Venture capital and alternative investments in Nigeria: Tapping into a local reservoir


Nigeria’s financial landscape has undergone a remarkable transformation since the return to democracy in 1999, marked by a growing inclination towards diversification of sources of financing and a renewed focus on intra-African trade and investment.

The narrative of Africa relying on international DFI funding is evolving, propelled by the realisation that African markets hold a substantial reservoir of local capital primed to fuel economic growth and development. Local savings can be mobilised for investment and international capital outside the traditional DFI orbit – can and is being raised to work with this local capital.

Redefining prosperity: A native paradigm
Traditionally, international developmental capital was pivotal in nurturing businesses in emerging economies outside the extractive industries such as oil & gas and mining. Nevertheless, the tide is shifting, unveiling an increasing volume of local capital capable of fostering innovation and growth in many sectors of the economy.

There are countless examples that vividly demonstrate this transformative trend. Take, for instance, the partnership between Interswitch and Helios Investment Partners, highlighting the significance of technology-driven solutions in addressing local challenges and attracting strategic supporters.

The collaboration between Nigeria’s NSIA and Morocco’s OCP in regard to fertiliser blending highlights increasing cross-border collaboration to solve localised issues. The partnership between Verod Capital Management (Nigeria) and Kepple Africa Ventures (Japan) to set up and reach a first close of $43m for a pan-African venture fund shows the developing partnerships with international private capital.

Although the Japan International Cooperation Agency (JICA) is a funding partner in the Kepple Africa Venture there are a number of private institutional funders and High Networth Individuals (“HNIs”) as well. For non-traditional sources to raise funding for local start-ups outside just the traditional DFI prism is encouraging. For example, the amalgamation of global and local investments by Flutterwave highlights fintech’s transformative potential, reaffirming Africa’s fintech future.

Collectively, these diverse instances signify a significant shift, with Africa’s internal capital reservoirs emerging as vital catalysts for innovation and growth, ushering in an era of augmented self-reliance and sustainable advancement.

Compelling value propositions aside, it is the risk-adjusted returns that drive investors, especially private capital, this is why stories like Paystack’s instil confidence among local and international investors. In 2020, Stripe’s acquisition of Paystack for $200 million sent a resounding message to the investment community about the value and viability of African enterprises.

Paystack’s triumph illustrates that innovative African startups can provide transformative solutions and secure substantial investments from global giants like Stripe. Paystack also had a number of Nigerian seed investors that helped fund the company from inception to acquisition.

As Nigeria, the continent’s largest economy, offers an appealing investment terrain, successes like Paystack’s bolster confidence in local capital for domestic investment, fostering an environment conducive to nurturing more prosperous ventures and propelling Africa’s tech ecosystem to unprecedented heights.

With other promising African fintech startups gaining traction, Paystack’s acquisition sets a precedent for future significant exits, underscoring the substantial potential awaiting astute local investors in the African market.

Nigeria boasts an expanding cohort of HNIs and African family offices that could play a pivotal role in the venture capital and alternative investment landscape. This segment coupled with expanding pools of savings in pension funds (N16.1 trillion as of May 2023 according to Agusto & Co) and mutual funds make up a significant combined store of wealth with a significant portion of this financial power yet to be deployed in volume in non-traditional investment avenues such as alternative investments. This presents an untapped opportunity to channel local resources into private markets.

Empowered by technology

Nigeria’s growing private equity sector, gaining local traction and global recognition, is a key driver for unlocking the innate potential within these markets.

Coronation Capital’s strategic vision revolves around democratising access to wealth creation mechanisms, not just for HNIs but extending this to Nigeria’s middle class beyond conventional equity realms and paving the way for innovative investment avenues.

Initiatives such as “Wealth by Coronation” seek to empower the middle class, providing access to premium investment opportunities that bridge aspirations with tangible financial objectives. An expanding, tech-savvy section of the middle and entrepreneurial classes now manage their own investment portfolios, investing globally on technology platforms, overcoming the bureaucracy and hurdles of traditional processes.

