Technology and Energy Investing in Nigeria – Interview with Chinaza Onuzo
In recent times, conversations about Africa is shifting from economic gaps, foreign aid, and difficulty in doing business to opportunities, creativity, a promising demographics, and financial inclusion. Given this, there has been a steady rise in investments in many industry sectors in Africa. The decrease in trade barriers and the increase in intra-African trade, has given rise to the need to diversify investments especially in the digital age. The future of economic development in Africa is of course, not without infrastructural challenges such as adequate means of transportation (roads, ports, rail, diverse transit lines) limitations with power grids and supply, and IT backbone. Nonetheless, Africa continues to persevere and naturally, the evolving climate fosters economic growth and entrepreneurial-fuelled innovation and invention. This has led to an increase in investments in sectors like supply chain, e-commerce, real estate, energy, and telecommunications, to name a few.
With this is mind; we sought to learn more about technology and energy investing in the African country with the largest human capital, Nigeria. And we had the opportunity to speak with the extremely knowledgeable Chinaza Onuzo, the Vice President at Africa Capital Alliance (ACA), who is particularly savvy in the technology and energy investment space in Nigeria. Chinaza is currently one of the Telecommunications, Media and Technology (TMT) investment leads for ACA and sits on the boards of a number of portfolio companies. Chinaza has completed transactions with investments totaling over US$1 billion in a number of sA: ectors including – Financial Services, Oil and Gas and TMT. He holds a Master of Science in Economics and Finance from Warwick Business School in the United Kingdom. He is also an alumnus of Duke University, holding a B.A. and B.Sc in English and Economics respectively.
Read our interview below:
Q: Thanks Chinaza for taking the time today to speak with me. If you don’t mind, I’ll dive right into it. In your opinion, what is the current landscape for investments in Nigeria?
A: The Nigerian investment landscape has greatly improved especially after the Central Bank of Nigeria (CBN) put in the exporter and investors window or Nigeria Autonomous Foreign Exchange Market (NAFEX) window, which is essentially a freely floating window. The black market, which was around N500 to a dollar has had a significantly drop to about N360 – N370, and this has improved the general investment climate. So we are beginning to see a renewed appetite for the Nigerian stock market, and we are seeing an increase in investments in funds. What this means is that private capital that was tipping on the sidelines is now starting to come in. We’ve just come out of a rough 12 -18 months but we are beginning to see some recovery for investments.
Q: What is the current level or rate of technology and energy investing in Nigeria?
A: In technology, there has been an increase in the smaller segment and there’s been a number of venture capital and accelerators set up in the last two years. There have been a lot of Nigerian businesses getting to prestigious spaces like Y-Combinators, 500 Startups, and you see Facebook investing in a company called Andela. In general, we are beginning to see a lot of interest in technology and we expect that as those companies expand and deliver, there will be a wave of funding over the next 3 – 5 years. On the larger segment, there’s a lot of interest in the backbone of the Internet particularly as it relates to telecommunication—there’s a lot of interest in access and data centers. So there are opportunities in both the small and large segments.
Energy is a slightly different kettle of fish. Because the oil prices has basically led to a slow down in investing especially in the oil field services space. We saw a lot of rates come down as they do when prices drop, so people are taking a while to recover from that. We are beginning to see a little bit of activity and the independents are starting to find their footing. We are also seeing a lot of interest in gas. There are people interested in gas to power supply. That part of the value chain will get a lot of investment over the coming years. The question remains as to how soon, because some of these projects are fixed projects and they take a while to come to fruition.
Q: Which areas (in technology and energy) are seeing increasing or decreasing investments?
A: There was initially an increase in investments in the downstream space post the partial deregulation, but we think that will slow down given that there was a little bit less deregulation than what was expected.
Q: What are the procedures involved in both technology and energy investing as it relates to ROI, risks and exit strategy.
