The COVID-19 pandemic may have upended global markets but there are still profitable investment opportunities lurking in the dark.
It was in a bid to identify these opportunities that the Private Equity and Venture Capital Association, Nigeria (PEVCA) recently held a webinar on Private Equity (PE) investment opportunities across market segments.
With most of the focus now on how to navigate the marketplace amid COVID-19, the discussion highlighted notable disruptions and where the more promising opportunities are across the select segments represented on the panel from Infrastructure to Consumer goods, Agriculture, Technology and Real estate.
COVID’s impact has been felt across all segments with some more negatively impacted than others.
Demand in the consumer space is however expected to continue but slower and inconsistent along with a downshifting by consumers due to reduced disposable income.
Key trends particularly in the consumer and Agribusiness sectors include the localization of supply (whereby raw materials are being locally sourced) and digitization that involves the adoption of technology in a manner that helps businesses pivot their business model or offerings and enhance performance.
More investors are on the lookout for creative Entrepreneurs that offer innovative digitized solutions in the Healthcare and Education sectors.
A point was further made that locally relevant models needed to be developed for specialist healthcare in Nigeria.
Infrastructure is also generally viewed as a resilient asset class amid the challenging times.
With government revenue thinning, the need to attract private capital to bridge a gaping infrastructure deficit in the country has never been more pronounced.
Nigeria needs investments worth $100 billion for the next 30 years to address its infrastructure deficit in electricity, roads and ports, according to the Africa Development Bank (AfDB).
Managers of infrastructure funds also expect to see a prevalence of providing “Infra solutions” to clients who want to outsource services that are not core to their businesses such as large generation systems, large warehouses and coldrooms.
However, a key point raised was that among the often-cited challenges of undertaking infrastructure projects in Nigeria, a crucial factor for consideration was ensuring that the targeted consumers can afford the solution being provided.
The affordability gap needs to be well considered and bridged in this space. The key concern from a real estate perspective has been how much the underlying fundamentals of the assets being managed have been affected by COVID.
Over the last decade, commercial retail assets in Nigeria has been steadily growing across urban cities, however, Covid impact coupled with recent events across the country have heightened the risk factor and only competent managers will be able to manage through the difficult process. One of the benefits of investing in a structured fund is that diversified underlying assets can help cushion depressed yields reported from some segments.
It was noted that during the pandemic, residential units saw an uptick in demand from local buyers and Nigerians in the Diaspora, considering currency effects making these units more affordable. In other developed and frontier markets, COVID brought about a quick pivot to online shopping, however in Nigeria the pivot has not been asswift. Online retail still makes up a small fraction of the overall market and the focus has always been between modern and traditional retail.
There however remains an opportunity for a real estate play as most of the Nigeria-focused online retailers rely on distribution centres and warehouses for their delivery services. The Tech and venture capital (VC) segment has obviously been strong fund flows (a 76% increase in 2019) though this has likely tapered in 2020.
Most investments have been from foreign financial investors and from strategic investors looking to expand their business units into Africa. The increased capital pool has also led to an increase in Founders pitching their opportunities to fund managers. Some of these Founders were former employees of companies that have received rounds of financing in the past.
Investors attest to a rise in investment proposals looking to tackle challenges that they have seen in the Nigerian market and expand on that. Some new founders are focusing on backward integration and logistics infrastructure for retail. FinTech accounted for 40% of the total funds raised in the segment in 2019, and there has been a lot of targeting of the underbanked with loans and payment type products.
Some Startups are launching opportunities for people to get out of local currency and provide them exposure to dollar denominated returns. In speaking to what VC managers look out for to separate the chaff from the wheat-business case/model, team and team skills and market relevance.
Private Equity/venture capital and infrastructure managers through structured funds invest across sectors and market segments in Nigeria. These asset classes play a critical role in economic development, providing long term, transformational funding to companies along with business support and expertise to help companies grow and scale quickly.
The result is job creation, increased competitiveness for the country, and numerous social and environmental benefits. The desire to see increased participation by local institutional investors into the asset class, especially in view of the low yield environment, was also highlighted however it came with the acknowledgment that the constraint placed on local investors to make dollar commitments with Naira balance sheet needed to be addressed to turn the current tide.
The discussion touched on the topical founders and investors relationships. The emphasis on alignment of interests on the hard and soft issues could not be overstated as this forms the basis of establishing trust among the parties.
Other key factors highlighted (among others) were clearly defining the objectives of the parties involved, drafting clear agreements, ensuring transparency across the board and that experienced advisers are utilized, clear understanding of the level of involvement from either party, succession planning where relevant, reference checking on both sides.
Given the time horizon of the typical private equity investment, issues may come up and as such there should be dispute mechanisms included agreements to seek a cordial resolution.
This is with keeping in mind that an antagonistic relationship during the investment period is value destructive for the business and all parties involved. PE managers raise money from third party investors under strict governance standards and thus have certain obligations to those parties. Communicating openly, upfront and addressing issues well ahead help strengthen the trust factors.
