment as collateral to take out another loan, if required. This is deals with access to credit and is a very important part of financial inclusion.
One big issue we face in Nigeria is the lack of good mobile money infrastructure. It has meant that we’ve had to use the agents who install the equipment to collect lease payments. As a result, rather than collect daily payments, they have to collect seven days’ worth in advance.
For comparison, in East Africa, people pay with mobile money on their phones every day.
Q: Can you shed light on some of your products at GLP?
A: We have an entry level product which is a solar lantern and it has an MP3 player, radio as well as a USB phone charger. And we plan to expand further and introduce more products.
What people need, from a productivity perspective, is to have light at night. I have been to many provinces in Kenya where shopkeepers cannot stay open at night due to lack of electricity.
There are communities in Lagos that lack electricity people have to have to go to their nearest town and pay to charge their phones.
The GLP’s entry product is relatively affordable at around $40.
Q: What is the feedback you have received regarding the products and what have been your biggest challenges?
A: We have had a lot of success in Nigeria so far, although as I mentioned earlier, the main issue is the lack of requisite infrastructure,. That is the one big issue.
We are hoping that once the infrastructure gets built, that will bring less friction around the installment collection process.
The second challenge, which we are going to ask the government to support us on, is the tariffs on importing the solar devices into the country.
Because our products and payment method can be deemed as a tool for financial inclusion, the government should seriously consider granting exemption on the customs duties and tariffs on imported solar devices.
That is something we are pursuing with the relevant people over the coming months because we believe the more of these devices we can deploy, the better off people will be as it solves two problems for them. The First is the issue of getting electricity into homes and businesses while the second is that our payment plan solves the financial inclusion problem which is a significant developmental objective.
I keep bringing up financial inclusion because it has a significant impact on economic growth.
About a year ago, BCG conducted a study that showed that for every one percent increase in financial inclusion there is a corresponding 3.6 percent increase in GDP growth.
The multiplier effect of financial inclusion is very important, and it is a very important part of our investment thesis at Apis. We call this “Contextual Financial Services.” People don’t wake up in the morning and think, “I would like to have a loan today.” They wake up and say, “I would like to buy a car” and then when they are ready to buy the car, they want financing for that car and insurance.
So, the way we consume financial services is very different from how we consume FMCG products. We see financial services embedded within products like these and we bring these rural customers into a form of financial economy because then they build a credit history with it and then can borrow. After that they find the need for a deposit account to store their money in.
In many countries, what we find is that people don’t have a place to deposit their money from a perspective. It is very important for people to be able to put their money in a deposit account and build a credit history. The reason is because one of the things we need as people is access to finance. An unexpected event could use up all a person’s funds. After that, their cash-flow becomes tight. If they have a credit history and they could deposit what you can to either pay for the unexpected event directly or allow their insurer deal with it. As such, being financially included not only allows them to have a bank account, it also helps them have access to an insurance scheme and other financial products at an affordable cost.
Even if they don’t have insurance, they can pay bills and have access to credit and smooth out their consumption.
This kind of smoothing out can only happen when they are within the formal financial services ecosystem and products like these allow them to do that.
Q: Why did APIS suddenly pull out of the Bankers Warehouse deal?
A: Before I respond, I’ll like to provide some context.
As a private equity fund, the trajectory of our deal begins with a discussion, after which we decide whether we are interested in the company. Then we spend a lot of time getting to know the business; the company, the management, the business plan. In the absence of a business that we actually help them build a business plan and mapping out a value creation plan in which we think about how can we help them expand.
One of the things we did with GLP was to develop a value creation plan in Nigeria which we are now executing. If we do all of that and everything goes well, we sign a transaction document which contains some conditions that need to be fulfilled before we can invest. These conditions can be regulatory approval or in some cases, approval to send funds into that particular country.
In the case of Bankers Warehouse, we had some conditions that needed to be fulfilled before we completed the deal and those conditions were not fulfilled within the timeline that we had envisaged. That timeline elapsed and so we couldn’t consummate the deal.
