Nigeria is expected to see more private equity deals this year as a new era of cheap financing emanating from the European Union finds its way into higher yielding emerging markets.
“Nigeria is the most important economy in the region and it is now at the top of Deloitte’s priority list”, says James Douglas, global leader of Deloitte’s Debt and Capital Advisory practice.
More debt financing is expected to flow out of Europe into Africa in a renewed search for higher yields on the back of European Central Bank monetary stimulus.
“In Europe, there is a paucity of transactions. M&A deals have been insufficient, hence the search in emerging markets like Nigeria”, Douglas said.
About €50 billion in new money from Europe was raised for investing in the last two years. This year, about €15 billion has been made accessible.
There’s also an increase in the scale of Chinese appetite for debt in the African market.
More funding is also arising from Sovereign Wealth Funds, development banks, and pension funds in Europe.
Following the devaluation of Nigeria’s currency, and the plunge in the currencies of other emerging markets, hedge funds are becoming more sanguine about investment return prospects in such markets.
“A lot of them see this as a huge opportunity to enter into the emerging markets as a result of their weakened currency”, Douglas said.
Nigerian companies are also seeing the low rates in Europe as an opportunity to refinance some of the debt in their capital structure.
“Nigerian companies have the option to access cheaper long term funds due to waiver of taxes in corporate deals”, said Fatai Folarin, lead partner, Tax & Regulatory Services at Deloitte.
“Inclusion of corporate bonds in the tax waiver regime has made them attractive and put them at par with zero rates securities”, he said.
Investors are likely to accept a lower interest rate with a tax exemption than they would without the tax exemption.
According to him, there is less scrutiny by tax authorities where the lower rate is applied on debt payments to foreign investors.
Of the seven biggest alternative financing investment deals in Africa recorded in 2014, Nigeria accounted for three.
PE backed establishment generates 129% more revenue and 257% more employment growth than non PE counterparts, according to Douglas.