Union Capital seeks a slice of the Nigeria investment banking pie
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Union Capital seeks a slice of the Nigeria investment banking pie

Union Capital executives reveal why now is the right time to set up shop in Africa's largest market, despite a competitive banking landscape and the current deal-flow drought.

A slew of boutique investment banks are competing in Nigeria's burgeoning corporate finance market, despite the economic and market slowdown.

Union Capital Markets is one of the latest firms to emerge in Nigeria. Born out of Union Bank, it was sold off after regulatory approval from Nigeria’s Securities and Exchange Commission (SEC) last year. 

Yinka Odeleye

 Through private deals, we can diversify our business and create other revenue pools

Yinka Odeleye,
Union Capital Markets

While the business gained some traction under Union Bank, the firm’s new directors believe that Union Capital will soon become a solid presence in the market. The firm hopes to be a leader across business streams: investment banking, advisory, asset management, securities trading and alternatives asset classes, including private equity and real estate.

Yinka Odeleye, previously head of Citi’s corporate finance team based in Nigeria, is one of three executive directors at Union Capital, alongside Egie Akpata and Tunde Sarumi.

“Some of Nigeria’s emerging corporates, the country’s future champions, are not on international investment banks’ radars at the moment,” says Odeleye. "This will be our sweet spot.”

The three directors boast local knowledge and international experience. Odeleye, as well as working for Citi in New York and Nigeria, has held senior positions at Lehman Brothers in the US and local outfit Guaranty Trust Bank. 

Akpata has previously worked as the head of capital markets at UBA Capital and was assistant vice-president of global markets at Deutsche Bank in New York. 

Sarumi was previously managing director at Nigeria’s First City Asset Management and has also worked as a vice-president at Morgan Stanley in the US and Fidelity Investment in Canada.  So what can local firms such as Union Capital offer to the market? From a naira capital-raising perspective, as well as financial advisory for governments, Union Capital says it is well-positioned over international firms to capture business. 

“Most international firms do not participate in Nigeria’s SEC-regulated capital markets activity so are not able to underwrite naira securities because they don’t have a licence,” explains Odeleye.

“Some of them may decide to get the licence in the future, as Standard Chartered bank has done, but they do not have deep relationships with local institutional investors and pension funds that local firms like us have.”

And there is a local content policy where the sale of government assets require local participation by a Nigerian consultant or adviser. While the international firms offer global distribution, product complexity, from swaps to hedging, they are often required by government to partner with a local firm in executing these deals.

“Given the government’s dire financial position, as a result of falling oil prices, we expect the new government to sell a number of assets to private investors to raise funds to plug its fiscal gap and a number of these deals will have to be executed by local investment banking firms, or by local firms in partnership with international banks,” says Odeleye.

While international banks are less active in the market for low-fee, sub-benchmark deals, Odeleye is probably understating the competitive landscape.

To the pessimist, this isn’t the best of times to
start up an investment banking business.
However, we have a contrarian view

Tunde Sarumi, Union Capital Markets

There are several local investment banks, brokerages and securities firms already well-established in Nigeria, including FBN Capital, United Capital and FCMB Capital, which all developed in the mid-2000s. Independent investment banks in Nigeria include Vetiva, CardinalStone Partners and Afrinvest.  

One of the largest independent firms is Chapel Hill Denham, a local boutique investment bank, which has been growing from strength to strength on home soil, working on some of Nigeria’s largest transactions. Most recently, Chapel Hill acted as financial adviser to Lafarge Africa on the merger of its Nigeria and South Africa businesses.

And many of South Africa’s investment banks, for example Standard Bank and Rand Merchant Bank (RMB), are looking to gain more from Nigeria. Standard Bank, as Stanbic IBTC in Nigeria, has been in the country for some time. South Africa's RMB, however, a strong player at home, is starting to build up a reputation in Nigeria as well.

Perhaps one of the biggest pull factors to the country is Nigeria’s sheer size: the government’s latest rebasing exercise highlighted the western country as Africa’s largest with GDP 2013 at $509 billion, 89% larger than previously believed. 

