To borrow, perhaps clumsily, from the iconic science-fiction television series Star Trek, Africa is the final frontier for new investment opportunities. It may be the last remaining expanse on earth with almost innumerable business prospects, an expanse with nearly infinite capacity and potential and many “strange new worlds” to discover.
The actual forms of these prospects
are different in each country. This series aims to look at different operating
environments around the continent and think through what it might take to build
a business to the point that it is ready to attract institutional capital. In
this chapter, we look at Nigeria.
But first, let’s clarify what it means
to be considered investable. It is a well-understood concept in financial
services based on the essential premise that any investment should generate an
attractive return.
Previously, this was seen through the
single lens of profitability. Still, the context has changed over time to include
environmental, social and governance practices (ESG) along with diversity, equity and inclusion
(DEI).
Of course, context is everything, and
the precise balance of these factors will vary from territory to territory. For
example, ESG considerations in majority Muslim countries would be adjusted to
incorporate religious and cultural priorities but still be in line with what is
internationally accepted.
Companies in developed economies are
learning to make space for the next generation of people and communities from
diverse backgrounds. So too must companies in developing economies learn to
implement structures and policies to make their companies more attractive for
investment.
So, about Nigeria
Like the United States, Nigeria is
where big dreams can become reality, but not everyone understands how to
successfully make that transition.
It is said that ideas are a dime a
dozen, and that execution and consistency are the real differentiators for what
sets investable businesses apart from the rest. In this regard, execution also
includes the ability to implement the right internal processes and procedures
that lead to more seamless external interactions.
In Nigeria, though, being investable
is somewhat less obvious and formulaic than in other markets, though it is
likewise primarily concerned with the ability to generate profits. While
business owners can be considered aggressive, innovative and persistent, those
attributes do not attract investment on their own.
How to attract
investors
I suggest a five-pronged approach, and
in Nigeria, that plays out as follows:
1. Embed Transparency in your
company DNA. Despite an
overall improvement in disclosure standards, particularly from a regulatory
perspective, the nature of disclosure as an ethical par for the course remains
lacking in this part of the world.
In this instance, disclosure needs not
to include the same requirements as listed companies, but there is a growing
need for well-documented, organised company information.
Privately held companies that go
through auditing accounts, instituting appropriate ESG frameworks, implementing
risk, compliance and other operational controls, as well as incorporating human
resources, automatically make themselves more investable in the long run.
2. Focus on Institution Building. Too many Nigerian businesses are centred
around the person and personality of the founder or CEO and, as such, present
weaker investment propositions. Investors look more favourably at companies
that can ensure business continuity through an articulated succession plan that
eliminates key person risk.
A practical global example is what
happened with Apple following the passing of Steve Jobs. Tim Cook took over from Steve Jobs less
than two months before the Apple founder passed away. He has grown market
capitalisation by around 600% to nearly $2.5 trillion in the decade since while
more than doubling annual revenue.
3. Accessibility as a
Strategy. An effective
strategy is typically demonstrated by understanding the operating environment
and implementing new product ideas and market channels. Given Nigeria’s
population and other demographics, solving for mass-market access to goods and
services is a consistent winner.
For example, the change to small packaging in Nigeria with
milk, soft drinks, alcoholic spirits and medicine by Friesland WAMCO,
Promasidor, Diageo and GlaxoSmithKline demonstrates a more acute understanding
of market needs over and above an already well-established sales strategy.
4. Stakeholder
Relationships. More than
most places, Nigeria is an environment that runs very much on high-quality
relationships because being investable is not just about the internal strength
of an organisation but how well it is placed externally.
Engaging in key relationships
proactively and often can help mitigate any potential risks. This is particularly true of regulators, which are
becoming increasingly prevalent in Nigeria as the market matures.
5. Revenue Model. Currency depreciation is a substantial
concern across many African economies but is particularly pertinent in Nigeria,
given the wild exchange rates over the past seven to ten years. As the country moves towards what looks to be some sort of
unified, market-driven exchange rate, investors are left
seeking ways to counter both depreciation and USD cash shortages.
Companies that can either price in
foreign currency or index their prices accordingly are very attractive to
investors because they provide a level of revenue assurance. Admittedly this
aspect is out of the control of most businesses, but it is a significant boost
where the possibility exists.
Ighosime Oyofo is an experienced emerging
markets investment banker with a track record in financial institutions,
telecommunications, infrastructure, consumer goods, industrials, real estate
and education. He has worked across project and corporate finance, strategy,
capital markets, SME and M&A advisory for the past 15 years and has been
involved in deal structuring, execution, valuation, due diligence, senior
relationship and stakeholder management, origination and business development.