Private Equity: A Viable Alternative Investment in Nigeria
Alternative investments are generally known to lack liquidity and are thus considered more risky than the traditional asset classes such as stocks and bonds that one can buy and sell at anytime. Private equity happen to be a form of alternative investment that has all the characteristics that can make then to be classified as a more risky asset class than traditional investment. The question we now have to ask is whether private equity in the Nigerian context is as risky as it is generally believed to be. From my own perspective, the answer is no. If private equity investment is well managed, it actually carries lower risk than publicly listed stocks that is managed at the same level as public equities.
Private equities are ownership stakes or stocks that are held in an unlisted but operational entity. Wikipedia and Investopedia provide different and more detailed definitions of private equity investment. Private equity investment should not be confused with Private Placements into which many Nigerians sunk billions of Naira a few years ago. While Private Placements (PP) are forms of Private Equity (PE), not all Private Equities are Private Placements. The PP market was abused in Nigeria between 2007 - 2008; a lot of non-operational companies took advantage of Nigerian's strong appetite for quick returns and lack of financial education to issue PPs for shell companies that had only an office address as an asset. This article will go beyond the vagaries of PPs and explore how PEs can actually help to jumpstart the Nigerian economy.
Historically, PEs had been associated with risky investments in businesses that are just starting up (also known as Venture Capital), are in the process of expanding (PE) or are in the process of going public (Mezzanine - also known as PP). They were considered risky because there was usually no well defined exit routes and thus liquidity was an issue. The underlying companies usually operated in new industries whose viability could not be ascertained and most investors, apart from the founders, usually held minority stakes in the company and thus had little control in how the business was run. For these reasons, PEs are generally restricted to institutional investors and high net worth clients who were financially savvy and could afford to do the due diligence that is required before investing in PE; these kind of investors are known as accredited investors in many jurisdictions, including the US.
There is a stark difference between private equities in Nigeria and in developed countries but the traditional way of looking at these kind of investments still dictate that they should be placed in the same class. This is where I disagree that PEs in Nigeria have the same level of risk as PEs in developed countries an thus should be restricted to only accredited investors. While the PEs in developed countries are focused on new products in advanced industries such as biotechnology, pharmaceuticals and technology, the PEs in developing countries such as Nigeria are focused on technology transfer or bridging the gap between developed countries and developing countries. In essence PEs in Nigeria are generally focused on developing industries that already successful in other climes. A recent PE investment that was successful was in the Telecoms industry and the next big thing is the power industry. These industries are no-brainers and there is no reason these kind of investments should be restricted to only accredited investors since the chances of failure of these industries are near zero.
It is rather unfortunate that the laws regulating investment in Nigeria are so backward that many of the power firms had to rely solely on banks to fund the purchases of power assets. Even the pension industry with trillions of Naira was locked out of this opportunity because SEC and PENCOM had already classified these investments as high risk and thus unsuitable. There is no gainsaying the fact that distributing companies and generating companies are going to be cash cows in a few months and there is no reason to lock out the general public from investing in these kind of deals.
Once the power sector has been fully privatized, attention would be shifted to other sectors such as healthcare, water and education. It is also stands to reason that a lot of foreign funds and bank loans would be available in abundance to facilitate the investment in these sectors. I believe that it would not be fair on Nigerians to also be locked out of these kind of investments when the time comes. When we have gotten to a level where PEs are beginning to focus on products that have no known market such as the next cure for cancer or HIV or the next 3D Laptop, then the SEC can come up with its rules to exclude non-accredited investors from taking such risks.