Nigeria's M&A: What's Cooking In 2024?

Editor's Note

Welcome to the first edition of our newsletter! In this issue, we peer into the crystal ball to predict the major trends that will shape the capital markets in Nigeria in 2024. We discuss potential hot deals in the M&A sector, whether SPACs are going to take off in Nigeria, and what Capital Aggregators will do with all that money!

Also on the radar: AI and crypto reshaping finance, raising legal questions around privacy and compliance. Plus, sustainable investing trends like green financing and expanding ESG integration.

We sat down with capital markets expert Wole Adeleke for an insider perspective on recent developments in the capital market and 2024 outlook.

Finally, our Compliance Reminder Pane helps businesses avoid regulatory pitfalls like hefty fines or operational disruptions. We hope this extensive Reminder will be a year-long valuable resource for you and your business.

We welcome your engagement and feedback to ensure we cover topics most relevant to you in future newsletters. Please reach out with any questions or insights to share. Thank you for reading - we look forward to continuing the conversation!

Nigeria's M&A: What's Cooking in 2024?

As we step into 2024, M&A enthusiasm is building up amid interesting developments in Nigeria.

The CBN recently announced plans to raise minimum capital requirements for banks from N25 billion to N100 billion. This looming recapitalisation could catalyse the next wave of banking consolidation. We expect a surge of mergers between mid-sized banks seeking scale, while larger banks acquire weaker rivals. By 2024 end, there will most likely be a significant reduction in the total number of banks in Nigeria.

With privatization of state assets on the cards, deals will heat up in power, infrastructure and transport. Major players in the Telecom industry are expected to divest stakes to comply with local shareholding requirements. Therefore telecoms will also see activity as operators adjust ownership structures. Increased private sector participation in the healthcare sector will drive investments in hospitals and pharmaceutical companies - we foresee robust dealmaking by hospital chains and investment funds.

The oil and gas sector remains compelling. As international oil companies (IOCs) pack up their rigs and leave Nigeria's onshore and marginal oil fields, a golden opportunity is emerging for local players. The Petroleum Industry Act, with its focus on boosting local content, has kicked open the door for indigenous exploration and production (E&P) companies to step up and claim their stake. This shift is likely to trigger a wave of consolidation within the Nigerian E&P space, as smaller companies merge to pool resources, expertise, and capital to compete effectively with established players.

Despite a dip in venture funding in 2023, Nigeria's start-up ecosystem is expected to continue humming along. As founders expand into new markets and new ventures, restructuring into holding structures will pave the way for consolidation, fundraising, and strategic stake sales to new investors.

Nigeria's consumer goods market, underpinned by Nigeria's young and growing population, will continue to attract consumer goods giants and Private Equity firms, leading to deals in retail, FMCG, and manufacturing.

IP: The Unsung Hero.

Throughout this M&A waltz, intellectual property (IP) will be the silent partner, its value influencing every step. . As sectors like technology and healthcare see increased M&A activity, understanding and protecting IP will be more critical than ever. Thorough due diligence will be crucial to identify and assess the IP rights being transferred, ensuring value protection for both sellers and buyers post-acquisition. Clear warranties and indemnities regarding ownership, validity, and non-infringement will be key to mitigating risks.

SPACs: The New Kids on the Block?

The Nigerian Securities and Exchange Commission (SEC) laid the groundwork for Special Purpose Acquisition Companies (SPACs) when it released regulations on SPACs in 2021, and while the party might not be in full swing yet, here's what to expect:

• A Gradual Start: Don't expect a SPAC flood in 2024. The minimum IPO size (10 billion naira) might limit player participation, but the rules could be tweaked to allow smaller SPACs.
• Foreign Flavor: Foreign investors could be interested in Nigerian SPACs, but ensuring easy access to foreign exchange for repatriation will be crucial.
• Promoter Power: SPACs need strong sponsors with proven track records and expertise to attract investors.
• Finding the Right Fit: Can SPACs find suitable acquisition targets within their 2-year timeframe? Nigeria's growing startup ecosystem might offer some promising options.
• Listing Dilemma: SPACs will need to decide between the Nigerian Stock Exchange and offshore exchanges, considering listing requirements and costs. The SEC will have to tread a fine line between regulation and fostering growth.

