Private Equity in Nigeria: A rapidly evolving industry

Being at the 2 day annual Africa Private Equity (PE) and Venture Capital Association (AVCA) conference held in Lagos, last week in the midst of investment bankers, Private Equity players, venture capitalists, and global pension fund managers, gave an insight into the rapidly evolving PE industry in Nigeria.

The conference which was the 11^th one to be held and second in West Africa, highlights how far PE has come in Africa and Nigeria in particular.

Private Equity consists of investors and funds that make investments directly into private companies.

Capital for private equity is often raised from retail and institutional investors, and can be used to fund new technologies, expand working capital within an owned company, make acquisitions, or to strengthen a balance sheet.

Private Equity firms and opportunities are mushrooming in Nigeria as the African growth story meets investors who have suddenly realized they are under-invested in one of the last frontiers of growth, alpha and outsized returns in a world of increasingly correlated financial assets.

Key takeaways

PE as a financing tool is desirable for Nigeria with its large informal sector especially as the traditional means of financing is often not available to companies in the early growth phase.

The opportunities that are available in the Nigerian PE industry are enormous as every industry sector such as financial services (including insurance and mobile money), e- commerce & IT, power, oil and gas; services, telecommunications and Agriculture are a potential goldmine for investors.

A lot of the stakeholders would like to see Nigerian pension funds invest more in PE.

Nigerian Pension assets are growing at a rate of $250 million per month or 25 percent per annum, while Pension Fund Administrators (PFAs) are allowed to invest a maximum of 5 percent of their Assets under Management (AUM) into PE.

The current PFA investments in PE are put at 1 percent of total industry assets.

PE is an added form of diversification for PFAs as Nigeria’s $80 billion stock market does not adequately reflect the economy with the absence of sectors such as oil and gas (upstream), telecoms, and Agriculture.

However the high bond yields and double digit equity performance (2012, 2013), means PE firms/ funds will struggle to outperform that benchmark and may be less attractive to PFAs.

According to the revised PENCOM guidelines, for PFAs to be eligible to invest in a PE fund, such a fund must be registered in Nigeria and have 75 percent of its assets invested in the country.

The anecdote that PE exits are difficult in Nigeria and Africa, may actually be a myth as exits are happening at an average of 30 per year.

The right deal structure is very important for ensuring a successful exit while entry multiples are on the rise for PE firms with the entry enterprise value being the biggest in West and Southern Africa.

PATRICK ATUANYA & BALA AUGIE