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Nigeria is facing an uncertain future as outbreaks of ethnic and religious violence
continue to place strains on Africa’s most populated country. With the 2003 elections
approaching, the continuing battle amongst incumbent politicians and between competing
ethnic and regional groups is likely to intensify. Such an environment will test Nigeria’s
fragile democracy, which has never witnessed a hand over from one civilian government
to another. The Nigerian government is expected to continue with economic
liberalization, at a slow pace. The government’s main challenges will be to curb
spending, increase the pace of its privatization program, liberalize domestic fuel
subsidies, improve the nation’s infrastructure and improve homeland security.
The challenges and constraints that private equity investors face in Nigeria can be
grouped into three areas:
· Macro/country factors,
· Industry-specific factors,
· Company-specific factors.
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the investor is located, the focus of their fund, and the preferred investment stage of the
fund manager. It is important to have a strong understanding of the issues that private
equity investors in Nigeria face in order to develop strategies for a successful Nigerian
private equity industry in the future.
Venture Capital and Private Equity in Nigeria
Funds under management and commitments
Total funds under management in Nigeria are approximately $75 million (Exhibit IV).
This is due to the fact that private equity is a fairly new phenomenon in Nigeria. The first
private equity fund in Nigeria, a $35 million fund sponsored by Capital Alliance Private
Equity (CAPE), was raised in 1998.
Nigeria’s banking industry has established the Small and Medium-Scale Industries Equity
Investment Scheme (SMEIS) to fund the country’s troubled businesses. Under the
scheme, launched on August 21st by President Obasanjo, all banks are required to set
aside 10% of their profit before tax annually for equity investment in small and mediumsized
industries for the next five years. CBN officials said that 33 banks had already set
aside N4.15bn (US$37m) for the scheme, which is expected to have annual funds of
around N5bn. Although the banking industry has yet to deploy the funds into companies
at this time, this will only slightly increase both the commitments to and the number of
private equity funds under management in Nigeria.
In terms of size relative to GDP, Nigeria’s private equity industry is much smaller than
the Israel (12.1% of GDP), USA (4.9% of GDP), the UK (2.3% of GDP) or South Africa
(4.2% of GDP). The relatively small size of Nigeria’s private equity market (as a
percentage of GDP) may indicate significant room for growth in the near future.
Types of funds
Significant players in the Nigerian private equity industry include the private equity
investment portfolios of government and aid agencies. Examples of these include CDC
Capital Partners (previously the Commonwealth Development Corporation) and the
International Finance Corporation (a division of the world bank).
Independent (third party managed) funds are not yet prevalent in Nigeria at the present
time. CAPE is the first independent fund in Nigeria. The fund is positioned as an
independent venture fund with a particular focus on startup and development capital
investments. Additionally, as a result of the SMEIS initiative, approximately three to
four new SME funds will be created by the end of 2002. This bodes well for
entrepreneurs who have found it difficult to secure startup or development capital from
local banking institutions. There are currently no buyout firms in Nigeria at this time.
Sources of funds
About 42% of Nigeria’s independent funds are sourced mainly from US and European
government and aid agencies, 17% from local banks, 25% from local pension funds, and
15% from partners and other sources. In Nigeria, institutional investors are reluctant to
invest in private equity. A large reason for this is might be lack of familiarity with the
private equity asset class. In the short term, Nigeria may see increased commitments
from US and European government and aid agencies is most likely, however foreign
pension funds are not likely to be significant source of commitments.
Private equity investments in CAPE portfolio companies grew from approximately $5
million in 5 companies in 1999 to approximately $12 million in 4 companies in 2000.
The average deal size has increased from approximately $1 million to approximately $3
million for new investments reflecting the later-stage of the investments.
The fund has made 65% of its investments in telecommunications and information
technologies sectors and 35% of its investments in the media and outsourcing sectors.
Approximately 60% of the funds investments are expansion and development capital and
40% are venture capital.
The fund has not exited any of its investments, but is currently in negotiations for the sale
of one of its portfolio companies.
Nigeria Country Analysis
An Electoral Act recently signed by President Obasanjo has paved the way for staggered
elections in 2003. However, state governors have complained that the order of the
elections, with the federal elections first, followed by state and local, is unfair and have
promised to push the country into chaos by conducting state and local elections in mid-
2002. Political parties remain weak due to their few years of existence and vulnerability
to corruption. Elections are likely to be characterized by fraud and vote-rigging as
incumbents try to hold on to their positions by any means necessary.
