Private Equity Investment in Nigeria: Investing in Infrastructure the Best Bet
With Private Equity deals in the US and much of Europe going bust over inability of banks to syndicate the huge loans necessary to fund "the mega buyouts" that became the norm over the past few years and the slowing down of stockmarkets in the same markets, somepeople have written off the ability of the private equity industry to generate alpha returns to its investors.
However, I believe the hope for the Industry lies in exploring uncharted terrritories and extracting more value from their portfolio companies by working with management to improve the performance of such companies. In exploring uncharted territories, few terrains are as unchartered, in Private Equity terms, as Nigeria. There exist substantial opportunities for principal investors in the Nigerian economy to generate higher returns than may be obtainable in Europe or America.
In exploring PE opportunities in Nigeria, there are basically two options available to investors, these are: 1) Investments in Privately Held companies and 2) Investments in Infrastructure projects/deals. Although a number of PE firms, eg Helios, have made some investments in certain quoted companies such as FCMB, I believe this model will not generate superior returns to PE investors, once the Nigerian stock markets "cool down"and normalize. On the privately held company option, a major impediment will be the poor level of financial disclosure by priate companies in Nigeria. This coupled with their often weak corporate governance standards make investing in privately held companies in Nigeria a much more difficult exercise than is the norm in many parts of the world.
Investing in Infrastructure presents a very good investment opportunity, as Nigeria has extremely underdeveloped infrastructure and big rewards await those who can provide it. For instance, electricity supply in Nigeria falls far short of demand and as such most factories rely on "diesel guzzling" generators. There are a number of opportunities for PE firms to invest in Captive power plants that will generate electricity for sale to companies in a restricted area such as the Agbara Industrial area, Ikeja Industrial Estate etc. Furthermore, a company that can get a sustainable business model for providing a good transportation system for transporting large numbers of people in an efficient and comfortable manner.
An example of the gains from investing in Infrastructure is MTN Communications Nigeria, at the time of its creation in the year 2001, the country had less than 500,000 lines. In only Six years of operation, the company is probably the most important member of the MTN Group. The wide gap between the number of lines available and the effective demand for them, led to massive sales and very lucrative margins. Furthermore, PE firms can enter into Public-Private Partnerships to provide certain services to the populace. A very good example will be the concessioning of toll roads, a business model that has been perfected all over the world by Australia's Macquarie Bank, Airports, Sea ports etc. It is clear that Nigeria is on a path of sustained growth and it is clearer still that existing infrastructure in the country cannot keep up with the expected pace of growth. A good strategy may be to invest directly in infrastructure projects or to invest in companies, such as energy companies, port operators etc, with a high exposure to basic infrastructure.
There are profits to be made from investing in infrastructure and though it is not for the faint of heart, the likely gains compensate for the risks involved.