Overall, SPACs might take some time to truly heat up in Nigeria, but the long-term potential is undeniable. 2024 might be about learning the ropes, but the future could see SPACs playing a bigger role in Nigeria's M&A scene.

While the M&A momentum looks promising, issues around policy consistency, forex liquidity, and transparent regulations need attention for sustaining deal activity. Overall, M&A looks set to scale new highs in 2024 as investors seek exposure to Nigeria's huge potential. Do reach out if your plans involve dealmaking - we can help you with expert guidance and advice.

Capital Aggregators and all that Moolah!

The asset management industry in Nigeria is projected to continue a path of steady growth in 2024, with total assets under management estimated to reach 4 trillion naira by the end of the year. As capital aggregators, asset managers will leverage their expertise to channel funds from institutional and individual investors into productive investment opportunities.

However, growth will rely on maintaining investor confidence through sound governance and adherence to SEC regulations on issues like risk management, disclosure and fund governance. Strict enforcement of rules and new guidelines aimed at enhancing investor protections will be key.

In parallel, we expect crowdfunding platforms to gain relevance as an alternative funding source, especially for youth-driven and creative ventures underserved by traditional capital providers. Increased broadband penetration and fintech innovation will enable more efficient linkage between fundraisers and interested funders.

But thoughtful regulations will be essential for orderly development of crowdfunding and preventing abuse. SEC rules will need to strike a balance between flexibility and investor protections around areas like fundraiser registration, disclosure requirements and platform accountability. Building investor understanding of risks will also be crucial.

If prudently regulated and governed, both asset managers and crowdfunding platforms can enhance their positions as capital aggregators, funneling Nigeria's expanding pool of funds into productive uses and supporting broader economic growth.

The Road to 2024: Nigeria's Capital Markets Gear Up for a Green Future

With the urgency of climate change underscored by the 2023 UN Climate Summit held in Dubai, UAE, Nigeria's capital markets are poised to play a crucial role in catalysing finance for climate resilience investments in the coming years.

By 2024, we can expect green bonds and other sustainable finance instruments to gain further traction as regulators and companies align with global net zero emissions targets. Initiatives like the FMDQ's Green Exchange project will likely accelerate.

Heightened environmental, social and governance (ESG) awareness among institutional investors and corporate bodies will also drive markets toward more sustainable business practices. More firms will integrate ESG factors into their investment processes and operations.

While the transition will take time, the local markets have demonstrated some commitment to supporting climate-aligned investments. With thoughtful regulations, reporting frameworks and partnerships, Nigeria's capital markets can mobilise the patient long-term capital needed to mitigate climate risks and unlock a greener future.

Green Bonds: Financing a Greener Future

Green bonds have emerged as a powerful tool for financing environmentally friendly projects. From renewable energy initiatives to sustainable infrastructure, these bonds are shaping a pathway toward a greener future. In 2017, the Federal Government of Nigeria issued its first sovereign green bond – making Nigeria the first African country and the fourth country globally to issue a sovereign green bond. This is geared towards making the country compliant with the implementation of the Paris Agreement 2015. According to the Nigerian Green Bond Market Development Programme Impact Report (2018-2021)¹, N47.82 billion has been raised through the issuance of Green Bonds in Nigeria, and over five hundred (500) capital markets professional have been trained and five (5) green issuers have been provided technical assistance to support their issuances.

Green Financing: Aligning Investments with Sustainability

Green Financing, however, goes beyond bonds, encompassing a broader approach to align financial activities with sustainability goals. Businesses and investors are integrating green financing into their strategies, promoting eco-friendly practices and responsible investment decisions. An example is Letshego Nigeria Microfinance Bank (Letshego) which drums support for the growth of Nigeria's Green Economy by providing affordable financing for individuals and small businesses. They offer reduced rates to encourage more Nigerians to adopt a sustainable lifestyle.

