Nigeria is the fourteenth most attractive investment destination in Africa according to Africa Investment Index. With a population of more than 190 million people (the median age of 17.9 years) and GDP of N31.2 trillion, Nigeria is the largest economy in Africa.
According to the Global Impact Investing Network report 2015, Nigeria dominates the West African impact investing sphere with 28 active impact investors, which includes 8 Development Finance Institutions (DFI) investors and 20 non-DFI and. From 2005 to 2015, $1.9 billion was injected into the country via 181 direct investments and about $2 billion via 54 indirect investments.
DFIs invest majorly in large deals with focus on energy, manufacturing and ICT sectors; direct investments in these sectors accounted for 68 per cent of capital.
DFI impact capital and number of impact deals in Nigeria
Source: GIIN Report
Non-DFIs strongly favour financial services as investments in this sector accounted for 65 per cent of capital deployed with microfinance making up half of these investments. Non-DFI capital is concentrated in deals between $1-5 million range but majority of deals were less than $1 million although typically held by a single investor. Almost all DFI investments are made through debt as this is less risky, it allows for more passive management and a clearer exit path. Non-DFIs use significant debt, but they also use equity and quasi-equity instruments. Quasi-equity guards against the risk of early stage enterprises and allows investors take advantage of the rapid growth usually associated with growth firms.
Non-DFI impact capital and number of impact deals in Nigeria
Source: GIIN Report
Challenges faced by impact investors in Nigeria
Due to the fact that the impact investing society in Nigeria is small in comparison to the country’s population and due also to the fact that few investors are located in Nigeria, the impact investing sector in Nigeria has struggled. Major challenges this sector has faced include the following:
- Lack of acquaintance with the concept of venture capital or private equity, which enterprises to find it difficult to agree to equity investments, preferring to ‘be in charge’ rather than lose control even though their businesses would become bigger.
- There is difficulty in finding exit options from investments when required because the financial market is not properly developed. Investors prefer to see an Initial Public Offering as a frequently used mode of exit.
Perceived opportunities for deploying capital in Nigeria
High-potential sectors for deploying impact capital in Nigeria include:
- Agricultural sector: This sector is viewed as a high potential sector because of its ability to increase food security. Investors that are willing to attain in-depth understanding of the agriculture value chains and be able to provide the needed finance will benefit from its exciting prospects.
- Infrastructure and energy: For DFIs that have the ability to invest in large deals, investments in power plants, roads, ports and other major infrastructure represent a critical support to the economy. For non-DFIs, there are small scale energy solutions such as renewable energy solutions which provide interesting opportunities.
South-Africa: Impact Investing Situational Analysis
South Africa is the sixth most attractive investment destination in Africa according to Africa Investment Index. Being the second-largest economy in Africa, the country is a suitable comparison with Nigeria with respect to the state of impact investing.
Also the largest single market in Southern Africa, South- Africa accounts for 74 per cent of all capital deployed in the Southern region and the largest impact investment market on the African continent, which amounts to $4.9 billion from non-DFI capital and $24.2 billion for DFI capital. The $4.9 billion of non-DFI capital was spread across 307 deals by 46 unique investors. 25 of these 46 investors have their headquarters in South Africa, while additional 8 investors have local offices in the country. The $24.2 billion DFI capital was spread across over 7,000 deals. There are over 12 national DFIs in South Africa of which the major ones are: Industrial Development Corporation and Development Bank of South Africa, these domestic DFIs have invested over $14 billion.
International DFIs such as African Development Bank and International Finance Corporation disbursed almost $10 billion in South Africa, half of the investments made in the Southern region. Many non-DFIs made direct investments in the financial services, which accounted for 34 per cent of the total capital employed, while more than half of the non-DFI deals were made in the energy sector. DFI direct investments made in the energy sector accounted for 37 per cent of the total capital employed.
DFI impact capital and number of impact deals in South Africa
Source: GIIN Report
Over half of non-DFI investments have been under $5 million. The most common deals came under $250,000 as 95 per cent of capital deployed was accounted for by deals over $10 million. Over half of DFI deals are below $5 million. Unlike the rest of the region, non-DFI investors show preference for equity instruments as equity accounts for almost 90 per cent of capital disbursed.
Non-DFI impact capital and number of impact deals in South Africa
Source: GIIN Report
South Africa is the economic and financial capital of the southern region. The country has higher concentration of impact investors than Nigeria. With about 32 local impact investors who have headquarters and an additional 26 regional investors that have local offices in the country, the number of impact investors here is larger than the number in Nigeria, which has just 28 impact investors of which only seven have local presence.
The reason for this Impact Investing ecosystem disparity in both countries is because until recently in Nigeria, pension funds were not permitted to make private equity investments. This placed a restriction on the growth of the impact investing industry, barring capital inflow into impact investing vehicles, unlike in South Africa.
Another reason for the disparity is that institutional investors seem to be unfamiliar with the concept of impact investing. Hence, institutional investors (and even HNIs) tend to have negative perception towards investing in funds that focus on social and environmental impact, not realising that investing in these sectors could also be consistent with their return objectives. In post-apartheid South Africa however, investors have always made investment decisions with the mind-set of empowering the society.
For Nigeria to bridge this gap in the industry, efforts need to be focused on outreach efforts towards attracting HNIs and Institutional investors to impact investing, targeted education and awareness creation on the subject. This way, the investors will gain better understanding of how they can create impact and how this impact can also help them achieve their desired financial return.
Furthermore, analysts have suggested that the Nigerian pension law needs to be amended to allow pension funds to make significant equity investments in impact projects. According to them, this would create access to a large pool of funds that could be channelled to impact investing.
Innocent Unah & Abisinuola David-Olusa