Leading private equity firm, Verod Capital Management Fund, is seeing huge opportunities in companies that are replacing imports with domestic production in Nigeria.
Africa’s largest economy is pushing an import substitution strategy, in a bid to boost local production, reduce the huge demand for dollars, an create opportunities for companies sourcing raw materials locally.
From agricultural products to manufacturing, Verod is bullish towards companies tapping into Nigeria’s import substitution drive by producing goods locally that were hitherto imported abroad, said Danladi Verheijen, managing partner and co-founder of Verod
“Generally, any Light Industrial products that can be produced locally instead of imported is of great interest to us,” Verheijen said.
“Covid- 19 has also led many countries to think more about being self-sufficient, and this is particularly important for Nigeria. There are massive needs and opportunities for import substitution. We look for entrepreneurs who are skilled, who can scale businesses, and who have the requisite levels of corporate governance in place to make us comfortable enough to back their businesses with growth capital,” he said in an interview with How We Made It In Africa, an online news medium.
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According to Verheijen, Nigeria has a very large domestic market for food products, and a very low extremely low manufacturing base, with the government making several very helpful policy changes over the years to dramatically increase the amount of local production of agricultural products and encourage the establishment of more agribusinesses.
“At Verod, we don’t invest in primary agriculture – we would avoid growing rice, soya beans, maize, guava or mango, for example. We don’t think we are the best at primary agriculture and mitigating the risks those types of businesses face. However, we do invest in agriculture businesses that have a processing angle, i.e., their end product is a branded consumer product that can be sold to a large consumer base,” he said.
From toothpicks to tomato paste, down to refined petroleum products, Africa’s most populous nation imports almost everything.
The reliance on imported items has led to a huge demand for foreign exchange and a depreciation of the naira through the years. The current exchange rate crisis facing Nigeria stems from the country’s high import content amid declining revenues.
The country’s external reserves, which have been used to defend the naira from spiralling out of control, have been on a free fall in recent years. Though some argue that the gross mismanagement of the external reserves is what brought it to its present low level, it is instead the intense pressure from Nigerians’ utilization of imported products that has shrunk the external reserves to as low as an import cover less than five months.
This dire economic position has been further complicated by the significant drop in export revenues from crude oil, resulting in external reserves being depleted without being refilled.
Besides negatively impacting the country’s exchange rate and external reserves level, excessive importation has led to a near decimation of the country’s manufacturing industry. The comatose state of manufacturing is reflected in the country’s high unemployment and underemployment numbers.
To curtail Nigeria’s reliance on imports as well as reduce the deleterious effects of excessive importation, the government has developed an import substitution strategy that on one hand, limits access to forex (which then makes it difficult to import) and on the other hand, supports the country’s manufacturing sector.
Verheijen believes these policies have helped boost local production. One of such he said has been impactful was that of the rice ban which overturned Nigeria from being the world’s largest importer of rice.
“The list goes on and on,” he said. “So we like the investment theme of import substitution and we see many opportunities to manufacture things locally across multiple sectors”
Speaking of the firm’s success in sticking with investment in companies that are import substitution focused, the private equity firm boss named GZ Industries as a clear case example.
The company, which he said, started manufacturing aluminium beverage cans ( used for beer, Coca- Cola and other carbonated soft drinks) locally to displace imports from Latin America and Southern Europe; was the deal that first put Verod on the map. “The company has now expanded out of Nigeria and into South Africa, and has experienced pretty high returns along the way,” he said.
Investment in Rotoprint, which produces labels for consumer products, and was started by an entrepreneur who previously imported labels from India, but realised it would be more profitable to produce them here, was also a success story for Verod
Also, investment in drug manufacturer Emzor exemplifies the tremendous scale of opportunities available in Nigeria, Verheijen said
“Emzor is the largest drug manufacturer in Nigeria – for perspective, they are 50 percent larger than the second-largest player, multinational GSK – but have only approximately 13 percent of the market share. The pharmaceutical industry is a very fragmented market here but offers huge opportunities,”
