Venture Capitalism and Enterprise Revolution in Nigeria
The African Capital Alliance (ACA), a private equity fund manager in western Africa, announced the raising of $200 million from investors in July last year. The third installment of the Capital Alliance Private Equity (CAPE) fund will target important sectors such as power, oil and gas, communications and financial services in Nigeria and across the sub-Saharan region. The ACA is confident of eventually raising a total of $350 million for the fund from aid agencies, international banks and Nigerian institutional investors. The development reflects mounting confidence in Nigeria’s resurgent economy, considering the country’s fist such fund that started out in 1998 with a capital of just $35 million.
While there is no conclusive data on the size of the Nigeria equity market, estimates for the whole of Africa put it over $6 billion in 2000; South Africa, the continent’s largest economy, accounting for half the share. High economic growth fuelled by an enthusiastic reforms programme has seen Nigeria’s growth scale to almost double the figure for developed markets in recent years. The country’s GDP growth rate in 2006 stood at 5.6%, significantly higher than the US (3.2%) or the UK (2.8%)1. Although the private equity market is still in its infancy here, increasing opportunities to invest in high-growth businesses have succeeded to some extent in eroding the conventional insistence on public equity and debt. However, there continue to be significant risks attending investment in Nigeria due to unhealthy policies, a volatile security situation and massive infrastructure shortfalls. Much of this holds true for the continent at large and explains why it receives only a fragment of global foreign direct investment (FDI). Out of the estimated $250 billion in global FDI to developing countries in 2001, Africa received only $11 billion2.
For many international investors, venture capital and private equity in Nigeria are risky propositions because of political instability, violence, social unrest and corruption. Progress in this direction has been impeded by several other reasons as well:
* Poor corporate governance and lax regulatory mechanisms.
* Red tape, legal restrictions and hostile investment policies.
* High trading costs in the primary market for equities.
* Market volatility and the resulting high-risk perception.
* High exit risk for investors because of low liquidity.
* Difficult and often confusing ownership and property rights.
Over the last decade, Nigeria has displayed a steady commitment to reforms. The Investment and Securities Decree was passed into law soon after the return of civilian rule in 1999, opening up the economy to foreign investment. The government of former president Obasanjo also established the Investment and Securities Tribunal for speedy resolution of disputes arising out of investment deals. More recently, the Securities and Exchange Commission slashed transaction rates for equities from 6.9% to 4.2%. International venture capital investors have shown increasing interest in Nigeria after the liberalisation of several important markets like telecommunications, transport, and oil marketing. The fact that fresh 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 bestow tremendous potential on the Nigeria economy – Africa’s third largest and among the most rapidly growing. The country’s ambitious Vision 2020 programme and the UN Millennium Development Goals together represent considerable challenges in terms of economic revival. Past experience favours strongly against big businesses, which have had a dismal track record and a high-failure rate under both private and public operation. Undeniably, the fate of Nigeria’s long term goals rests on rapid proliferation of SMEs and their ability to drive an enterprise revolution that will sufficiently diversify the economy away from oil and reverse decades of stagnation. The objective is to use SMEs to deliver sustainable development, employment creation and most importantly, poverty alleviation.
This is where venture capitalism derives its significance in the context of Nigeria’s long-term ambitions. Private equity investment has been responsible for some of the most notable economic success stories across the globe. Entrepreneurs starting out with angel loans turned India around into the largest software exporter in the world. In South Korea, booming small high-tech businesses bypassed larger firms to lead the country’s recovery from the Asian economic crisis. Equity funded enterprises have likewise recorded high growth figures in developing countries from Asia, across Europe and in South America. The global experience with venture capitalism throws up a number of important considerations in terms of providing the right environment for rapid growth. The following are some of the most important challenges and considerations facing Nigerian policy makers in this regard:
* Establishing a venture capital technical assistance programme to enhance SME performance in diverse economic sectors.
* Institutionalising tax benefits for equity investment to attract foreign investors.
* Providing risk guarantees to create strategic venture capital industries that improve self reliance and curb import quotas.
* Enhancing venture capital capacity to stimulate and promote the industrial expansion.
* Focusing equity investment on SMEs that optimise resource utilisation and assist local raw material development.
* Promoting innovative business ideas, processes and techniques that boost both productivity and profitability.
* Hastening industrialisation through equity infusion in high-growth areas like telecommunications and tourism.
Nigeria’s reforms process prompted a unique voluntary initiative at the turn of the last century when the Nigerian Bankers’ Committee launched the Small and Medium Enterprise Equity (SMEEIS) scheme. Billed as an attempt to promote entrepreneurial expansion, the scheme required all locally operating commercial banks to earmark 10% of pre-tax profits for equity investment in small and medium enterprises. Even though more than Naira 18 billion had been set aside by 2003, utilisation of the funds remained abysmally poor at less than 25%. The Nigerian Central Bank owed it to a lack of viable projects and general reluctance toward equity partnership. If poor managerial and business packaging skills are areas of concern, the prevailing mindset against venture capitalism in both existing and emerging enterprises is even more so.
To quote former Central Bank governor Joseph Sanusi (29 May 1999-29 May 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 to own 100% of a moribund business”.