Private equity in Nigeria: Replicating Manchester United's model
Private Equity in Nigeria: MTN and Ikeja City Mall.  Source: Stears Business

Many football fans first learnt about private equity (PE) when Malcolm Glazer controversially took over Manchester United in 2005 through his PE firm, Red Football. 

For much of the 1990s, Manchester United was arguably the best-run football club in England. They were able to stay debt-free while achieving great success on the football pitch by developing promising young teenagers into superstars. 

This success caught the attention of billionaire, Malcolm Glazer. His firm took a loan to fund a 98% take over of Manchester United’s shares. 

His next move was contentious. He transferred the loan burden to Manchester United, loading the club with hundreds of millions of pounds of debt. 

Many supporters were incensed with the sudden debt burden. Some even left to start a new football club - FC Manchester

Nonetheless, today, the business side of the club is doing better than the football team’s current form. Malcolm Glazer brought in a solid management team to focus on the commercial segment of the club. Management focused on taking advantage of opportunities to increase revenue by growing and monetising the presence of the brand in profitable markets like China

In 2019, almost half of the club’s revenue came from sponsorships, licensing and sale of merchandise as opposed to matchday and broadcast revenues. 

Manchester United is no longer the swashbuckling football team it once was, but its annual revenues are higher than ever - from $366 million in 2009 to $796 million last year. 

The football team languishes in 5th position in the English Premier League at the time of writing, but the club was number one in revenue generated among English clubs in 2019. Globally, it also made the 3rd highest revenue among all football teams - behind only Real Madrid and Barcelona. 

The investment by Malcolm Glazer seems to be paying off. But, Malcolm’s stake in Manchester United is just one form of private equity. 

In general, private equity is investing in companies that are not publicly traded.

Technically, this definition includes investments in both mature and startup companies; unlike venture capital that funds young and upcoming businesses. 

However, most people refer to investments in mature privately-held companies as private equity

The term private equity is relatively new. The concept, however, is not. 

Firms have been purchasing ownership stakes in businesses since the early 20th century when Henry Phipps sold his stake in Carnegie Steel to JP Morgan. He used the proceeds from that sale to buy shares in promising companies and benefitted from their growth during the second industrial revolution. 

However, people started to pay attention to PE in the 1980s when American PE firm, KKR & Co, purchased RJR Nabisco, an American conglomerate that sold tobacco and food products, for $31.4 billion, a record at the time. 

This purchase led to the front-page headline on the December 1988 edition of Times magazine: "A Game of Greed: This man could pocket $100 million from the largest corporate takeover in history. Has the buyout craze gone too far?”

By all accounts, KKR’s acquisition of Nabisco did not go as planned. KKR initially planned to hold on to Nabisco for a few years, improve its operations and sell its ownership stake back to the public for a decent profit. 

The American PE firm could not achieve any of this. It ended up holding its stakes in the company until 2004 with the founders agreeing never to put so much money into a single investment again. 

Nonetheless, PE firms quickly spread, chasing down opportunities and investing in businesses all around the world.  

 

Private equity in Nigeria

PE has been in Nigeria since the 1990s. The industry encountered some level of success in its early days. One of the pioneer companies that helped raise the profile of Nigerian PE was African Capital Alliance (ACA). 

ACA achieved considerable success by investing in businesses that grew exponentially. It helped fuel the growth of major Nigerian companies such as Swift Networks and MTN Nigeria. 

At the advent of Nigeria’s telecommunication revolution, ACA invested an undisclosed amount in MTN Nigeria at a time the company was worth only $400 million. 

Since then, MTN has cemented its position as the clear market leader among GSM operators in Nigeria, with 39% of the total market share, ahead of Globacom and Airtel, which each have 27%. 

At the time ACA sold its stake in MTN, the telco was worth $13 billion, giving ACA a handsome 3150% return on its investment. 

A major peak for the Nigerian PE industry came in 2014-2015, a period termed as “Africa Rising.” During this time, the Nigerian economy was snowballing at over 6%, fueled by crude oil prices of over $90 per barrel.  