A: In terms of tech – the purely tech space in Nigeria, as it is quite young; is primarily a venture space. Hence, the tech space values more aggressive returns. Telecommunications however is more mature, so we are looking at ROIs of 20 percent at best.
Energy is as always, around 10 – 15 percent returns with an opportunity to add leverage to increase individual equity returns.
Where risk is concerned, the factors are significant but of different types. So in the tech space for example, the risks are primarily related to the ability to properly execute, so the risk is more on the security of the individual company than on the regulatory framework. The exception is in the cases of fintech companies that are regulated by the CBN.
Now on the energy side, there are more regulations. You have multiple regulators affecting what you do from the ministry of petroleum to the department of petroleum resources (DPR) to the National Petroleum Investment Management Services (NAPIMS). So there is a lot more hurdles to cross, which is why mainly large players are able to invest in energy. Now having said that, you also find that people in energy are generally more financially sophisticated, so that enables you to structure some sort of “downside protection” and enables you to get your money out if need be or negotiate a sort of exit.
Q: Are there any new regulations introduced or put in place to facilitate investments and/or encourage/raise incentives for foreign investors?
A: Yes, there are a few incentives like tax holidays, visa on arrival, and freedom of repatriation. There are also things like one stop business shop, and other endeavors by the Nigerian Investment Promotion Council. The NAFEX, which I spoke about earlier, essentially allows foreign investors ease of entry and exit. So endeavors and processes are just generally working to ensure that Nigeria attracts more investments. And a favorable climate like the ones being promoted is necessary, because, when you look at Nigeria’s overall infrastructure, the private sector and government contribution is about 10 – 20% of what is needed, so we need more investments to drive growth. So the government and other vested interests are actively working to drive more investments.
Q: With regards to technology and energy (or just investments in general) are there states in Nigeria that are more conducive for investment?
A: Where technology investment is concerned, historically, many investors and entrepreneurs have a preference for Lagos, as it has about 40% of the country’s GDP. Lagos is also believed to be a good starting point as companies believe that if they can scale in Lagos, they can then easily expand to other major states and cities such as Port Harcourt, Owerri, Ibadan, and Abuja, Benin etc. For now, Lagos seems to be the primary destination.
In Energy, there are a lot of investments in Lagos but also in other places where investments have already been made. Port Harcourt and Warri for examples are big energy towns. Nonetheless, the centers of investments in Nigeria are still predominantly Lagos and Port Harcourt, in the Energy space.
Q: What are some challenges to anticipate when investing in Nigeria? Are there any particular challenges/risks associated with investing in technology and in energy in Nigeria?
A: So in Nigeria, like many countries in Africa, an understanding of the place and culture is necessary. You need to know the culture and the people you are working with, and especially in the tech space. You need to know your local market. Sometimes, investors try to do a number of things that they think will work in Nigeria because it worked in another market like Kenya or China, but when they come to Nigeria, they struggle. So, the local market matters. And basically, if you are not solving a local problem, then you may not get the type of adoption that will make your business successful.
With regard to energy, you need to understand the specific laws that apply and also find the many credible operators that you can cooperate with. Like other places in the world, you need to find what you need in other to reach your objective.
Q: How is the knowledge (or lack thereof) of President Buhari situation affecting investments or investment decisions? In your opinion, is there a brewing uncertainty about a potential transition?
A: The current situation is not ideal but the acting president (Vice President Yemi Osinbajo) is effective at enforcing the authority and function of the president, to the best of my knowledge. And he has been able to enforce certain things such as the executive orders that were passed with regards to the airports or signing of the budget. So there is a process in place for the acting president to act in place of President Buhari. Nevertheless, we are all hoping for a speedy recovery of President Buhari, to have no uncertainty with reference to Nigeria’s political future. Moreover, there was a recent meeting of governors in London and there’s optimism that the president will return. From an investor’s point of view, we can say that the uncertainty is not helpful despite the good work of the acting president, so the quicker President Buhari returns, the better for the country.
