Managing Director/Chief Executive Officer, Capital Trust Investment and Asset Management Limited, Seyi Oke, in an encounter with Festus Akanbi spoke on the prevailing investment climate in Nigeria and the fear that the commencement of political activities, including campaigns may make the equity market unattractive to companies seeking to raise funds in 2022
The State of the Nigerian Economy
With the devaluation of the naira and the slowing down of the economy, it’s been pretty tough. There is less money for investment and there has been pressure from the spending of government. The private sector too has been careful. We have been watching for some risk factors. The election is by the corner and this has impacted our ability to attract foreign currency investments because let’s say you took a dollar investment in January and now even if you were able to run it profitably in naira, by the time you want to switch back to the dollar, you will find out you are running at a loss. So, it has been a challenge as well. In the healthcare space where we play, for example, we have a lot of clients who have taken monies from banks and investors that are dollar-denominated and they have to give returns in dollars. You can understand how challenging that has been.
Part of what we offered is to give clients the alternative of exiting their dollar exposure and replacing it with naira exposure, eliminating foreign currency risk from their business and that’s a huge part of our value proposition and it’s part of the services we have been able to effectively render within the last one year. We are optimistic that government will have to spend some more, elections are around the corner, there is increased pressure for capital expenditure, the government is looking to fully deregulate the petroleum sector with the plans to remove the subsidy on petrol importation. That will also impact the purchasing power of Nigerians and the only thing that can be a relief is an increase in economic activities of the government and we are expecting that will happen especially in the election year.
Drop in Portfolio Investments
You cannot take away concerns that have always been associated with foreign exchange risk. The biggest challenge for me is the follow-up effect on this demand, Because of the uncertainties, foreign investors are taking their money out, and then you will find a lot of local investors as well, because of that, they are taking naira and switching to dollars, further putting pressure on the naira, vis-à-vis the dollar. Yes, there is that pressure, yes, that has been impactful especially in the capital market with regards to direct foreign investment by way of private equity investment and investment in the stock market and I think the biggest pressure is coming from the follow-on effects on Nigerian investors who are now panicking or scared because of this sudden flight of capital.
State of Capital Trust’s portfolio management
We believe private equity is an opportunity that is emerging and growing in Nigeria. The market is saturated with a lot of conventional asset classes like stocks, corporate and government bonds. But where the market is going is alternative securities investment. So being able to come up with alternative investments that have returns that are inflation hedges because they have much higher-level returns than even higher than inflation is where the market is going.
We have identified that as far back as 2015 and started working towards that. The Securities and Exchange Commission licensed infrastructure fund in 2015, we spent the next year and a half working with our partners for that fund, we started raising money in 2016/2017. In over three years, we have been able to deploy capital effectively in the infrastructure space. And again, it is the infrastructure that is generating revenue, so you will find out that the value of those assets has greatly increased and also increased.
Investors who put their money in this type of portfolio will be excited by the level of return they are getting. Similarly in the healthcare sector, we have the N100billin Nigeria Health Development Fund, which is also a private equity fund, and the strategy in both cases is to go after local capital, money is with the pension fund, money is with the insurance companies, who already have a lot of exposure to government securities and
the regular capital market and stock market options in terms of shares in premium companies, providing them with alternatives under putting their money in the healthcare sector. We have a lot of pension assets, PFAs which have subscribed to the infrastructure fund. We have a lot of PFAs too that have subscribed to health care funds and the idea is to deploy this large pool into the space and in both cases, we have been able to generate returns that are higher than inflation, so we give good returns to our investors.
Raising Equity Capital in 2022
Listing or coming to the market to raise money in this climate, in my opinion, will be tough in 2022 given the risk associated with preparation for the 2023 elections.
Investors tend to be very conservative as elections get closer so putting money inequity is not what I will advise my client to do. Investors will prefer to identify with short to medium-term returns that they can get within this particular tenure of this administration again because of the natural uncertainties that come with the election. I foresee 2022 to be a year when there will be a lot of debt issuances, pre-financing, syndications as a stop-gap rather than equities coming to the market to raise funds.
Have the real estate potentials been fully tapped? The answer is no. The housing deficit is a clear indication of that effect. I think the issue is not whether the opportunities have been fully tapped, it’s really about offerings in the market. We have so many of us who are developing property and we are targeting the upper middle class and above. We have a lot of houses in Ikoyi and Lekki but how many people can afford them. Where the gap is in affordability and part of what we are trying to do as a company is to focus on that sector. If we do that, we will make money and have an impact. For our infrastructure fund, for example, we will not build houses in Ikoyi or Lekki. We have only one transaction in that axis, all the other ones we are doing in the real estate space are around affordable housing for civil servants and the target has been the hardworking men and women in the immigration service and that project is already going on in Abuja and other parts of Nigeria. Our focus is affordable housing. That’s where opportunities are and we believe that’s where we can make money and be impactful as well.
Capital Trust Achievements in 16 years.
We started as retail investment managers with the focus on trying to create opportunities for small funds to be pooled together and invested in assets. That was our strategy when we started in 2006 and then we evolved into a full-time, wholesale investment banking business where we have been able to maintain our clients from retail investors to wholesale investors as well. Over the years, we have expanded capacity.
Specifically, within this period, we have been able to set up an infrastructure fund. That was the first private equity fund in Nigeria that is pure equity. We are also the first promoter and fund manager to the first naira denominated dedicated healthcare fund and interestingly, this fund was set up before Covid and we had foreseen the opportunity in healthcare and we came up with a model even before Covid struck.
Capital Trust is a licensed capital market operator and this means we function in the capital market. We are licensed by the Securities and Exchange Commission to act primarily as fund managers and also as corporate investments advisers. It means we are licensed to manage structured funds and to provide financial advisory and investment services as well, as a corporate organisation. The company was incorporated in 2006 and we got our licence the same year. We are 16 years old now and over the years, we have three structured funds today-The N100billion The Nigeria Healthcare Development Fund; we are a co-fund manager in the Nigeria N20.5billion Africa Infrastructure Trust Fund, and we are also the promoters and managers of Capital Halal Fixed Income Fund. The Nigeria Healthcare Development Fund, a private equity fund focuses on investing in healthcare. The Africa Infrastructure Fund focuses on investing in infrastructure and the Halal Fund focuses on Shariah-compliant investment opportunities.
Capital Trust as an organisation has a DNA for innovation. We have always been very creative from the inception of the business and we have been innovative in our product delivery irrespective of what the market offers. That is not to say that we do not face the challenges that other financial institutions face but we can find a way to create products that keep our clients.
In the past year, this has helped us to keep our heads above water. We have been able to do very well and then this year has been a better year or shaping to be a better year than we did last year. In the last year, it has been an improved performance.