The World Bank forecasted continuous high growth rates of 5-9% for Nigeria. This, combined with Nigeria’s large population and the increasing proportion of Nigerians living in urban areas, presented an attractive opportunity for PE firms. 

The total private equity funding into Sub-Saharan Africa during this period was over $6 billion, more than the combined funding received in the three years prior. 

Understandably, these dollar investments went mostly to companies in industries positioned to benefit from Nigeria’s fast-growing population and urbanisation rates. 

One such industry was agriculture. Sub-Saharan Africa had 60% of the world’s arable land, and an increasing middle class meant that food would continue to be in high demand. The World Bank predicted that agriculture could grow from being a $313 billion industry in 2013 to a $1 trillion industry in Sub-Saharan Africa by 2030. 

Investors were looking to invest in PE firms whose focus was to tap into Africa’s agricultural market. One example, Sahel Capital, raised $66 million for its Fund for Agricultural Finance in Nigeria (FAFIN) fund to invest in up to ten promising Nigerian agribusinesses. 

Manufacturing was another sector poised to benefit from Nigeria’s favourable population and economic growth. In 2015, Dubai-based PE firm, The Abraaj Group acquired a majority stake in Mouka Limited, the famous foam manufacturing company in Nigeria. 

 

Nigerian tweaks to the PE business model

The practice of PE in Nigeria is a bit different from the western world in a few significant ways.

Generally, PE firms pick out businesses whose returns are likely to compensate for the market risks. 

In Nigeria, these risks are heightened - especially foreign exchange risks (i.e. risks that an unanticipated decrease in the value of the naira could weaken an investor’s wealth). There are regulatory risks too (i.e. risks that a change in government policy could adversely affect a company’s business model). 

For example, the Central Bank of Nigeria’s decision to devalue the naira in June 2016 meant that many investors were suddenly in a situation in which the dollar value of their expected returns had reduced significantly.

The recent re-regulation of motorbike hailing services in Lagos is similar. These firms had to suddenly rethink their business models after the government banned motorcycles and tricycles in many parts of the state. 

To manage these risks, PE firms in Nigeria have had to adapt to the different business climate. They target diversified businesses across various countries and encourage firms they purchase to expand their operations across Africa. For example, PE-backed Nigerian companies such as Continental ReInsurance, Interswitch and GZI Industries also have operations outside Nigeria. 

Risk management is not the only area that differentiates Nigerian PE.

PE firms in Nigeria tend to purchase a smaller stake of businesses than their counterparts elsewhere. 

In Nigeria, entrepreneurs are often unwilling to give up majority ownership of their businesses to investors. 

Why is this? 

Due to the youth of many Nigerian businesses, the founders are still around and are attached to the company; this makes them unwilling to give away too much ownership stakes. 

By contrast, the USA can boast of multi-generational companies such as General Electric, JP Morgan, Goldman Sachs and Hewlett-Packard, whose management were not involved in the founding of the company. As a result, they find it easier to sell stakes in the company. 

In Nigeria, few businesses have existed for more than one generation. Our most prominent companies - GTBank, Zenith Bank, MTN Nigeria, Seplat and the likes - are barely three decades old. 

Giving up less equity allows founders to retain control of the direction of the business. 

But this is antithetical to the nature of PE firms, which usually rely on their majority ownership stake to improve the management team, drive growth and expansion efforts, cut extraneous costs and use technology to increase efficiency. 

The minority ownership that PE firms acquire do not give them enough power to unilaterally impose their desired management team like the Glazer family did in Manchester United. As a result, PE firms tend to be less hands-on in the Nigerian companies they purchase.

A related reason why Nigerian PE firms invest in minority ownership stakes is the lack of leverage in our deals. The concept of leverage is simple. It means taking loans and adding the proceeds from those loans to personal capital for investment. 

The up-side of this is clear. 