The continuing controversy over the introduction of sharia (Islamic law) in ten northern,
Muslim-majority states, remains an ever-present source of tension. President Obasanjo
has refrained from contesting the constitutionality of sharia and has relied on moral
appeals for tolerance to overcome any tension. However, widespread unrest has led to
religious clashes that have claimed at least 5,000 lives by conservative accounts. The
possibility of future unrest remains high especially since the September 11 terrorist
attacks in the United States.
With Nigeria and the U.S. developing closer relations since the attacks and the U.S.
successes in Afghanistan, it is difficult to tell whether religious tensions in Northern
Nigeria will continue unabated. The Nigerian government’s reliance on the use of its
army in recent religious and ethnic clashes has prompted analysts to worry that the
army’s political interest might become rekindled.
Nigeria continues to display the characteristics of a dual economy, with a modern
segment heavily dependent on oil earnings overlaid on a traditional agricultural and
trading economy. The overwhelming importance of the oil sector is evident in recent
2001 Economist and Central Bank of Nigeria data that oil accounted for more than 70%
of federal government revenue, over 98% of export earnings and 10.4% of GDP at factor
cost (Exhibit V). Agriculture (with livestock, forestry, and fishing) is still the principal
activity of the majority of Nigerians, consisting of 41.6% of GDP at factor cost.
The IMF has urged the Nigerian government to address serious macroeconomic
imbalances in its economy—higher government spending, at state and local levels; rapid
monetary expansion and the acceleration of inflation; and disorder in the foreignexchange
markets—stressing that it is essential for the Nigerian government to restore
economic stability, especially by restraining public spending at all levels and saving a
larger portion of oil earnings. However, the IMF extended Nigeria’s one-year US$1bn
stand-by credit, despite the government’s failure to meet important conditionalities. The
IMF is under considerable political pressure by Western governments to provide aid to
Nigeria especially since the September 11th terrorist attacks on the United States.
The government continues to fund its budget deficit through domestic borrowing. The
Economist predicts a modest fall in the deficit from 6.8% of GDP in 2001 to 5.6% of GDP in 2002. Because of rapidly rising inflation and the increased volatility of the naira
in the first half of 2001, the Central Bank of Nigeria (CBN) has had to raise the minimum
rediscount rate sharply—at the end of September 2001 it stood at 20.5%, compared with
14% at the end of 2000 (Exhibit V). The CBN is likely to remain cautious with
monetary policy to prevent a further increase in inflation.
Economic growth is expected to achieve only a slight increase to 3.0% in 2001 due to
constraints in oil production from OPEC. Investments in offshore oil production and
various new gas projects continues to be the main drivers of growth in GDP. Outside the
energy sector, increased government expenditure in 2001 –03, in the run up to the
elections, is driving an increase in public and private consumption. Growth is expected
to pick up in 2002 –03 due to higher oil production and investment in various offshore
oilfields and new gas projects.
With strong growth in the agricultural sector and increased government spending, real
GDP is expected to increase to 3.5% in 2002. However, real GDP growth rates of 3-5% a
year will not lead to a marked increase in GDP per head in Nigeria while the population
grows at 2-3% a year. In addition, because this growth is driven mainly by investments
in the energy and government sectors it is unlikely to create jobs or reduce poverty
significantly. To do so would require GDP growth of 8-10% per year, driven by a similar
rate of increase in the agricultural sector (Exhibit V).
Although the government seems willing to allow the value of the naira to fall, it seems
unable to free itself from the strong interests of those who oppose the devaluation of the
currency. The Central Bank intervened frequently in the foreign-exchange market in
2001 and caused the naira to appreciate and stabilize at N112:$1 (Exhibit V). As oil
prices continue to decrease, there will be additional downward pressure on the currency.
The naira is expected to depreciate by 25% over the next two years.
What is the future of venture capital and private equity in Nigeria? To many investors,
private equity in Nigeria is not possible. The myriad of issues associated with various
Nigeria - political instability, social unrest, corruption, poor infrastructure – have
convinced many investors that providing private equity financing to private sector firms
is neither possible nor attractive. However, further analysis may suggest otherwise.
Nigeria is a logical choice to develop a venture capital and private equity industry due to
its large population and market size. As the number of investment professionals increase,
there will be a larger number of SME funds and larger private equity funds. International
private equity investors are becoming more active in the Nigerian market due to the
recent telecommunications liberalization policies of the current Nigerian government. If
the government continues its policies of political stability and liberalization, international
private equity investors might overlook the high costs of doing business in Nigeria and
begin making private investments equity investments in Nigerian firms.