Globally, the value of Venture Capital (VC) investments has witnessed unprecedented increase in the last decade, with the United States (U.S) setting an all-high investment record of about $330 billion in 2021. A flashback to 2010 when the VC community could not boast of up to 20 prominent unicorns, Venture Capital investments stood at $50 billion. Currently, the VC space boasts of topping 1000 unicorns competing for the gains of industrialization, and offering a more innovative investment platform for private equity. The concept of VC doubles as both a form of private equity and potential-growth startups financing, expected to yield long-term profits. Venture Capital is often raised by limited partners, categorised as high-net-worth individuals, banks and financial institutions. Delving into the Nigerian market, there have been remarkable outcomes in the VC space. Today, Nigerian startups have raised close to $1 billion even though funding activities decreased in 2020. Between 2020 and 2022, VC valuations have experienced a 431 percent increase. Judging from its 70 percent fall in funding in 2020, the Nigerian VC space has garnered adequate potential to attract both foreign and local investors. With startups like Flutterwave and Moove raising $455 million in total, foreign investors have had their fair share of investments in Nigerian startups but the same cannot be said about local investors. The Nigerian VC space is largely underexploited by well-off Nigerian investors, leaving room for foreign dominance on a fertile and lucrative business space.
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What do we know about Limited Partners (LPs)?
The term Limited Partners is attributed to institutional and individual investors invested in private equity through Limited Partnership agreements. Examples of institutional investors include: Pension Funds, Foundations, Endowments, Banks and Insurance Houses. This nature of investment carries a degree of risk since private equity investments are not publicly traded or listed on the stock market. However, over the years, VC structures have consolidated these risks, assuring investors up to 5-times their investments through diversifying portfolios and prioritising investments in FinTechs or smart-induced startups. Limited Partners are significant contributors of venture funds, providing the required capital to fund investment deals assessed by the VCs. Simply put, LPs commit capital to venture funds. Unlike General Partners who manage venture funds, LPs are not burdened with administrative or managerial responsibilities other than fund commitments. A majority of funds from LPs have their sources from Pension funds, Family Offices and High-Net-Worth individuals. In Nigeria, the concept of VC is still new and is faced with slow market penetration, as VC-type transactions are relatively small scale. Anecdotal evidence suggests that Nigerians are grossly unaware of the potential of the space, and the few that are aware, remain reluctant to commit to the industry requirements. For individuals with high-risk appetite, VCs provide LPs with a uniquely structured platform that accepts capital into venture funds, reinvests these funds into potential businesses that have been assessed, assisted and guided towards proper mentorship and strong management, targeted at generating high returns for the investors. In 2021 alone, private equity investments in VCs yielded LPs 62 percent returns after one year performance. Whereas in 2022, prominent LPs like Wesleyan University have a record of 95.3 percent returns from private equity alone. The growth rate of VCs is alarming, causing VC managers to invest proactively. At this rate, there is a need for LPs to sustain growth through making larger investments or having more LPs join the VC space to commit more funds. A study conducted on the perspective of LPs in 2021 showed that a significant number of LPs remained positive about investing in Venture funds. And in a similar study, about 33.3 percent LPs surveyed exceeded their benchmark in the last decade, implying a positive and upward potential of the VC space.
Why LPs from Northern Nigeria?
Certain socio-economic and geographic factors have decelerated the overall industrial and economic development of Northern Nigeria even though the region has birthed major industry captains and public figures in Nigeria. A consolidation of these resources into viable investments provided on the Nigeria Venture Capital space will certainly boost the economy of the region. Diversifying into the Nigerian VC space by becoming Limited Partners, promises reduced investment risk, exponential returns on investment and decongestion of the Nigerian exchange market.
This will provide alternative and more-profitable investment opportunities to Northern Limited Partners, as a means to wealth creation, fostering development in Northern Nigeria for many generations to come. With the current performance of VCs in Nigeria, more LPs entering the VC space will assure higher growth rate.
Fahad Garba Aliyu is the Managing Partner at Ignite Capital Ltd and he can be reached at [email protected]
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