The perfect storm for investors? An emerging economy and an overhauled London listing

Last week, the UK Department for Business and Trade Africa (DBT) convened Nigerian and UK companies – from banks to energy and tech companies – investors and advisors to a roundtable as part of its campaign “Mobilising capital to Africa”.

I’ve tried to capture the critical discussion points here - highlighting solutions and the next steps to shift beyond theory.

Unlocking capital in an emerging market

As the Nigerian economy emerges from some significantly trying times, we’re seeing new opportunities for growth and investment from its abundant supply of natural resources, diverse climatic conditions, and as home to a growing, young, and tech-savvy workforce.

However, unlocking capital in Nigeria to support these opportunities presents some challenges. Local investors, from infrastructure and renewables to SMEs, are notoriously absent across the board. This absence of local investors heavily impacts the ability to attract international investors and foreign direct investment (FDI). Africa’s inward FDI accounts for a paltry 5.2% of global flows.

Addressing industry capacity is a persistent factor that holds back capital flows, especially as the asset management industry in Nigeria needs to attract a revitalised youthful segment into the advisory environment. There is an opportunity to leverage the UK’s credible advisors affiliated with the LSE to help deliver relevant financing solutions, combining an understanding of domestic and global market factors and how likely it is to impact the Nigerian (or African) enterprise seeking to unlock capital.

Dual Listings

It is vital for Nigerian companies to have an anchor domestic listing on the NGX for direct influence on operations and regulation and to support deep local capital markets (fundamental to the Nigerian economy).

However, as these companies grow and increase their capital needs, they must shift beyond home markets. In the longer term, adding a global platform like the LSE to support growth becomes necessary. The question shifts from ‘which exchange’ to ‘both exchanges (at the right time.’ ?

As one commentator put it, “London gets Africa and has a deep history”, evidenced by the 122 African companies listed on the LSE, of which 50 are dual-listed.

Seplat is a success story. It has been dual-listed for a decade on the NGX and LSE. Despite the touted detraction of costs (incidentally, both the NGX and LSE have recently lowered listing fees), Seplat has benefitted from liquidity, profile, governance, and credibility. It has issued a Eurobond, creating even more liquidity, price transparency and creditworthiness.

Access to capital for SMEs

The Nigerian SME market contributes 50% to the country’s GDP and accounts for over 80% of employment (PwC’s MSME Survey 2020). Yet, on average, fewer than a third of SMEs can access finance at all or at realistically priced levels (ca.25% plus for debt). Furthermore, private equity fund structures for African SMEs don’t serve them well due to transaction (and fund) sizes, fund life limitations or other liquidity constructs.

To find the relevant aggregation structure and disintermediation model to service Nigerian (and, more broadly, African) SMEs, there needs to be a shift from shoehorning to a fit-for-purpose Permanent Capital Vehicle (PCV) that can be listed to attract public capital (likely with the support of guarantee capital).

The question of what a PCV should look like, be named, and so on remains answered to avoid fuelling the argument by investors who view this ‘untested’ structure as driving up (perception) risk. Notably absent in Nigeria are tax incentives for banks and other investors to on-lend/invest in SMEs, like the efficient Enterprise Investment Scheme (EIS)/ Seed Enterprise Investment Scheme (SEIS) in the UK.

Enhancing the 'investability' of Nigerian tech companies

Nigeria saw the largest proportion of tech investment (Disrupt Africa's 2022 Tech Funding Report) in Africa. Establishing a marketplace that allows companies to start, grow, and scale will cultivate this rapidly expanding sector and facilitate investment.

Nigeria must establish a good answer to potential investors about why it is a country worthy of capital. It needs to go beyond selling the exciting market growth and size story and develop compelling case studies beyond the recent unicorns.

The tech sector should benefit from the listed/IPO exit route as a naturally scaled option. This is amplified by the various trading venues the LSE offers relative to company size and stage. Perhaps the most exciting is its new regulated crossover market. It envisages a dozen auctions a year, allowing private companies to share information with potential investors via a closed portal, permitting them control over what type of investors could participate, and setting pricing and volume limits.

No matter the positive marketplace (re)evolution, the role of local capital and government continues to be missing. Seeding a successful tech market must start within the home market, bolstered by an effective campaign telling the story with a constructive narrative emphasising Nigeria’s potential, nuances, and success. Data speaks volumes, builds credibility, and diminishes risk perception.

Concluding action

The inputs from our high-calibre participants signalled the urgency for change and success. The UK is a natural partner to Nigeria due to its understanding of Africa’s biggest market. Despite recent economic challenges in Nigeria, the mood is lightening. An informal poll in the room suggested that 40% of the Nigerian participants had been asked for investment capital on the day in question!?

There is an abundance of ideas and activity – but we need to determine how to mobilise capital at scale, manage risk, tell a good investment story and reshape perceived risk.

As with all the campaign events I host for DBT Africa, if you have firm feedback, ideas, or constructive commentary, please get in touch with me to discuss how we might include these as appropriate going forward.

Thanks to those who supported the event, including Abi Ajayi, Head of Middle East & Africa, Primary Markets LSE, his colleague Tom Attenborough (Head of International Primary Markets LSE), Simon Olsen (Partner Deloitte Equity Capital Markets Group), and Chris Godman (Head, International ECM and Technology Advisory Standard Bank London).