By: Katherine Anderson, Investment Fellow @ VestedWorld and Wharton MBA Candidate, ‘19
I didn’t know much about investing in Nigeria when I started my Fellowship with VestedWorld. At that point in my career, I’d learned quite a bit about finance in the U.S. as an analyst at an investment bank and an investor at a family office — but I’d never had reason to learn the particulars of Nigeria. It didn’t take much time to see that the country is in a period of rapid growth and that it presents an enormous investment opportunity. After reviewing countless pitches and diving into the unique market dynamics of the country, I believe there exists outsized opportunity in two target investment themes: import replacement and technology-based services.
Why Focus on Import Replacement?
Nigeria imports a lot of its raw materials and finished products, and the importation process can add additional costs that pass down to the consumer. A number of factors can contribute to the price premium, like shipping expenses, regulatory costs and exogenous volatility that businesses cannot control. But many products would be cheaper to produce locally — this presents an opportunity for businesses to enter the market and undercut the high prices of imported products. Manufacturing products in the country with minimal imported raw materials would give a price advantage over incumbent providers and furthermore appeal to a price-sensitive consumer base.
Given that so many different Nigerian products are imported, it is important to more specifically identify what industries are the best targets for an investment. Agricultural processing presents a particularly large opportunity. Africa imports about one third of its processed food or drink; and McKinsey predicts that the agriculture industry in Nigeria could grow at 5.2 percent annually until 2030, during which time food, beverage and tobacco processing could reach $72 billion, growing at annual rate of 6.8 percent. The industry represents significant investment potential.
Agricultural processing presents a particularly large opportunity. Africa imports about one third of its processed food or drink; and McKinsey predicts that the agriculture industry in Nigeria could grow at 5.2 percent annually until 2030, during which time food, beverage and tobacco processing could reach $72 billion, growing at annual rate of 6.8 percent. The industry represents significant investment potential.
Government policies also support import replacement as a business model, and, potentially, increase the attractiveness of investments into this theme over the near-to-medium term. When oil prices began to drop in 2014, the Nigerian government banned importers of 41 items from accessing the foreign-exchange markets. The import ban remains in place today and is incorporated in the new administration’s economic growth initiatives. Additionally, some products, such as noodles, fruit juice in retail packs, and beer are outright banned from importation.
President Buhari has pledged to help reduce the economy’s sensitivity to oil prices by increasing local manufacturing and agricultural activity. As a part of the Strategic Implementation Plan (SIP), the government promoted the ‘Made in Nigeria’ campaign that raised awareness of import substitution. Through the SIP, the government also created the Anchor Borrowers Program that connects smallholder farmers to larger processors in order to enhance domestic food production, particularly in rice. The Economic Recovery and Growth Plan (ERGP), announced in February 2017, added additional policy goals. Within agriculture, the plan expects to achieve self-sufficiency in tomato paste, rice and wheat by 2017, 2018 and 2020, respectively. The new federal government attention to backward integration will give Nigerian companies additional advantages over imported products and the trend is that restrictions favoring import replacement will only continue to tighten. Ideal investment opportunities will take advantage of the industries and products that are targeted in these government initiatives, with the caveat that the fundamental investment case should not hinge entirely on government support and should stand on its own two feet.
What Risks Should Investors Consider When Targeting an Import Replacement Business?
Buhari’s administration is openly prioritizing import replacement as a federal development goal, but that does not guarantee that those policies will continue indefinitely. Any government programs could change under new leadership, and Nigeria has its next presidential election in 2019. Contentious programs, such as Buhari’s backward integration programs, are particularly vulnerable to swift and dramatic changes. Many believe his policy changes have led to visible setbacks in the health and quality of life of lower income citizens due to sharp increases in food prices that limit access to adequate nutrition, making them a high-profile target for changes in a new administration. Even if the government interventions are cut entirely, many benefits of import replacement will still exist, but the cost advantages relative to imported products will be softened.
Currency fluctuations are another potential risk and another reason that companies that use locally sourced raw materials are preferable investments. For example, if a company buys imported raw materials in U.S.D. and sells the final product to consumers in naira several months later, the effective raw material cost in naira could be significantly different than it was at the time of purchase. In that time, if the naira strengthens against the dollar, the company benefits. If the naira weakens, the opposite is true, because the company effectively paid more for the raw materials than they were worth at the time of the final sale. In general, imported raw materials add additional costs for a business due to regulatory restrictions and currency fluctuations. The best opportunities for investment will be from companies that rely on raw materials that are (or can be) locally sourced, such as aluminum, sesame seeds, woven fabrics, copper, and nuts.
