‘Hike in interest rate will make Nigeria an attractive market for foreign investments’

The recent MPC vote, which saw the interest rate increase to 14 percent, continues to receive commendation among the investment community. Paul Okunaiya, senior investment manager for Africinvest Capital Partners, spoke to FRANK ELEANYA on why investors may begin to favour Nigeria once again and what the organisation he represents have been doing in terms of leveraging investment opportunities in the country and Africa.

What is Africinvest into?

AfricInvest is a Pan-African Private Equity (PE) fund manager founded over 22 years ago and currently with Assets under Management in excess of USD 1 Billion. We work across Africa and have a broad coverage of the continent with offices in 6 African countries – Tunisia, Morocco, Algeria, Côte d’Ivoire, Kenya and Nigeria. We have invested in over 125 companies in 25 countries mostly in sub-Saharan and North Africa. We also have an office in Paris that covers investments in France.

Our mandate is to identify growing SMEs that are well established and positioned in their local markets with the potential to scale up activities on the regional level to build them into “Regional Champions”. We target significant minority -without excluding majority, positions, in providing investment from a range of €10 million to €30 million.

We have been investing in the Nigeria market since 2005 and have made investments in different sectors spanning financial services, insurance, manufacturing, agriculture, FMCG, Oil & Gas Service and so on. For example, in the Insurance space, we invested in Mansard (then GT Assurance) in 2006 and increased the stake in 2011- leading a consortium of other investors to take a majority stake in the company following the regulatory induced divestment of GT Bank. We exited in 2014 to AXA – giving access to the world largest insurance group to the Nigeria Market.

What is your take on the recent MPC vote?

I may not have all of the details on the interest rates in developed countries at this time, but they are definitely low. Prior to now, the rate of the MPR was not actually interesting and attractive to any foreign investor. With the latest development, you will see the players in the short term. That is what you call ‘hot money’, moving money from various markets across the world; seeking for the best returns for the funds. We have long-term investors, which is where we (Africinvest) are. We do actual real investment. What the Central Bank or the MPC did is for the long term; of course the inflation has really been going up which has been a concern. Theoretically, increase in interest rate should control inflation. A lot of companies have stocks that have been sitting for more than two years. A lot of commodities have been impacted by the foreign exchange situation. Now the CBN comes and says the MPR is now 2 percent flat. No one expected that. Many thought there would be a little increase. It is really the long-term effect of it that matters. There is the cry about the impact on the borrowing cost by manufacturers. It would be only for a short while, it is better to have access to Forex to get necessary raw materials to produce which the increase is expected to attract.

The CBN in June introduced a flexible exchange rate. The market expected changes but as an investor, what was most important was the implementation. The Central Bank reserved the right to intervene in the currency markets; foreign investors will carefully monitor how “free” the currency trades. The currency should be free; it will depreciate and then appreciate later depending on the factors including consumer taste and habit.

There is something else; the exclusion list does not give a true Forex demand position. Rice for example is extremely important and will be imported in any case. Excluding just rice puts pressure on the parallel market resulting in increased disparity between it and the interbank; and causes inflation as well.

I observed that you did not mention infrastructure as part of the sectors that you consider for investments. Is there a particular reason you omitted it?

We invest in Infrastructure. However, in this market (Nigeria), there are many challenges that come with infrastructure. This distorts in most cases the project timing and projections. Our investment horizon is typically between 4 and 6 years with a focus on strategic exits or listing in the local or regional stock markets.

With infrastructure here, you can only tell the start time and cannot ascertain the project end. The finish time may come at about the time we really need to exit. Our investment approach is to create value and not just provide funds, which is fungible. We seek to bring significant value addition to our investee companies. When we cannot create the value it does not align with our strategy. From our experience, this has been the challenge. We however consider expansion plans that require investments in infrastructure. The investment is in that case in the company and not solely the infrastructural project.

How do you navigate a tough terrain like Nigeria as an investor?

We have presence in the six African countries mentioned earlier and have invested in some “interesting” markets such as Libya and Angola, probably one of our very difficult terrains, but at least, we learnt from it. It is the experience of 22 years investment. In the Lagos office, we cover Anglophone West Africa. We are however flexible. For example, we are considering an opportunity in Cameroon, which is a Francophone country. We have considered opportunities in Liberia and have made some investments in Ghana. We are currently closing on a transaction in Ghana.

How do you measure the viability of an investment?

We want to look for a company that is doing well. We are not turn around managers neither are we distressed opportunistic investors. There are fund managers specialised in that. Our investment mandate is based on the fund. Our fund mandate is for growth companies. We may however consider on case basis, for example, we considered an opportunity in a company, which suffered a certain operational burden. We reviewed and considered to invest, as we understood that the company had sound fundamentals and only needed work to take out the burden.

What are your thoughts on the current investment climate in Nigeria in view of regulation?

I have not been close to the current activities in the SEC and the leadership. The former DG tried to enforce a lot of discipline in the market. You could tell she tried to bring back sanity in the system because there was a lot of madness. On the over all, we expect the environment to get better in terms of regulatory framework. I think what should be done is to attract investors and create opportunities, like what the Pension Commission did. For us, our market is not just Nigeria but Africa. I think regulators can be more flexible. The SEC should sustain what they have; the insurance sector will need to do more in terms of releasing market information; the CBN will need to keep brainstorming; they have a lot of work to do with the economy. Investors are watching if the regulators can be consistent; things will be a lot better. 

How best should investors be convinced that Nigeria is the market for them?

Nigeria is certainly an important market. It cannot be ignored. A lot of investors are on the sidelines. Some want to invest but they have not found the right opportunity. Majority are that way. Some are waiting for the country’s policy to become clearer or sustained. For AfricInvest, we are here for the long term. We made investment in the week of the Presidential elections last year, March 2015. A lot of companies are struggling at this time and would require the right equity partners to pull through and be ahead of the market. We are here for the long term and will continue to invest in the Nigeria market. Where else do you get the population and habit of people who spend? Nigerians naturally spend even in scarcity and will not require government incentives to spend.

FRANK ELEANYA