Founders of Nigerian businesses who brought in private equity (PE) investors and venture capitalists (VCs) two to 10 years ago are locked in ownership tussles with their investors, with most of the cases now at the behest of lawyers and courts.
The situation portends danger for foreign direct investment into Nigeria but also exposes the vulnerability of Nigerian businesses that are forced to source growth funds from other climes due to dearth of single-digit, long-term funds in the local financial institutions, according to analysts.
On September 25, the board of HealthPlus said it had suspended founder Bukky George as CEO due to the inability to reach an agreement with her, leading to the hindering of operations of the company and delaying the implementation of its growth plans.
Alta Semper, also known as Idi Holdings, had announced an $18-million investment into the health firm in 2018.
However, founder Bukky George told BusinessDay that Alta Semper Capital LLC UK (AS) announced an $18 million investment in HealthPlus on March 15, 2018, but paid up $10 million as Tranche 1. Tranche 2 was due 12 months later.
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She said the pledged funds were never fully disbursed in order to implement the firm’s strategic objectives, stressing that its growth journey had been fraught with serious challenges, unmet expectations, and erosion of market share and brand equity.
BusinessDay also gathered that Food Concepts, founded by Deji Akinyanju, is in ownership tussle with its investor. But sources close to Deji Akinyanju said the investor had completed plans to take over the business. Food Concepts, owner of Chicken Republic, got $3.02 million from the International Finance Corporation (IFC), an arm of the World Bank, in 2011, according to reports.
The situation is also extended to the health sector. PathCare, founded by Richard Ajayi, a renowned Lagos-based medical doctor, was acquired by Europe’s largest lab operator Synlab in 2017. Synlab, owned by private equity firm Cinven, did not publicly announce how much it invested in PathCare, which, as of that time, was Nigeria’s largest private pathology laboratory company.
However, Ajayi had said the company bought back a 26 percent stake held by PathCare South Africa, its former parent company, year before the Synlab deal, according to a Reuters’ report.
But the deal has gone awry due to issues around breach of local intellectual property, breach of agreement, and disagreement on whether to bring in local or foreign experts, sources close to the deal said.
Similarly, Wakanow, founded by Obinna Ekezie and Ralph Tamuno, has also been taken over by a PE investor. In December 2018, Carlyle Group announced that it had agreed to invest $40 million in Wakanow.com Limited, one of Africa’s largest online travel agencies.
In an interview with BusinessDay, Ekezie and Tamuno said the investment facilitated by Platform Capital went awry because the investor and Platform Capital had an ulterior motive to hijack the company and signed a merger deal with Travelstart, a competitor, without the consent of the founders.
“At a point, they went after Platform Capital legally on this issue and other malpractices. Carlyle then brought in a new CEO, and took over the company,” Ekezie alleged.
He called on the government to revisit and establish policies to protect Nigerian entrepreneurs and provide alternative local equity funding options favourable to encourage economic growth.
These are not the only firms involved. BusinessDay found that Imax and AIC, among many others, are also in this quagmire.
The National Bureau of Statistics (NBS) and the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN) said in a 2019 report that fewer than 2 million MSMEs had access to credit out of 41.5 million entities between 2013 and 2017. PwC Nigeria, in a new report, estimated the annual financial gap for Nigerian MSMEs at N617.3 billion.
Muda Yusuf, director-general, Lagos Chamber of Commerce and Industry (LCCI), told BusinessDay that there was a need for local founders to ensure that their terms of engagement with foreign investors were clear and unambiguous from the outset.
“It should appropriately and adequately cover the interest of the promoter of the business. Perhaps, our domestic investors enter into these agreements in a hurry in the bid to grow their business,” he said.
Yusuf suggested a review of the Nigeria Investment Promotion Commission (NIPC) Act of 1995, saying it was due for review to adequately protect indigenous investors.
“It is a 1995 legislation. It is too open-ended and gives room for crowding out of indigenous investors. We should strike a balance between the quest for foreign investors and the protection of the interests of indigenous investors. This is not to diminish the importance of foreign investment, but there should be safeguards to protect indigenous players across sectors,” he suggested.
Samuel Oyigbo, a commercial lawyer, advised that the two parties must insert clauses of what might happen in the future in the agreement in case of any breach.
“If, for instance, you pledged to bring $50 million into the business in April 2020, but you ended up bringing $30 million by then, it still amounts to breach of agreement. In this case, if an earlier agreement was to have 50 percent stake with $50 million, it certainly means you would be entitled to 30 percent. But then, this has to be inserted in the agreement,” he said.
An experienced Nigerian entrepreneur, who does not want her name in print, advised local founders to get serious-minded advisors, who were entrepreneurial in thinking, not necessarily the big names.
“We will need to develop our own PE and VC colonies so that we can be relevant in scaling up our businesses. This is what India did and now the Egyptians and South Africans have copied it. Brazil has matured in doing the same thing. We cannot have N7 trillion in our pension funds and the local PEs and VCs are not able to access this money in a secured form to utilise for funding businesses locally. Why should a PE take a local founder all the way to Mauritius to tango, if the funds were available for them to access here and inject into the business?” she asked.
However, ‘Tokunboh Ishmael, managing partner, Alitheia Capital and chair of the Board of the African Private Equity and Venture Capital Association, cited examples with Tomato Jos, an agro-processing company, Okra, a fintech Nigeria-based company that connects bank accounts to apps, among others, as successful PE cases.
“Firstly, it is important that founders conduct their due diligence. Founders are selling a stake in their business, investors are selling money. Both sides need to understand the nature of the terms under which the other is selling and seek to protect their interests.
“Some of the terms reflected in equity agreements are a direct result of an investor’s negative experience and desire to protect their investment. Often in the rush to complete a transaction, legal documentation is not thoroughly vetted and understood. Founders should understand the small print and recognise the value that a PE investor brings to their business,” she explained.
She stressed the need for founders and investors to align their interests, with both parties focused on the same goals and outcomes.
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