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Nigeria 2016 | FINANCE | FOCUS: NIGERIAN PRIVATE EQUITY

Investors are looking for deals in Africa's largest economy, and private equity firms are at the forefront of this cadre, snapping up everything from established energy companies to emerging start-ups.

Investor appetite for private equity (PE) in Nigeria continues to grow. In fields like finance, telecommunication, insurance, retail, and manufacturing, Nigeria is becoming a preferred sub-Saharan destination for PE. With a GDP growth rate of above 7%, a rapidly expanding consumer class and the deregulation, privatization, and restructuring of strategic sectors, there are opportunities to be had.

Nigeria's importance is underscored by its considerable population and its status, after a rebasing of its economy in April last year, as the continent's largest economy. Sub-Saharan countries outside South Africa, such as Ghana, Kenya, Nigeria, and Uganda, are attracting the most PE interest.

Private equity funds invested $8.1 billion in African companies over 2014, which is historically the second highest year of investment in the continent, with the African Private Equity and Venture Capital Association recording $8.3 billion in 2007. The largest of these bets went to Nigeria. Emerging Capital Partners invested $3.15 billion in IHS, a cell phone tower operator. African Capital Alliance, the first institutional private equity fund manager in Nigeria, has four direct private investments funds, with a capital commitment of over $720 million.

The scale of impact of these investments on Nigerian businesses is massive, considering that banks in Nigeria tend to charge high interest rates, sometimes as much as 30%. Therefore, it is clear that those investing are expecting high returns. Nigerian firms that combine high standards of corporate governance with the potential for high returns have been the largest benefactors of PE so far.
Nigeria has attracted US private equity firm Carlyle Group LP, the world's second-largest manager of investment alternatives to stocks and bonds. It invested $147 million in an 18% stake in Diamond Bank Plc, a commercial bank headquartered in Lagos, with operations across West Africa and the UK. The finance will be used for the development of the bank's IT infrastructure, working capital support, and the expansion and refurbishment of its branches. Carlyle has said it may spend as much as $200 million on a second Nigerian company this year.

In April 2015, Aliko Dangote announced a plan to quadruple the supply of gas from 1 to 4 billion cubic feet per day by building pipelines. Pipeline infrastructure is desperately needed in order to support Nigeria's gas-fueled power stations. Dangote announced that opportunity may be backed by Carlyle Group LP and Blackstone Group LP, the world's two largest private-equity firms.

There look to be future opportunities in the power production space as privatization continues in Nigeria, and also in the banking and financial services sector, where PE firms are likely to get involved as the government starts to divest its holdings in financial institutions that it obtained under the Asset Management Corporation of Nigeria (AMCON) program.

One of the largest receivers of PE has been the e-commerce industry, where local investors have about a 20% stake in some of the largest firms. The sector has required relatively high investment capital, meaning that growth of the e-commerce platform has been rapid and returns fast compared to other areas like property and oil and gas. Over the past three years, the e-commerce sector has recorded unprecedented growth. Pioneered by the Rocket Internet-backed retailer, jumia.com, the sector has driven online shopping in Nigeria to about 35% of total formal retail and was valued at over NGN100 billion ($503 billion) at end-2014.

German-owned Rocket Internet's Africa Internet Group has not just been backing one player, but also providing capital for Kaymu.com, an online marketplace, Lamudi, a real estate site, Easy Taxi, a transport app to rival Uber, Carmudi, an auto marketplace, Jovago, a hotel booking site, and hellofood.com.

Other investors are jumping on the bandwagon, with Naspers, who first invested $50 million into Konga in March 2013, and Swedish investment company AB Kinnevik also investing $25 million early in 2014. The most recent $50 million funding into Konga has been led by Naspers, which now controls more than half of the company.

Private equity has the power to transform the fortunes of start-ups that may change the way key sectors do business. Importantly, PE capital does not come with crippling interest payments and requires transparency and strong corporate governance. Although the pension system in Nigeria does not currently provide a base of capital for the industry to draw from, recent pension reforms may change that over the next five years. Nigeria's strong fundamentals and sophisticated start-ups will likely continue to attract PE investments, assuming the country's macroeconomic fundamentals are properly managed.