Higher oil prices, exchange rate stability, improved economic output and government policies targeted at the ease of doing business are at the heart of a benign outlook for deal making in Africa’s largest economy this year, but investors will be cautious ahead of the upcoming elections in 2019, according to Enitan Obasanjo-Adeleye, a director and head of research at the African Private Equity and Venture Capital Association (AVCA), who spoke to BusinessDay’s Lolade Akinmurele. Excerpts:
Deal drivers and full-year expectations
The size of Nigeria’s economy, its status as an African investment hub and its large and growing consumer base make the country an attractive destination for international and local private equity firms. We’ve also watched the Federal Government make concerted efforts to improve doing business which has resulted in increased FDI to key sectors – $4.145 billion at the end of Q3 2017 versus $3.574 billion for the same period in 2016. 2017 also saw changes in the Nigeria Pension Commission’s regulations to allow for greater flexibility in the investments of infrastructure and PE funds.
On the back of an improving domestic environment we expect to see robust economic growth across Africa due to higher external demand and rising commodity prices. This would likely be reflected by increased PE activity in a market that is rebounding, as Nigeria is.
Countries coming to the fore of Africa PE deals and impact of government policies
Overall, West Africa attracted most PE investments in Africa between 2012 and 2017, accounting for 27 percent of deal volume. Looking forward, 85 percent of Limited Partners (LPs) in AVCA’s 2017 Survey identified East Africa as the most attractive region in Africa for PE investment over the next 3 years. On a country-level, LPs rank Nigeria, Kenya, Ethiopia and Egypt as the most attractive countries for PE investment in Africa over the same period. In Egypt, for instance, the new Investment Law which came into effect on 1 June 2017 is worth noting. The policy has introduced tax incentives to stimulate foreign investment into the country resulting in a rise in FDI of 14.5 percent during the 2016/2017 fiscal year.
Overall, the continent’s growth story remains compelling. AVCA’s 2017 LP Survey showed that most LPs remain confident about Africa’s prospects over the medium-to-long term, considering Africa to be more attractive for PE investment than other emerging, frontier, and developed markets.
Fund managers are now better prepared than they were in 2016 to mitigate currency risks
In AVCA’s 2017 Limited Partner (LP) Survey we find that currency risk is viewed by survey participants as the biggest challenge to LPs when investing in African PE, with the percentage of LPs sharing this view standing at 69 percent (up from 60 percent in 2016).
Countries like Nigeria that have suffered from currency volatility remain attractive to investors because skilful General Partners (GPs) can adopt different strategies to weather short-term headwinds and access compelling long-term growth stories.
In AVCA’s recent report entitled “Volatility and Uncertainty: How Private Equity Navigates Through Turbulent Times”, we showed that investors have weathered FX volatility by focusing on the quality of business operations, expanding revenue streams, perhaps even passing on increased costs on to consumers, and reducing the need for hard currency by sourcing inputs locally.
In terms of regulation, the Central Bank of Nigeria (CBN) introduced the FX window in April last year to increase liquidity in the FX market by allowing investors to convert capital brought into Nigeria at a market-determined rate.
This has been important for PE funds for repatriating profits or capital.
Nonetheless, currency volatility can help foreign investors by creating opportunities for purchasing quality assets at reduced prices, with export-driven local companies becoming more attractive in this environment. The best time to make long-term private equity investments, after all, is not at the top of the market – look at Actis’ string of successful deals in North Africa during perceived risky periods. In any case, the continent’s growing consumption, and Africa’s rapid rate of urbanisation continue to provide convincing investment opportunities for PE investment in sectors that are relatively insulated from the immediate economic headwinds created by the declines in commodity prices and local currencies.
Strategic acquisitions remain dominant exit route
The primary exit route in Nigeria for PE investments remains trade or strategic buyers, such as with Helios’ exit of HTN Towers Nigeria to IHS Towers in 2016, as the size of the Nigerian economy makes it appealing for strategic buyers looking to increase their footprint or gain market share. We are not yet seeing a significant broadening of exit routes, but there are occasional sale-backs to entrepreneurs that have benefited from PE investment and are ready to take the business further forward – such as Investec’s exit of Daraju Industries in 2017. In the future, offshore and cross-listings might be more of an option for exits of sufficient scale, but the local IPO route is not yet a very active exit route.