Assume you wanted to put your monthly savings of ₦100,000 in a business that could double your investment - you receive ₦200,000 after one year. 

This is fine, but it is more profitable to get a loan of ₦900,000, add it to your ₦100,000 savings and invest the ₦1,000,000, instead. 

This way, you receive ₦2,000,000 in one year. Don’t forget to use a fraction of your profits to repay the loan. This is leverage in a nutshell and is what PE in the western world is built on. 

It’s not the same in Nigeria. 

Because there are less developed credit markets, many PE firms do not go into investments with loans like Malcolm Glazer did with Manchester United. 

The result of this is that the returns on their investment is smaller, but there is also less debt burden on the companies they invest in. In Nigeria, there are fewer controversial news reports of PE firms selling a business’ assets, or laying off workers to repay their loans. Many Nigerians do not even know about PE firms. 

 

Success stories

Nonetheless, PE firms have already amassed great success in the Nigerian business landscape. These companies have provided the funding for ambitious efforts that have helped jumpstart Africa’s largest economy. 

Arguably, one of the greatest contributors to the growth of Nigerian consumerism has been the increase in western-style shopping malls in many parts of the country. Many do not know that these efforts were largely financed and supported by PE firms that have experience undertaking these efforts in other parts of the world. 

Actis Investment, a London-based PE firm, was behind the development of Palms Shopping Mall in Lekki, Ikeja City Mall, Twin Lakes Mall, Jabi Lake Mall in Abuja and a few others. 

PE firms have also used their broad experiences and expertise to support Nigerian businesses navigating through difficult situations. 

A case in point is Wakanow, the Nigeria-based online travel agency. 

Wakanow had experienced declining sales in its largest market, Nigeria, as a result of the 2016 recession. In addition to the dwindling revenue, Wakanow had significant outstanding debts to one of the most powerful banks in Nigeria. The bank even appointed a Chief Financial Officer for Wakanow to ensure the company repaid the loan.

It was precisely at this time that Carlyle Group, an American PE firm, provided Wakanow with a lifeline by investing $40 million in the company, turning its fortunes around. 

 

Impacts are being noticed

The growing impacts that PE firms are having on the Nigerian business landscape are not going unnoticed. Now, the federal government is exploring different ways to support these investments. 

In February 2020, the Director-General of the Securities and Exchange Commission (SEC) even described PE firms as agents of economic growth. 

Currently, the majority of investors in PE are foreign investors. Private equity needs investors willing to invest their money for the long-term. And in Nigeria, too few investors are willing to do this in anticipation of returns in six, seven or more years. 

The one class of Nigerian investors who, theoretically, should be willing and able to invest their money for the long term are Pension Fund Administrators (PFAs). 

However, PFAs are yet to embrace private equity fully. 

Yinka Odeleye, a Partner at Synergy Capital Managers, a Nigerian PE firm, sees the potential of PFAs to boost Nigeria’s private equity industry. 

He tells me “We have not tapped up to 10% of the potential of private equity in Nigeria. When local asset managers such as PFAs start to invest in private equity, then we will see private equity start to reach its true potential.”

Nigeria's pension asset is already halfway to an ₦11 trillion mark, as of April this year. The National Pension Commission (PENCOM) also recently increased the maximum investments that PFAs can make in PE from 5% to 10% of their Assets Under Management. 

This has freed up PFAs to get higher returns by investing more in PE funds and could also boost the strength of the private equity industry in Nigeria.

The promise that these firms have for the Nigerian business landscape is evident. It is a good thing that the government realises this promise and is backing their growth with supportive policies and rhetoric.

We have seen that PE has the potential to help businesses and economies achieve impressive growth, but PE investments do not always go according to plan as we saw above in the $31.4 billion purchase of RJR Nabisco.

Today, increasing numbers of Nigerian PE firms are springing up. If the Nigerian PE investment environment remains attractive, private equity might just be the unexpected catalyst that would get our economy growing quickly again.

 

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Osato Guobadia

Osato Guobadia

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