CardinalStone Partners Limited, one of the few non-bank affiliated financial services businesses in Nigeria, recorded 48% over subscription in its debut commercial paper issuance, Michael Nzewi, managing director/CEO, in this interview with Hope Moses-Ashike, speaks on the company’s expansion plans and other issues. Excerpt.
Congratulations on the successful outing of CardinalStone Partners first ever Commercial Paper (CP) issuance which was oversubscribed by 48 percent. This strong oversubscription shows the level of investors’ confidence in the company and management team. What are the steps you have taken to build this confidence in over one decade of your operation?
Founded at the peak of the 2008 financial crisis by four passionate individuals, CardinalStone Partners Limited is one of the few non-bank affiliated financial services businesses in Nigeria today that has sought to expand its business from its initial investment banking focus into an assortment of financial services offerings having learnt to invest and grow businesses even in challenging market conditions.
Over the years, as a mode of differentiation across our various businesses, we have adopted a culture underpinned by strong cost management and operational efficiency while finding innovative and creative ways to providing solutions to our clients’ needs.
What is your investment plan with the raised fund of N7.1 billion and what are you planning to do with the excess N2.1 billion oversubscription?
You are right, the Commercial paper issuance was oversubscribed. We commenced the transaction with the intention to raise up to N5 billion under a N10 billion Commercial Paper Programme, but at the completion of the book build, we were oversubscribed by 48 percent. This honestly did not come as a surprise to us given the “credible borrower” track record we have built over time and the effective go-to-market strategy adopted by the transaction team.
We have decided to stick with our plan to raise N 5 billion at this first issue, so we shall be returning the excess subscription. The proceeds of the Commercial Paper Issuance would be channelled towards financing the company’s short-term securities-backed lending business as well as investment in and trading of short-term money market investments.
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The investor base in the Commercial Paper is highly diversified – asset managers, pension fund administrators, insurance companies, trustees amongst others. What impact do you think the funds will have in your operations and is there any plan for expansion of your operations or diversification to new market segments?
Of course, we believe the success of our debut issuance has put the company in a better light in terms of how we are perceived by the investing public and this will invariably impact our operations going forward.
While the company already has an established presence dealing with High Networth Individuals (HNIs) and institutional investors, we see the overall firm’s business growing by virtue of the brand visibility this exercise has brought about especially with some institutional investors whom are investing with us for the first time. We intend to leverage this to roll-out some of the innovative products the firm has been working on for the last couple of months. This includes launching our first mutual fund to deepen our reach in the retail space; so definitely watch out for that as we intend to disrupt the market a bit and gain first-mover advantage with our unique investment strategy.
Do you think that the 7 per cent yield for the CP is competitive and in tune with today’s realities and demand for more returns by local and International investors?
It is interesting that you would ask this question because this was a crucial subject matter for the transaction team when we were considering our go-to-market strategy. We had it in mind to issue at a competitive price which is why getting a sense of what investors were looking at in terms of returns was a key discussion point during our pre-deal investor engagement phase.
In determining the final price, we took into consideration several factors which included investors’ returns expectations, prevailing bank placement rates and government treasury bills as well as the yield offered in recent similar issuances by comparable companies.
When are you likely to return to the market, given that the Programme is for N10 billion?
We shall be returning to the market soon to commence our bond issuance programme. Apart from the Commercial Paper, our overall financing strategy includes issuing longer term debt instruments as part of our capital structure.
Can you assess the performance of the company vis-a-vis the competition and the value you are bringing to investors and shareholders?
Based on the firm’s unique business model and given the need for the company to constantly track performance against the competitive landscape, we try to compare the commercial aspects of our different businesses with competition and we can say that we are able to effectively compete at the highest level in our various business lines. For example our securities trading subsidiary, CardinalStone Securities Limited, has consistently ranked among the top 10 securities trading firms on the Nigerian Stock Exchange based on volume and value traded in the last 5 years and our share registration business, CardinalStone Registrars, ranks among the tier 1 players by virtue of the number of registers held and number of shareholders across its various registers. Our Investment banking business is also one of leading advisers in its market segment of focus. We are confident we will continue to deliver value to all our various stakeholders.
How do you see the opportunities in investment banking, securities trading, asset management, registrar services and consumer finance in the near term?
As earlier mentioned, CardinalStone started off with an intended focus of building a leading Investment Bank of African origin. However, the strategic focus of the company has gradually evolved over time to asset management and financing related businesses lines where we see a rapidly growing retail clientele requiring alternative asset management and financing products. We see significant growth opportunities by leveraging technology to drive client acquisition and offer value adding asset management products as well as implementing AI-enabled credit process to drive business efficiency in our consumer lending business.
Nevertheless we also see sustained long-term growth opportunities across our other businesses. In investment banking, we will continue to deepen relationships with our target mid to large cap companies as well as ensuring that innovation and creativity is at the core of how we provide solutions to their problems. We will be introducing digital technologies into current offerings in the share registration business and adopt top-of-class trade execution capabilities to drive growth in our securities trading business.