Initial Public Offerings (IPOs) still scarce
As covered in AVCA’s ‘’PE Exits in Africa 2017’’, the majority of exits in Africa have been to trade buyers, followed by PE investors and other financial institutions. IPOs remain scarce: there was just one PE exit via IPO in 2016, a number which has remained constant since 2012. This can be down to a number of factors including regulator issues or the political environment of the day. On the finance side, underdeveloped capital markets and low levels of market capitalisation are often determining aspects for IPO paucity in West Africa.
A good example of this was Interswitch, which aimed to raise US$ 1 billion and list on the Nigerian Stock Exchange but was suspended owing to Nigeria’s worsening macroeconomic climate and FX shortages.
Much of the incentivising will come as a direct consequence of the Federal Government’s continued efforts to maintain political stability. Beyond that, further efforts to deepen liquidity and provide access to a wider investor base through cross-border exchange alliances could also be an incentive to list, as could listing support programs for SMEs.
Investors to soft pedal ahead of elections
The presidential election could pose a key challenge to PE investors in 2018, but elevated political risk can be surmounted by experienced regional investors with well-developed local networks who can identify superior companies benefiting from attractive long-term macroeconomic themes that trade at good valuations.
However, as with previous election cycles, we expect PE activity to slow down until there is certainty as to the next government’s economic and fiscal policies.
Trend in hedging against currency volatility
Events over the past few years have put currency volatility on the radar for Nigerian GPs who previously may not have considered hedging solutions. TCX – which sees Africa as its core business – and some commercial banks can provide risk hedging solutions for investors at critical points of the investment cycle. Formally hedging currency exposure over the multi-year holding period of a PE investment is generally too costly and difficult to achieve, given the unpredictability of the cash flows involved and in Nigeria’s case, the unpredictability of the Naira. Hence, most investors have sought to hedge only by diversifying investments across geographies, although many free-floating African currencies have become more correlated in recent years.
How Nigeria’s private equity market has evolved over the years compared to peers
As Africa’s leading economy, Nigeria has consistently attracted PE interest and FDI over the last few years. The Government has sought to make Nigeria a more attractive destination for investment through regulatory developments and tax incentive schemes. As a result, PE deals in the country are currently at solid levels, with the main PE firms actively executing deals and exits. As covered in AVCA’s 2017 Data Tracker, between 2012 and 2017, Nigeria accounted for almost 19 percent of PE deals in Africa in terms of value, and 11 percent in terms of volume. As with other African markets, PE investments in Nigeria are associated with the rise of the African consumer, and we have seen increasing activity in the FMCG, agriculture, healthcare, education and real estate sectors, as fund managers capitalise on consumer driven growth. We have also seen an increase in the share of PE deals in the Information Technology Sector, which in 2017 accounted for 15 percent of total PE deals across Africa, up from 8 percent in 2015. This increase was primarily driven by investments in technology enabled platforms serving different industries and regions across Africa, specifically in the financial technology and e-commerce industries. From a regional perspective, Nigeria – and to a lesser extent Ghana – has been the driver of PE growth in West Africa.
Low hanging fruits to boost private equity activity
Nigeria has a huge infrastructural gap and there is significant opportunity in this space, which PE firms have not fully taken advantage of, particularly in the energy, transport and utilities sectors. We have seen a few transactions take place with the potential to start bridging the infrastructure deficit, such as African Infrastructure Investment Managers’ (AIIM) and others’ investment in the Lekki-Epe expressway.
In telecommunications, we have already seen a growth spurt over the last few years, such as Helios’ investment in Helios Tower and Emerging Capital Partners’ and Investec Asset Management’s investment in IHS Towers.
Why PE firms are reluctant to latch on to opportunities in infrastructure
What is important for growth in infrastructure investment is the continued development of the right legal and regulatory enabling framework to give private sector investors increased confidence. An enabling business environment will naturally lead to increased capital deployment, whether this is adjusting electricity tariffs to induce more investment in the power sector, or structuring projects to suit the needs of investors and ensure that the proposed structures are appropriate for their risk-return profile.
Venture capital success stories
The venture capital industry in Nigeria remains small relative to its PE counterpart. Nonetheless, there have been success stories, as seen through the growth of Jumia, which is now valued at over US$1 billion following investment from MTN, Goldman Sachs, and AXA.
Lagos has emerged as an incubation hub and Nigeria is in the top three destinations for start-up funding in Africa, having raised US$114.6 million in 2017.
The top two destinations, South Africa and Kenya, raised US$167.9 million and US$147 million, respectively.
In November 2017, Facebook announced that they would open a community tech hub in Lagos, which is an encouraging development that will likely cement the city’s position as a key venture capital hub in Africa.
