Venture Capitalism and the Entrepreneurial Revolution in Nigeria
The African Capital Alliance (ACA), a private equity fund manager in West 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 focus on important sectors such as energy, 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 growing confidence in Nigeria’s resurgent economy, considering the country’s first fund of its kind which began in 1998 with capital of just $35 million.
While there is no conclusive data on the size of the Nigerian equity market, estimates for all of Africa put it at over $6 billion in 2000; South Africa, the continent’s largest economy, accounts for half the share. High economic growth fueled by an enthusiastic reform program has seen Nigeria’s growth scale nearly double that of developed markets in recent years. The country’s GDP growth rate in 2006 was 5.6%, significantly higher than that of the US (3.2%) or the UK (2.8%)1. Although the private equity market is still in its infancy here, the growing opportunities to invest in high-growth businesses have succeeded to some extent in eroding the conventional emphasis on public equity and debt. However, significant risks related to investing in Nigeria remain due to unsound policies, a volatile security situation, and massive infrastructure deficiencies. Much of this is true for the continent as a whole and explains why it receives only a fraction of global foreign direct investment (FDI). Of the estimated US$250 billion in global FDI to developing countries in 2001, Africa received only US$11 billion2.
For many international investors, venture capital and private equity in Nigeria are risky propositions due to political instability, violence, civil unrest, and corruption. Progress in this direction has also been hampered for several other reasons:
* Poor corporate governance and lax regulatory mechanisms.
* Bureaucracy, legal restrictions and hostile investment policies.
* High trading costs in the primary stock market.
* Market volatility and the consequent perception of high risk.
* High exit risk for investors due to low liquidity.
* Difficult and often confusing property and property rights.
Over the past decade, Nigeria has shown a strong commitment to reforms. The Investment and Securities Decree became law shortly after the return of civilian rule in 1999, opening the economy to foreign investment. The government of former President Obasanjo also established the Securities and Investments Court for the speedy resolution of disputes arising from investment agreements. Most recently, the Securities and Exchange Commission slashed stock transaction fees from 6.9% to 4.2%. International venture capital investors have shown increasing interest in Nigeria following the liberalization of several major markets such as telecommunications, transportation, and oil trading. The fact that the 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 tremendous potential to Nigeria’s economy, the third largest in Africa and one of its fastest growing. The country’s ambitious Vision 2020 program and the UN Millennium Development Goals together represent considerable challenges in terms of economic reactivation. Past experience strongly favors large companies, which have had a dismal track record and high failure rate in both public and private operations. Without a doubt, the fate of Nigeria’s long-term goals rests on the rapid proliferation of SMEs and their ability to fuel a business revolution that will sufficiently diversify the economy away from oil and reverse decades of stagnation. The objective is to use SMEs to generate sustainable development, job creation and, most importantly, poverty reduction.
This is where venture capitalism derives its importance in the context of Nigeria’s long-term ambitions. Private equity investment has been responsible for some of the most notable economic success stories around the world. Entrepreneurs who started with angel loans made India the world’s largest software exporter. In South Korea, small, booming high-tech companies bypassed larger firms to lead the country’s recovery from the Asian economic crisis. Equity-financed companies have also posted strong growth figures in developing Asia, Europe and South America. 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 policymakers in this regard:
* Establish a venture capital technical assistance program to improve EMS performance in various economic sectors.
* Institutionalize tax benefits for capital investment to attract foreign investors.
* Provide risk guarantees to create strategic venture capital industries that enhance self-sufficiency and reduce import quotas.
* Improve the capacity of venture capital to stimulate and promote industrial expansion.
* Focus capital investment on SMEs that optimize the use of resources and help local development of raw materials.
* Promote innovative business ideas, processes and techniques that boost both productivity and profitability.
* Accelerate industrialization through the infusion of capital in high-growth areas such as telecommunications and tourism.
The Nigerian reform process prompted a unique voluntary initiative at the turn of the last century when the Nigerian Bankers Committee launched the Small and Medium Enterprise Capital Scheme (SMEEIS). Billed as an attempt to promote business expansion, the scheme required all locally operating commercial banks to earmark 10% of pre-tax profits for equity investment in small and medium-sized businesses. Although more than 18 billion naira had been set aside by 2003, utilization of the funds remained abysmally low at less than 25%. The Central Bank of Nigeria owed it to the lack of viable projects and the general reluctance towards the capital company. If poor management and business presentation skills are areas of concern, the prevailing anti-venture capitalism mindset in both existing and start-up companies is even more so.
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 business successful and profitable than owning 100% of a dying business.