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Venture Capitalism and Enterprise Revolution in Nigeria Part 1

The African Capital Alliance (ACA), a private equity fund manager in western Africa, announced the raising of $200 million from investors in July 2009. The third installment of the Capital Alliance Private Equity (CAPE) fund will target important sectors such as power, oil and gas, communications and financial services in Nigeria and across the sub-Saharan region.

The ACA is confident of eventually raising a total of $350 million for the fund from aid agencies, international banks and Nigerian institutional investors. The development reflects mounting confidence in Nigeria’s resurgent economy, considering the country’s fist such fund that started out in 1998 with a capital of just $35 million.

While there is no conclusive data on the size of the Nigeria equity market, estimates for the whole of Africa put it over $6 billion in 2000; South Africa, the continent’s largest economy, accounting for half the share.

High economic growth fuelled by an enthusiastic reforms programme has seen Nigeria’s growth scale to almost double the figure for developed markets in recent years.

The country’s GDP growth rate in 2006 stood at 5.6%, significantly higher than the US (3.2%) or the UK (2.8%). Although the private equity market is still in its infancy here, increasing opportunities to invest in high-growth businesses have succeeded to some extent in eroding the conventional insistence on public equity and debt.

However, there continue to be significant risks attending investment in Nigeria due to unhealthy policies, a volatile security situation and massive infrastructure shortfalls.

Much of this holds true for the continent at large and explains why it receives only a fragment of global foreign direct investment (FDI). Out of the estimated $250 billion in global FDI to developing countries in 2001, Africa received only $11 billion.

The increasing shift of emphasis to the small business sector is a crucial step in the right direction.  In these days of globalisation and the digital economy, small firms play a crucial role in experimentation and innovation that lead to technological change and employment growth.

They definitely have a key role to play in catalysing the Nigerian economy into a knowledge driven one thereby bringing wealth and prosperity for all. For Nigeria to be able to make such a successful transition it must put in place the right conditions and encourage the right culture that stimulate a knowledge driven economy.

But what does this mean in reality? It means Nigeria must provide the opportunities for ideas, for creativity and brilliance to develop, leading to commercial success in the internal and global market places.

It means Nigeria must put more efforts into fostering a strong entrepreneurial culture in which more and more innovative people can set up their own businesses thereby creating more jobs and wealth.

It means we have to provide the right environment that would enable business to flourish and to grow. In short, it means we have to ensure that the knowledge economy improves peoples’ lives, and Nigeria’s long term economic and employment prospects.

For many international investors, venture capital and private equity in Nigeria are risky propositions because of political instability, violence, social unrest and corruption. Progress in this direction has been impeded by several other reasons as well:

Poor corporate governance and lax regulatory mechanisms.

· Red tape, legal restrictions and hostile investment policies.

· High trading costs in the primary market for equities.

· Market volatility and the resulting high-risk perception.

· High exit risk for investors because of low liquidity.

· Difficult and often confusing ownership and property rights.

Over the last decade, Nigeria has displayed a steady commitment to reforms. The Investment and Securities Decree was passed into law soon after the return of civilian rule in 1999, opening up the economy to foreign investment.

The government of former President O. Obsanjo also established the Investment and Securities Tribunal for speedy resolution of disputes arising out of investment deals.

More recently, the Securities and Exchange Commission slashed transaction rates for equities from 6.9% to 4.2%. International venture capital investors have shown increasing interest in Nigeria after the liberalisation of several important markets like telecommunications, transport, and oil marketing.

The fact that fresh policies have persuaded at least some investors to overlook the high cost of doing business in Nigeria is a significant achievement in itself.


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