Carlyle picks up stake in Nigeria’s Diamond Bank
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Carlyle picks up stake in Nigeria’s Diamond Bank

Executives from Diamond Bank and Carlyle reveal the rationale for the latter's investment in the lender, citing the long-term investment horizon despite the oil-driven volatility in Nigeria’s economy.

Global alternative asset manager Carlyle Group has upped its exposure to the African continent with a $147 million investment in Nigeria’s Diamond Bank.

The transaction, which was announced on Monday, will depend on approval by the Nigerian regulators, but if given the go-ahead Carlyle will acquire an 18% stake in the bank.

Uzoma Dozie-large
 We want Carlyle to be active members on our board, to add value and offer up their network, not just to provide capital

Uzoma Dozie

The deal will mark the private equity firm’s first investment in Nigeria and its first in African financial services.

“We have known the Diamond Bank team for a while now, since we started looking at the banking sector much more closely around two years ago,” says Genevieve Sangudi, managing director and head of West Africa for the Carlyle sub-Saharan Africa Fund (CSSAF).

“We were keen to go into business with them because they are a well-diversified bank, with a reputable management team. Moreover, the banking sector in Nigeria reflects the positive, long-term macroeconomic trends in the country, despite recent volatility and was a good investment for the group.”

According to the joint press release, proceeds from the investment will be used to increase Diamond Bank’s tier 1 capital, improve IT infrastructure, and will be used towards the refurbishment and expansion of its branches.

Capital needs

Diamond Bank has raised around $700 million in tier 1 and tier 2 capital during the past two years. In June, it received approval for a N50.3 billion ($309 million) rights issue after the bank’s debut Eurobond in May was scaled down to $200 million from $350 million.

“Market conditions means that liquidity has been tight in Nigeria,” says Uzoma Dozie, Diamond Bank’s recently appointed CEO, in an interview with Euromoney. “A rights issue at this point in time seemed like the most sensible option.”

Adesoji Solanke, sub-Saharan Africa (SSA) banking analyst at Renaissance Capital, says: “The successful rights issue clears the capital overhang which has surrounded Diamond Bank over the past 24 months.”

Diamond Bank’s management recorded a September 2014 Basel I capital adequacy ratio (CAR) of 16.9%, which drops to 13.5% under Basel II and III. If the rights proceeds are factored in, CAR returns to around 17%, according to Solanke.

“To acquire such a decent size stake in the bank, we think Carlyle acquired in part or in full the rights attributable to Kunoch Holdings [set up by the founding members of Diamond Bank] after Kunoch’s acquisition of the Actis’ stake, and possibly picked up some additional shares via traded rights on the exchange,” he says.

Private equity is a long-term call. Businesses
such as Carlyle are concerned with long-term forecasts
as opposed to short-term glitches

Adesoji Solanke

Funds managed by Actis, another private equity investor specializing in emerging markets, acquired a substantial equity stake in Diamond Bank in 2007. In August, Kunoch Holdings acquired a 14.8% stake in the bank after it completed its purchase of Actis’ share.

Before the Kunoch deal, Actis had two seats on the board. “With Carlyle holding an even bigger stake, the group should get at least two board seats,” says RenCap's Solanke. “We do not know Kunoch’s shareholding post the rights issue.”

Diamond Bank's Dozie says: “The number of board members that we will have from Carlyle will be discussed at the next board meeting. We want Carlyle to be active members on our board, to add value and offer up their network, not just to provide capital.”

Long-term attraction

Nigeria’s economy has taken a hit during the past few months. Oil prices have plummeted, production hasn’t met expectations, and around $5 billion worth of oil has gone missing. As a result, the naira has depreciated and the country’s coffers have come under pressure.

In an effort to stabilize the currency, the Central Bank of Nigeria raised the benchmark interest rate to 13% from 12% – an all-time high – and devalued the naira by 8%. As of Wednesday, the naira was trading at a record low of 178.85 to the dollar shortly after the market opened, before a slight rebound.

However, private equity companies such as Carlyle have increasingly set their sights on Africa in a bid to leverage off of the continent’s strong economic growth, which has been reinforced by positive stories such as a growing consumer class and the spread of political stability.

Low yields in developed markets due to quantitative easing has also driven money towards the continent. According to data from the World Bank, SSA growth is set to average at 5.2% for 2014, up from 4.4% in 2013.

Capital flows to SSA continue to rise, hitting an estimated 5.3% of regional GDP in 2013. And while foreign direct investment (FDI) into the region has been poor, the trend is positive: in 2013, net FDI flows to the region grew 16% to $43 billion up from $37.7 billion in 2012, boosted by oil and gas discoveries in countries such as Angola, Mozambique and Tanzania.

Nigeria remains one of the top three destinations for FDI despite recent challenges, according to the United Nations Conference on Trade and Development.

“Private equity is a long-term call,” says Solanke. “Businesses such as Carlyle are concerned with long-term forecasts as opposed to short-term glitches. We view this event as positive for the Diamond Bank equity story.”

Brian Mugabe, head of Africa ex-South Africa research at Imara, says: “Nigeria is still very attractive to the investor. Non-oil GDP has been growing at a faster rate than GDP from oil, and Nigeria is Africa’s largest economy by GDP so cannot be ignored.”

CSSAF, launched in 2011, has invested $300 million on the continent in agribusiness, logistics and transport and financial services in countries including Nigeria, Tanzania, Zambia and the Democratic Republic of Congo. The fund closed this year at $700 million.

Other US-based private equity firms investing in Africa include Blackstone, Fairview Capital, Actis and Emerging Capital Partners.  KKR, which hired Kayode Akinola in 2013 from Helios to head its Africa division, made its first African investment in June this year when it invested $200 million in Afriflora, an Ethiopian company which exports flowers to Europe. KKR’s Africa fund is one of the largest, with $6.2 billion.

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