Nigeria: Vantage Capital shrugs off naira risks to invest in pharma

By David Whitehouse

Posted on Tuesday, 14 February 2023 06:00
A man counts the Nigerian naira at a currency exchange market in Ikeja district in Lagos, Nigeria August 12, 2017. Picture taken August 12, 2017. REUTERS

Africa’s largest mezzanine fund manager Vantage Capital is shrugging off uncertainties over the future value of the naira by investing in Nigeria’s pharmaceutical industry, managing partner Warren van der Merwe tells The Africa Report.

The wide gap between the official and parallel naira rates makes it harder to put money into Nigeria, but does not close the door, van der Merwe says. There are still “very strong businesses” that warrant attention. He is not waiting to see what happens in the election and aims to close the investment worth about $17m in an unnamed company at the end of March.

The South Africa-based firm said on 6 February that it has secured $377m of commitments for its fourth mezzanine fund. Backers include commercial investors from Europe and the US and development finance institutions such as the World Bank’s IFC.

Vantage Capital started investing in Nigeria 10 years ago in a market that was more “frothy and competitive,” van der Merwe says. Macroeconomic uncertainty has made it a “bit easier” to negotiate entry pricing for Nigerian investments. “The underlying business has to be very compelling,” due to the macro risks, and such opportunities are “few and far between,” he says. “We need to be compensated for risk.”

The Mezzanine is a hybrid of debt and equity financing. Such loans are usually not secured by the assets of a company and will rank behind other more senior debt. Repayment terms will often be more flexible than for a standard business loan and the lender will usually charge more interest to reflect the relative lack of security.

In Nigeria, Vantage Capital uses a hedging structure that allows it to provide a mixture of dollars and naira. The pharma investment would be the firm’s first in Nigeria since 2017. It has previously backed Landmark Africa for mixed-use property development in Victoria Island, as well as Purple Capital for Maryland Mall.

Those investments are now approaching maturity. Returns have been less than initially expected due to the difficult economic environment, but both have still produced “credible” returns, van der Merwe says.

Currency is the biggest issue when investing in Nigeria, van der Merwe says, with the wide gap between official and parallel naira-dollar rates serving as an invitation to corruption. The system “won’t be easy for politicians to do away with,”  he says. Still, further investments in Nigeria are possible, he adds.

Morocco and Kenya on watchlist

Since 2006, Vantage Capital’s mezzanine division has made 33 investments in 11 African countries. The main focus jurisdictions are South Africa, Nigeria, Kenya, Morocco and Egypt, with investments on average being held for about five or six years.

Morocco and Kenya remain high on the watchlist. Morocco “ticks a lot of boxes” in terms of political and currency stability, a developed banking and private-equity ecosystem and a diversified, growing economy, van der Merwe says. Kenya also benefits from a mostly stable currency, despite recent shilling weakness, and good rule of law. Still, the fact that both are relatively low risk makes the investing environment more competitive, he adds.

The planned Nigerian investment is part of a focus on the healthcare theme. The firm’s existing investment in CIM Santé in Morocco has enabled the hospital group to expand its beds fivefold to 620 over the past two years, with a target increase to 1,500 beds over the coming three years.

Vantage Capital typically targets medium-sized family-owned businesses that need capital to grow but which have used up available bank debt capacity. Taking on board a new shareholder would mean dilution, but mezzanine finance allows the family to keep control, van der Merwe says. Vantage can also help in attracting private equity funds as it can provide liquidity when a fund exits an investment, he adds.

Individual stakes for the new fund will range between about $10m and $50m. The fund has made two investments so far. These are Seaton Estates in South Africa which will build a residential development on the KwaZulu Natal coast, and Egyptian private-equity firm Compass Capital, which plans to buy a portfolio of office buildings in Cairo.

The fund will have about 15 investments once all the money is deployed, which is likely to take about three and a half years, van der Merwe concludes.

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