While established local, regional and international players see the benefits of being present in Nigeria, for now the larger, more established firms appear to have the upper hand, especially in an environment where strong relationships can make or break an investment banking business. 

Close ties with government, for instance, can either mean winning a mandate or losing it to a competitor. For all of its expertise, Chapel Hill has worked on many of the Asset Management Corporation of Nigeria’s deals, which observers say is thanks to its strong relationship with the government.

According to data compiled by Dealogic, international investment banking players Citi, Goldman Sachs and Bank of America Merrill Lynch have more than 75% market share in Nigeria’s debt capital markets, accounting for nine deals and $1.77 billion between April 2014 and March. In equity, Standard Bank, Renaissance Capital and RBC Merchant Bank account for 73% of activity, five deals and $680 million in deal volume in the same period.

Most of the independent players have at least a five-year head start on Union Capital. Those affiliated to commercial banks have at least 10 years on them. 

Despite Nigeria’s appeal to international investors and deep capital markets compared with some of the country’s peers, Nigeria’s financial landscape has been subdued of late. Recent bullishness after Muhammadu Buhari’s election as president last March saw stock markets rally in Nigeria. 

Yields on Nigeria’s 2023 Eurobond on April 1, just a few days after Buhari was elected, rallied to 5.9% and market capitalization at the Nigerian Stock Exchange (NSE) gained N904 billion to close at N11.621 trillion.

Market standstill

But since Buhari’s election, primary and secondary markets have come to a standstill. Towards the end of July, yields on Nigeria’s 2023 Eurobond were up to 6.5% and market capitalization of the NSE was N10.656 trillion. At the beginning of the year, after the dramatic drop in the oil price, Nigeria’s former minister of finance Ngozi Okonjo-Iweala dropped GDP growth estimates for 2015 from 6.4% to 5.5%.

So far this year, there has been only one international debt issuance – a Eurobond by the Africa Finance Corporation in May where Citi (with Odeleye) acted as global coordinator for the bond, and Mitsubishi UFJ Securities, Standard Bank and Standard Chartered Bank acted as joint bookrunners. There has been no IPOs from a Nigerian issuer this year.

Some Nigeria commentators argue that Buhari’s slow yet steady approach to leading Nigeria is needed to weed out corruption and push forth transparency. Others, however, have slapped him with the label ‘Baba go slow’ to illustrate the snail’s pace in which Nigeria’s economy is moving.

However, Sarumi is unbowed. “We intend to use the current market sentiments to our advantage by seeking new relationships with potential clients, most of whom are currently sitting on the sidelines waiting for the economic green light,” he says. 

"To the pessimist, this isn’t the best of times to start up an investment banking business. However, we have a contrarian view, with the acquisition of Union Capital Markets Limited – a household name in the investment banking space – we see a lot of opportunities.”

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Union Capital’s directors predict they will be on course to generate “significant profits” over the next five years. During the next couple of years, the firm hopes to gain a 10% market share in local securities underwriting and financial advisory. 

“Asset management is likely to take longer, given the sticky nature of the business and the need to build a wide distribution infrastructure,” says Odeleye. "We expect to reach 8% to 10% market share in asset management over the next four to five years, growing organically.”

Not only does the firm intend on providing investment banking, asset management and advisory services to local Nigerian firms, but the directors also intend on entering private equity deals as the principal. 

“The thing is, in Nigeria, people and businesses, especially some of the newer up and coming businesses are not keen on paying for advisory services, thus we need to open up our structure to ensure that there are other channels of revenue for us,” says Odeleye. "Through private deals, we can diversify our business and create other revenue pools.”

And the directors are not just satisfied with simply operating as advisers to other parties on M&A deals, but would also like to acquire sizeable stakes in well-managed, cash-producing assets in the real sectors of Nigeria’s economy. 

So far, none of the directors’ ventures to pick up such assets have come to fruition, but it is still early days and the directors are confident they will be successful in the near future.

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