Venture capitalism and corporate revolution in Nigeria

The African Capital Alliance (ACA), a private equity fund manager in West Africa, announced it had raised $200 million from investors in July last year. The third tranche of the Capital Alliance Private Equity (CAPE) fund will target key sectors such as Energy, Oil & Gas, Communications and Financial Services in Nigeria and across the sub-Saharan region. The ACA is confident of ultimately raising a total of US$350 million for the fund from charities, international banks and Nigerian institutional investors. The development reflects growing confidence in Nigeria’s resurgent economy, considering the country’s first such fund was launched in 1998 with capital of just US$35 million.

While there is no conclusive data on the size of the Nigerian stock market, estimates for Africa as a whole put it at over US$6 billion in 2000; South Africa, the continent’s largest economy, accounts for half of the share. With high economic growth fueled by an enthusiastic reform program, Nigeria’s growth scale has almost doubled that of developed markets in recent years. The country’s GDP growth rate was 5.6% in 2006, significantly higher than the US (3.2%) or UK (2.8%)1. Although the private equity market is still in its infancy here, increasing opportunities to invest in high-growth companies have managed to undermine to some extent the traditional insistence on public equity and debt. However, due to unhealthy politics, an uncertain security situation and massive infrastructure deficiencies, significant risks remain when investing in Nigeria. Much of this applies to the entire continent and explains why it receives only a fraction of global foreign direct investment (FDI). Of the estimated US$250 billion in global direct investment in developing countries in 2001, Africa received only US$11 billion2.

For many international investors, venture capital and private equity in Nigeria are risky ventures due to political instability, violence, social unrest and corruption. Progress in this direction has also been hampered by several other reasons:

* Poor corporate governance and lax regulatory mechanisms.

* Bureaucracy, legal restrictions and hostile investment policies.

* High trading costs in the primary market for stocks.

* Market volatility and the resulting high-risk perception.

* High exit risk for investors due to low liquidity.

* Difficult and often confusing ownership and ownership laws.

Over the past decade, Nigeria has shown a steady commitment to reform. The Investment and Securities Decree was enacted shortly after civilian government returned in 1999, opening the economy to foreign investment. Former President Obasanjo’s government also set up the Investment and Securities Court to quickly settle disputes arising from investment deals. Recently, the Securities and Exchange Commission cut stock transaction rates from 6.9% to 4.2%. International venture capital investors have shown increasing interest in Nigeria following the liberalization of several key markets such as telecommunications, transportation and oil marketing. The fact that new policies have persuaded at least some investors to overlook the high cost of doing business in Nigeria is a significant achievement in itself.

Its large population and market size give Nigeria’s economy – the third largest in Africa and one of the fastest growing – enormous potential. The country’s ambitious Vision 2020 program and the United Nations Millennium Development Goals combine to pose significant challenges to economic recovery. Past experience strongly argues against large corporations with dismal track records in both private and public operations and high have a failure rate. Undeniably, the fate of Nigeria’s long-term goals depends on the rapid proliferation of SMEs and their ability to drive a corporate revolution that will sufficiently diversify the economy away from oil and reverse decades of stagnation. The aim is to use SMEs to achieve sustainable development, job creation and, above all, poverty reduction.

From this, venture capitalism derives its importance in the context of Nigeria’s long-term ambitions. Private equity investments have been responsible for some of the most notable economic success stories around the world. Entrepreneurs who started with Angel loans turned India into the world’s largest software exporter. In South Korea, booming small high-tech companies have sidestepped larger firms to fuel the country’s recovery from the Asian economic crisis. Equity financed companies are also showing high growth figures in developing countries from Asia, throughout Europe and South America. The global experience of venture capitalism raises a number of important considerations in creating the right environment for rapid growth. The following are some of the key challenges and considerations Nigerian decision-makers face in this regard:

* Establishment of a venture capital technical assistance program to improve the performance of SMEs in various economic sectors.

* Institutionalize tax benefits for equity investments to attract foreign investors.

* Provide risk guarantees to create strategic venture capital industries that improve self-reliance and curb import quotas.

* Enhance venture capital capacity to stimulate and promote industrial expansion.

* Focus equity investments on SMEs that optimize resource use and support local resource development.

* Promoting innovative business ideas, processes and techniques that increase both productivity and profitability.

* Accelerating industrialization by injecting capital into high-growth areas such as telecommunications and tourism.

Nigeria’s reform process sparked a unique voluntary initiative around the turn of the century when the Nigerian Bankers’ Committee launched the Small and Medium Enterprise Equity (SMEEIS) scheme. The scheme, touted as an attempt to encourage business expansion, required all local commercial banks to allocate 10% of pre-tax profits to equity investments in small and medium-sized businesses. Although more than 18 billion naira had been set aside by 2003, the use of funds remained appallingly poor at less than 25%. The Nigerian central bank owed this to a lack of viable projects and a general reluctance to enter into an equity partnership. If poor management and business packaging skills are a concern, the prevailing anti-venture capital mindset in both existing and emerging companies is even more important.

To quote former central bank governor Joseph Sanusi (May 29, 1999-May 29, 2004), accelerated economic development is not possible until Nigerian entrepreneurs learn to appreciate that “it is better to own 10% of a successful and profitable business , than 100%. of a dying business”.