How can these opportunities be more effectively tapped to improve the performance of the company?
Majority of the opportunities earlier stated shall involve leveraging technology and digital strategies. We are of the view that the adoption of cutting-edge technology and a digital business as a complementary strategy to our current client acquisition infrastructure will support the proliferation of our stock broking, asset management and consumer finance products to a larger clientele base. That is why we are constantly innovating ways to leverage digital trends to avoid the likelihood of a technological lockout.
What steps is CardinalStone Partners taking to improve investment climate in Nigeria by bringing more people into the investment market and boost financial inclusion?
As earlier stated, the company is aware of the role the retail market plays in boosting financial inclusion. That is why our immediate strategy is to deepen our business with the retail market by intensifying efforts to grow our consumer lending business and launch a retail-focused mutual fund.
What is CardinalStone Partners doing to deepen investors education in the country?
The company has a CSR vision ‘to inspire positive change and create value for the youths in Nigeria and across Africa’. The vision is to educate youths on the importance of financial planning, inspire young entrepreneurs to build thriving businesses and encourage youths to fulfil their dreams by adopting two key strategies; the CardinalStone Mind Initiative (Financial Literacy for students & recent graduates) and the CardinalStone ‘STROL’ Initiative (Youth Empowerment). Our CSR strategy is largely aligned with that of the SDG Goals which is geared towards providing extensive financial literacy programs, collaborating with stakeholders to build a generation of financially & socially conscious young people.
Are we likely to see new areas of focus in the company including expansion and capturing of new market segments?
In addition to growing our current operations, we are currently in the process of setting up a Trustee business as well as looking for opportunities to acquire existing Trust businesses. We see having a Trustee business as a complementary service offering to our current businesses.
We are also on the look-out for acquisition opportunities in the registrar space in order to scale up our share registration platform.
What are the likely key drivers of the Nigerian equities market in the remaining part of the year considering the impact that COVID-19 has had on the market and the opportunities it has created?
For the rest of the year, the main drivers of the equities market shall include:
The pace of macroeconomic growth recovery: This is mostly related to developments on the oil price and production fronts. We expect oil price and production to continue to hover around current levels due to the cautious global re-opening of economies and OPEC+ restrictions on production. Ultimately, the economy is likely to face milder contractions in the third and fourth quarters of the year.
Development on the FX liquidity front: The apex bank recently resumed relatively small supply of FX to BDCs and the Investors & Exporters window. We believe that the monetary authority will have to increase its supply and gradually let go of its firm grip on the naira to boost equity investor confidence. This view is in line with concerns around huge FX backlog and the probability that manufacturers could increase FX demand as activities continue to open up.
Potential MSCI frontier market index shake-up in November: This shake-up could pan out due to the planned upgrade of Kuwait to an emerging market (vs frontier market currently). This adjustment would leave a gap in the index which other constituents may have to fill. An increase of Nigeria’s weight in the MSCI FM Index could spur an uplift in stock prices. This is however subject to a resolution of the current tight FX liquidity situation in the country.
Bargain hunting: We believe that the equities market in Nigeria is significantly undervalued. Specifically, the domestic bourse boasts significant dividend yield and ROI premiums relative to EM peers, given its considerably lower PE ratio. Several discerning investors will look to take advantage of this mispricing to boost medium-to-long term returns as we approach the end of the year / beginning of 2021.
What impact will the current depreciation of the naira at both official and parallel markets have on the Nigeria’s investment climate?
Investors mostly view a repricing of the naira closer to its fair value (which we estimate to be between N445/$ to N450/$) as very positive. But the current adjustment and harmonisation of official rates to around N380/$ appears insufficient, given the macro realities. Foreign providers of longer-term capital are likely to demand further currency adjustments and sustainable reforms to endear them to Nigerian naira assets. Foreign providers of short-term capital usually require appropriate interest rate compensation or sufficient currency repricing to embark on investments in relatively risky climes. These set of investors are likely to weigh the Nigerian offerings (in terms of interest rates, currency, and overall reforms) vis-a-vis those of competing markets going forward. All considered we expect foreign investors to remain mostly averse to Nigerian risks this year. Thankfully, some domestic bargain hunters are covering some gaps.
What are your views on foreign portfolio investment into the economy, and what can be done to achieve a more stable investment climate for the country?
As highlighted above, foreign investment in Nigeria is likely to remain weak this year. The authorities should embrace more pro-market paths to encourage foreigners to take on more naira risks. We also favour policies that will attract longer-term capital as opposed to fleeting hot monies. Promulgation and implementation of appropriate reforms, improvements in ease of doing business, provision of adequate infrastructure, and tilt to a more liberal currency regime are some measures that could be adopted.
What is the biggest challenge you see confronting the investment industry in Nigeria?
The biggest challenges confronting the investment industry include macro-economic weakness (which could cascade to high NPLs for instance), inadequate infrastructure, frequent FX liquidity issues, unfriendly regulations (banks appear to have been disproportionately affected on this front), and low labour productivity.