The most important thing in all of this is discipline. This is our investors’ money and we have a lot of responsibility to safeguard it. So, if we think everything is not a 100 percent, we don’t do the transaction. As you know, we make these investments all the time and we put a lot of effort to make sure we maintain the discipline to walk away from a transaction however difficult that can be.
Our judgement making process has to be clear so that if something hasn’t been fulfilled we walk away and look for alternative transactions.
We have moved on from Bankers Warehouse and we are looking at a lot of really amazing and interesting things in Nigeria and I am very confident that we will make some investments here in the near future.
Q: So, when did you make the decision to walk away?
A: When we reached what’s called the stop date on the contract, which is the date when the conditions had to be fulfilled and they were not.
Q: When was that date?
A: It was 90 days from when we started the process.
Q: Was it last year?
A: It was last year.
Q: Which financial sub-sectors have caught your eye?
A: Fintech for sure. The fintech ecosystem here continues to develop nicely and I think one of the good things is that currency volatility has abated which makes investment in Nigeria much easier because you now have some exchange rate stability and we hope it continues.
We are seeing a lot of interesting companies right across the spectrum from credit to payments and leasing. We have started to do significant work to grow our pipeline of companies.
Within the course of the year, we are hoping one or two become investable.
That said, we are not in any rush to do deals. We always try to find the right thing to do, at the right valuation, with the right management team and with the right market opportunity.
Q: What is your budget for Nigeria this year?
A: We don’t have a specific budget. However, our investments tend to range from $15 million to $50m dollars and perhaps a bit higher.
While I can’t the exact figure Apis will invest in Nigeria this year, I can say that as fund our mandate is Africa and Asia. Our investors are looking to make returns and so for us it’s a question of how we help them make the best return irrespective of where the opportunity lies.
We can to invest in Nigeria, Ghana, Kenya, Uganda, South Africa, India, Malaysia, Indonesia or any other country within our mandate if the right opportunity presents itself.
Q: Allow me to rephrase that question. Are you finding more deals in Nigeria now compared to say 2014 and how well has Nigeria competed against other countries in Africa and South Asia?
A: It’s getting better now. We are seeing companies maturing into our investment range. Remember, we do not do early stage, we do growth stage investment and we have a lot more companies at that stage of maturity today than in 2014.
There has been a lot more development outside of natural resources in areas such as financial services. A lot of companies that were founded five years ago are now getting to the size that interests us. So, there is a lot more quality and the valuations have been becoming more reasonable, so everything seems to be aligning.
Q: Would you say the challenge of not being able to find the right deal size is still there?
A: The size needs to be there, and the valuation needs to be at the right level for it to make sense for us. The market opportunity must be glaring, and we need to be convinced of the management team will execute on the market opportunities.
Q: How has your portfolio performed overtime?
A: I believe our portfolio has done well. In every portfolio you will have the stars, the investments somewhere in the middle of the pack and so on.
We are invested in a company called Star Health in India which has done exceptionally well and has earned over 40 percent in dollar terms year-on-year. GLP has also grown even faster in revenue terms and we see Nigeria contributing more to that growth.
Q: When did you launch GLP in Nigeria?
A: We launched a year ago in Nigeria and it’s doing very well.
GLP is actually, both an African and an Asian company. It started out in India and Kenya and a lot of its operations are based in Nairobi.
Another company in our portfolio that has performed well is Baobab. It has grown tremendously especially since it got a national license in Nigeria in 2016.
We also have Transfast, a money transfer operator, which has grown very fast and Nigeria happens to be one of its fastest growing markets.
If Nigerians, abroad keep sending money back to Nigeria, then this market will keep growing.
We some had challenges initially caused by Central Bank capital controls. However, that has abated now.
Q: I am sure you heard about TPG’s Investment in $42.5 million, Cellulant. Do you think it was a good deal?
A: We know Cellulant well, having we spent time with the company. There are aspects of Cellulant that we really like and there are aspects we were not sure of, but we did spent time looking at it.
However, at that time the deal size was a little too big for us. Secondly, there one was part of the our investment thesis in payments that Cellulant didn’t fully fit into so in the end we decided not to take the opportunity. I think Ken and the team have done a very good job and I think the company will do well.