Q: How did the most recent currency crisis affect investor’s ability to receive their returns (or the amount of their return)?
A: The currency issue was quite significant about a year ago – there were people who were able to repatriate proceeds but according to Bloomberg and Reuters, the backlog was $5 billion dollars in outstanding claims, which also created the massive difference between the parallel and actual market. However, with the introduction of NAFEX and non-deliverables forwards and the measures that the CBN has introduced, most of the backlog has been taken care of and we are in a position now where the market is ready to be stable. The government is currently working to get the market to about N350 from where we currently operate at, but that is something the government is continuing to work hard towards.
Moreover, CBN continues to intervene in the market a little bit and putting in liquidity to bring the rate to the price they want.
Q: When speaking to some investors, one of the questions I’ve been asked relates to taxes. So, in passing it forward, are there taxes involved for foreign investors?
A: There are no additional taxes for investors other than the taxes they pay as part of the investment, besides this; there is no special tax. So if you earn dividends from your investment, you get taxed at the same rate as your local investor and the taxes are evenly distributed. If you are selling your stake at a company there is no tax on the capital and equity investment, so you are able to take that free and clear. But Nigeria is generally very hospitable to foreign investors on various items, including taxes.
Q: So, as you work at one of the leading investment firms in Nigeria and perhaps Africa, I wonder, how does ACA help investors navigate the Nigerian landscape?
A: ACA has been investing in Nigeria for over 20 years. We were founded in 1997 and we raised our first fund in 1998. We have a team that is highly experienced in investing. I, for one, have been doing this for over 11 years and the average tenure of the investment teams that manage funds is about 8 – 10 years. We are very focused on ensuring a margin of safety.
Q: How does ACA mitigate risks and combat corruption in business and investment practices?
A: In terms of corruption, we adhere to the highest international standards. From the DFIs (Developmental Finance Institutions) and code of conduct that we adhere to. We have a corporate governance body that ensures that we have and use best practices.
Q: Does ACA have a presence in other African countries, and in the rest of the world and to what extent?
A: Our main base in in Nigeria, but we have a few things going in Ghana and West Africa. So we are more rooted in West Africa as opposed to pan Africa. Furthermore, a minimum of 50% of our investors is foreign. And this number continues to grow as our funds become larger. Almost every investor who started with us on our first fund has stayed with us to date. So we’ve been in and continue to have a very successful relationship with foreign investors.
Q: Does ACA also invest in its projects?
A: ACA is a fund manager. So we tend to invest in the fund, so it is rare that ACA invests in the companies directly without investing in the fund. Though it has happened in the past.
Q: Does ACA have any experience dealing with Scandinavian or European investors?
A: I cannot recall having had Scandinavian investors. I recall having met with people from a Swedish DFI at an FT Africa conference but it [an investment] did not materialize. But in terms of Europe, we have a number of European DFIs in our funds and we partner with other European investors as well.
Q: What type of investments is ACA involved or interested in?
A: We are investment agnostic and are quite open to various sectors. I head our TMT practice. We engage in healthcare, education, energy, oil and gas, power, financial services, FMCG, and we also have a dedicated real estate fund run by a separate team. So, we pretty much invest across the board and we look to investments that bring target returns of 25 – 30 % over a 5 – 6 year period.
Q: I would like to return briefly to the processes in place to facilitate investments. It is my understanding that the Nigerian Federal Ministry of Industry, Trade, and Investments (FMITI) work mainly to create an investment-ready environment for both local and foreign investors. But beyond the FMITI, are other Ministries working to drive investments?
A: It’s mainly the FMITI who is the primary driver for ensuring the attractiveness of investors to Nigeria. Nonetheless, it is possible that other ministers have sector specific incentives to facilitate investment, and I have heard of a few instances. But the overall responsibility for facilitating a welcoming investment climate falls on the FMITI.
Okay, so this concludes all the questions I have for you today. Thanks, Chinaza for taking the time to speak to me. It has been very informative.