Another hurdle is that studies have shown that, to a degree, Nigerians have a tendency to prefer imported products. There’s a perception that local products are lower quality. A survey showed that while 86 percent of consumers in Nigeria would consider buying a local brand, they would do so harboring concerns about quality. The silver lining is that not all sectors or products fall victim to that perception. Regarding the clothing industry, for example, a survey found that only 11 percent of Nigerian respondents agreed that international clothing brands are more fashionable than local ones. That represents an opportunity to sway public opinion. Quality is obviously a primary concern for Nigerians, and that’s something local companies can work to overcome. Targeted marketing campaigns and enhanced branding and distribution methods would be effective tools in reassuring local populations, who are open to purchasing locally, of product quality. Companies that deeply understand their target market and find creative ways to overcome the preference for imported products will be the most likely to succeed.
The silver lining is that not all sectors or products fall victim to that perception. Regarding the clothing industry, for example, a survey found that only 11 percent of Nigerian respondents agreed that international clothing brands are more fashionable than local ones. That represents an opportunity to sway public opinion.
Why Focus on Technology-Based Services?
Technological access, adoption and innovation have spread across the continent in recent years. McKinsey estimates that penetration of smartphones in Africa will reach 50 percent by 2020, increasing from only 18 percent in 2015 and indicating a massive influx of technology. Nigeria has been no exception to those trends — e-commerce in the country has doubled every year since 20107. Nigeria also has a large and growing labor force — a fact even more pronounced when set to the backdrop of the country’s high unemployment rate. That gives companies based on human capital a meaningful advantage.
But perhaps most importantly, technology-based services businesses would likely be able to avoid the major risks and limitations other business models would face in Nigeria. Physical infrastructure challenges, such as poor quality of roads, may not impact a technology company that requires only an internet connection. While access to reliable energy is still a problem in Nigeria, not all technology companies require access to constant and consistent energy or internet. For example, a company called PrepClass provides a crowdsourced platform for private home tutors. Even though the service is technology enabled, the primary product is the tutoring. If a customer’s energy or internet cut out for even 30% of the day, there would still be plenty of opportunities to sign up for a private home tutoring session on the cloud-based platform and confirm the session with the tutor. Although nearly all companies in Nigeria will face some challenges related to poor infrastructure development, the issues related to road quality and consistent energy will be muted for many technology businesses.
Capital intensity is also typically less of an issue with technology-based businesses than it is for other investment opportunities. By nature, technology companies most often provide value through intellectual property and design, rather than through the use of expensive assets. As such, they typically have fewer working capital requirements and need fewer capital expenditures to grow. This benefit is particularly valuable for African companies, where access to capital is limited. African companies generally have difficulty raising capital from local debt and equity markets, and foreign direct investment into Africa and other capital flows have leveled off since 20107. Ultimately, low capital needs will improve cash flow as well as reduce barriers to growth.
Some of the most exciting investment opportunities will combine the attractiveness of the technology industry with a services model that takes advantage of both the large labor force and the market peculiarities in Nigeria.
What Risks Should Investors Consider When Targeting a Technology-Based Services Business?
Low capital requirements for tech companies are appealing, but it also makes it easier for competitors to enter the space. When evaluating potential investments, ideal candidates will operate in an industry that has minimal existing competition. They must also have other barriers to entry that are more likely to be intangible, such as customer relationships and brand recognition.
Another factor that investors should consider is that technology companies that require a largely educated staff may encounter difficulties with the Nigerian labor pool. Despite the high population growth, education in Nigeria lags behind many other countries. Over 10 million Nigerian children do not attend school, in large part due to prohibitive costs. When children do attend, the education is often not adequate preparation for high-skilled technology positions. Attractive investments will either have minimal needs for highly-educated employees, or will have a deliberate plan to build up the candidate pipeline and train employees.
Attractive investments … will have a deliberate plan to build up the candidate pipeline and train employees.
When I first began research on Nigeria, it came as surprise to learn of how many exciting investment opportunities there are in the country. Knowing what I know now, it seems obvious. Nigeria is one of the biggest countries in one of the fastest growing regions in the world. Developing my views on the country’s most promising investment themes was not only interesting and invaluable for my future career, it was also enjoyable. I look forward to seeing how VestedWorld ultimately takes advantage of Nigeria’s many opportunities. For now, I’m off to the latter half of my Fellowship, working with a VestedWorld portfolio company for the next 90 days — in, you guessed it, Nigeria! Bon voyage!
 The Economist
 Nigeria’s Renewal: Delivering Inclusive Growth in Africa’s Largest Economy. McKinsey Global Institute, 2014.
 The Rise of the African Consumer. McKinsey Africa Consumer Insights Center 2012.
 Lions on the Move II: Realizing the Potential of Africa’s Economies. McKinsey Global Institute. 2016.
 Why Africa Remains Ripe for Private Equity. Boston Consulting Group. 2016.
 Source: UNESCO EFA Global Monitoring Report, 2012. Website reference: http://unesdoc.unesco.org/images/0021/002180/218003e.pdf