BusinessDay

‘Our emphasis is on capital preservation, achieving inflation-adjusted returns’

Michael Nzewi is the Managing Director/Chief Executive Officer of CardinalStone. He speaks on economy and markets in this interview with Iheanyi Nwachukwu. Excerpts

Inflation is at an all-time high in Nigeria. How is CardinalStone helping investors hedge against the current reality?

CardinalStone is a versatile investment management firm that applies diversification strategies for risk management and mitigation. In the era of rapidly increasing inflation, more than ever before, our emphasis is centred on capital preservation and achieving inflation-adjusted returns.

The strategy employed to achieve this objective is to deploy resources into investments that hedge against inflation (like alternative investments and high-yield fixed-income securities). Not only will this help with capital preservation but also boost return performance across our client’s portfolio positions.

The prosperity of a nation reflects how sophisticated its capital market is. As a major player in the space, what is your opinion on this?

As a financial market that brings buyers and sellers together to trade stocks, bonds, currencies, and other financial assets, the capital market is an avenue to exchange funds between suppliers and those who seek capital to further develop their businesses. Because of the significant role the capital market plays in facilitating capital for businesses and investments, it is expected to be a barometer of the fiscal health of a Nation’s economy.

A well-developed and strengthened capital market enhances business performance, increases employment, supports domestic consumption, and materially drives higher economic activities. There is an obvious interlink between a nation’s growth and its capital market development. Moreso, very often, the sophistication of a nation’s capital market is positively correlated with a nation’s long-term prosperity.

CardinalStone Securities facilitated the biggest trade in the history of Nigerian capital market. Tell us more about this and its impact on the Nigerian economy.

CardinalStone executed the trade that consummated the acquisition of a 93.4percent equity stake in Union Bank of Nigeria Plc by Titan Trust Bank Limited. The deal represents the sale of 27,336,952,296 ordinary shares of Union Bank of Nigeria Plc at N7 per share by a consortium of sellers led by Atlas Mara Limited and Union Global Partners Limited.

The total value of the deal is N191 billion ($461 million) and holds the record of the largest block trade executed in the Nigerian capital market. For the capital market, it is the biggest trade in the history of Nigeria and for us at CardinalStone, it was indeed a great feat. It took our resilience as an organisation and our tenacity as a people to ensure that we were immensely prepared to champion this trade. The impact of this deal on the various sectors and industries of the economy cannot be overemphasised.

Most importantly, this acquisition reinforces the attractiveness of Nigerian companies to investors, especially banks. It further sets a benchmark for the valuation of banking entities in future Mergers and Acquisitions.

The Central Bank of Nigeria (CBN) intensified hawkish rhetoric at the last Monetary Policy Committee (MPC) meeting by hiking the MPR by 150 basis points (bps) and increasing Cash Reserve Ratio (CRR) to 32.5percent. What is your view on this and its impact on banks?

The decision of the MPC took policy parameters to multi-year highs and underscored the CBN’s growing concern about the surging domestic Inflation. The outcome of the meeting also reflects the desire of the MPC to improve carry trade and curb the potential surge in spending as election activities intensify. On the impact on banks, asset yields are likely to improve on rising interest rates.

However, gains from higher asset yields may likely be offset by the policy’s negative impact on cost of funds and credit creation. Specifically, in addition to the expected MPR-induced increase in the savings deposit rate, banks are likely to raise rates as higher CRR squeezes their liquidity levels. Therefore, we expect interest expenses on savings and term deposits to rise materially in the coming months.

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Forex scarcity has been a huge challenge in the Nigerian market. How much impact has this had on the Nigerian capital market and is the industry equipped enough to proffer a solution to this lingering crisis?

In recent times, Foreign Exchange (FX) liquidity crunch has been the theme in Nigeria. The CBN’s pseudo-capital controls and low supply of FX have left an estimated over $1.5 billion of foreign funds trapped within the economy. Consequently, foreign participation in the Nigerian equities market has slumped to circa 15.5percent in 2022 from 48.9percent in 2019. This lingering FX crisis has left industries in a difficult situation, and finding a solution to this crisis has been challenging.

Your role as the Financial Adviser to Sango Capital on the partial divestment of its investment in Sundry Markets Limited was recently reported. Can we know more on what was done and how this will impact the Nigerian economy?

CardinalStone acted as sell-side financial adviser on the transaction which required us to provide leadership on the entire divestment process end to end. Our core responsibilities involved solicitation of investor interest, valuation advisory, buyer due diligence support, securing regulatory approvals, negotiation support regarding commercial and governance terms as well as evaluation of bids and selection of a preferred investor. With a staggering population of over 200 million and a significantly young population, the Nigerian economy has continued to experience growth.

This economic growth has translated to an increase in demand for consumer goods. An investment in a retail chain like Marketsquare provides a conduit that allows for the inflow of foreign capital to fund investment opportunities in Nigeria. This transaction is an add-on to the growing potential investor universe accessible to Nigerian businesses and CardinalStone is well placed to assist Nigerian businesses and entrepreneurs access such foreign capital to support growth, expansion, and infrastructure development in various sectors of the economy

We have seen you develop an exceptional track record of supporting private equity firms on successful investments and exits in the last few years. Tell us more about this and also run us through your core service offerings.

In the last decade and more, over 200 distinct transactions have been successfully closed by Private Equity (PE) investors in Nigeria. We have seen more continents (including Asia, Europe & recently North America) set aside huge funds to support African opportunities due to the continent’s huge population and rapidly growing economy. This has presented a huge opportunity for advisory mandates which CardinalStone is well placed to execute both for the buy-side and sell-side Mergers & Acquisition (M&A) opportunities. CardinalStone provides financial advisory services to private equity firms already invested in Nigeria and looking to get liquidity from their investments through partial or full divestments. In like manner, for the sell-side, CardinalStone seeks to provide financial advisory services to companies that require fresh equity capital injection into their businesses by finding suitable private equity investors that are in search of investment opportunities. As a leading securities trading firm in Nigeria today, CardinalStone also provides securities trading, asset management, trustees and registrar services.
PWC in a report predicted that Nigeria will be amongst the top 12 countries that will lead capital raising in 2030, surpassing countries like Russia, UAE, Saudi Arabia, Netherlands, South Korea, and Thailand. How well is CardinalStone positioned for this?

In positioning itself for the impending growth as postulated by the PwC report, CardinalStone is strengthening its relationships with potential investee companies by preparing them for potential capital raises. Over the last couple of years, CardinalStone has worked on a significant number of buy and sell side M&A transactions involving PE firms.

We continually build strong relationships and create a network of PE investors that are supportive of African opportunities. In addition, CardinalStone remains vested in strengthening its workforce of professionals by retaining and hiring the best-in-class investment banking professionals and engaging them in continuous learning and development.

Looking at your projection for fourth-quarter (Q4) 2022. Over N1.67 trillion worth of stocks were traded in H1 2022, 87percentof the entire 2021. What do you envision for the rest of the year?

For the rest of the year, we expect the market to be influenced by the fixed income yield direction, pre-election activities, and company performances.

We favour stocks with sound fundamentals, a proven track record of resilience in pre-election years, positive exposure to interest rates (for banks), low leverage (for non-banks), positive exposure to commodities, and attractive dividend yield (that is above 1-year T-bill rate).

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