Technology is a pivotal enabler, facilitating investment platforms and streamlining cross-border investments. Coronation Capital’s steadfast commitment to improving technology-driven accessibility will set it apart, equipping investors with the means to navigate private markets and venture capital with increasing ease.

Safeguarding investor interests

The well-being of investors is enhanced by a robust regulatory framework therefore, regulatory structures must adopt a long-term perspective while remaining nimble and responsive to market developments. This approach ensures that innovative products and offerings adhere to the highest transparency, security and compliance standards.

As local private markets and venture capital evolve, a steadfast commitment to engagement with regulators ensures the establishment of a secure operational environment that safeguards investor interests while fostering sustainable growth.

Recent legislative developments, such as the inclusion of private equity in pension fund portfolios, signify positive momentum towards regulatory alignment with alternative investments.

Coronation is devoted to strengthening the ecosystem by advocating for lucid guidelines, heightened transparency, and measures that enhance investor protection and confidence, thereby attracting a broader spectrum of investors.

Addressing FX volatility

Discussing the safeguarding of local investor interests is incomplete without recognising the impact of foreign exchange (FX) volatility and high inflation on the decisions of local Nigerian investors when considering domestic investment opportunities.

Many of these investors also have connections and liabilities globally so a weakening Naira affects their ability to invest locally as available funds are reduced due to their other cross-border liabilities.

The fluctuations and unpredictability of the Naira’s value against foreign currencies introduce elevated levels of risk and uncertainty into many such investment ventures while also reducing the acceptability of the Naira as a store of value. High inflation erodes not only the purchasing power of local investors but also complicates asset valuation, profitability projections, and overall financial planning.

FX instability amplifies the perceived risk associated with domestic investment, potentially deterring international private investors or local investors with non-Naira-denominated savings seeking stable returns. Measures to address high inflation, and FX instability and restore confidence in the Naira’s value are imperative to encourage increased sustainable local investment.

In an era marked by volatility and uncertainty, variation becomes critical. The Coronation strategy emphasises diversification so includes investments denominated in U.S. dollars, global equities, ETFs, and mutual funds.

This strategy is designed to act as a buffer against currency fluctuations and regional economic uncertainties, while also providing first-in-class local currency investments through ecosystem partners like Coronation Asset Management and Coronation Securities. Investors effectively will have a one-stop shop to meet their Naira and non-Naira investment especially US Dollars needs that will be enabled by cutting-edge technology.

Furthermore, a pan-African presence, solidified through a strategic partnership with Access Bank, empowers us to pinpoint and curate cross-continental prospects.

This ensures that our investors can tap into the wealth of the entire African continent, leveraging diverse markets to construct robust and varied portfolios.

A profound shift in the narrative is palpable, potentially ushering in a reality that challenges the overreliance on external, DFI-concentrated support.

Latent local capital is emerging as a potent force, poised to energise venture capital and alternative investments. Coronation Capital remains steadfast in its mission to guide Nigeria’s investors through this paradigm shift by addressing the historical trust deficit that has often discouraged active participation.

Our path is clear, guided by the principles of education, collaboration, innovation, technology-enabled and supportive of a progressive regulatory stance. We are working to ensure that local pools of capital particularly in Nigeria and, across Africa, become an increasingly important portion of the funding mix for indigenous ventures and projects.

It is also important that international private capital is attracted and deployed with local capital in a sustainable (emphasis on risk-adjusted returns) way so that the portion of international investment capital invested in Nigeria and Africa that is non-DFI related grows exponentially. This can only happen if policymakers and regulators work with local funds and investment managers to address the impediments to this growth such as non-competitive capital controls, policy instability, ease of doing business frameworks and ad hoc regulatory actions.

As we navigate previously uncharted waters, we extend an invitation to investors, regulators, and all stakeholders, inviting them to embark on this journey towards realising this potential, putting African capital at the centre of African investment growth and development while attracting more private institutional investment capital.

Akindele is CEO of Coronation Capital.

Culled from Business Day.