ESG Awareness: Investing with a Purpose

Environmental, Social, and Governance (ESG) factors now play crucial roles in shaping responsible investment decisions. ESG portfolio advancement has moved from just a moral imperative to the fore of strategic business decisions. The various advantages of advancing an investment portfolio with ESG principles include risk mitigation, improved brand reputation, and attracting socially conscious investors. This sustainability approach can in turn lead to long-term financial success. ESG awareness and implementation of such strategies tend to increase market share, employee retention and increased profitability of ESG compliant companies. There are investors that only invest in ESG compliant entities.

With a new administration in place, Nigeria's sustainable finance landscape looks poised for further growth in 2024. We expect to see more debut green bond issuances as Nigerian entities look to tap into growing investor appetite for sustainable assets.

More companies will likely adopt robust green bond frameworks that adhere to the principles of integrity, transparency and reporting. Regulators may also introduce incentives and guidelines to accelerate innovation in instruments like sustainability-linked bonds.

Beyond green bonds, ESG integration will gain further momentum as asset managers increasingly embed climate risks and social factors into their investment processes. Reporting on sustainability metrics and impacts will become more sophisticated across the market.

While in its early days, the roots of sustainable investing have taken hold in Nigeria. With supportive policies and industry commitment, 2024 could see many more green shoots emerge across the nation's capital markets and financial institutions.

Innovative Financing 2024- What you can do to catch up.

As we journey into the future, the intersection of technology and finance is becoming increasingly pronounced, revolutionizing the way we perceive and engage with the financial world. Let's look at how emerging technologies are reshaping finance, opening new possibilities and the perceived prospects it holds for 2024.

1. Emerging Artificial Intelligence (AI) Trends

Artificial Intelligence (AI) is no longer a distant prospect; it is now a driving force behind groundbreaking innovations in the financial sector. AIs with predictive capabilities such as Microsoft Azure ML, IBM Watson Studio, H2O Driverless AI, robo-advisor, robo-trading, etc, stand out as transformative trends. These AIs use machine learning to determine the future and prevent bad financial outcomes by using available financial data to identify early warning signs. These AIs can automate investment strategies, leverage AI algorithms to analyze market trends and even execute trades swiftly for you.

2. The Future – Decentralized Capital Markets

Blockchain technology and decentralized finance (DeFi) are poised to transform traditional capital markets. Soon, we could see the emergence of decentralized debt and equity exchanges powered by blockchain and digital assets. This would enable transparent, efficient capital raising and trading without centralized intermediaries.

However, for Nigeria to realize this future, the regulatory environment needs to evolve in tandem. As decentralized platforms potentially replace functions of traditional exchanges, regulators like the Securities and Exchange Commission (SEC) will play a crucial role.

Key focus areas for regulators will include crafting rules to manage risks around volatility, custody and settlement of digital asset transactions. Robust know-your-customer (KYC) and anti-money laundering (AML) controls will need to be implemented for decentralized platforms and wallet providers. Disclosure requirements will help protect investors in initial coin offerings and tokenization of securities. Kudos to the CBN for the just released Guidelines on Operations of Bank Account for Virtual Assets Service Providers

Upgrading Nigeria's capital market regulations to accommodate decentralized instruments and entities will enable the nation to harness the benefits of blockchain while safeguarding financial stability and integrity. The potential gains in efficiency and access warrant proactive engagement by regulators and industry leaders alike to chart the optimal path forward.

3. Real-Time Payments (RTPs) and Real-Time Data Analysis

Real-time payments (RTPs) now facilitate instant local and cross-border transfers through fintech apps and mobile money. Real-time data analytics also enables dynamic and responsive financial decision-making.

However, with these accelerations come risks around areas like money laundering, data privacy and consumer protection. Real-time abuse can spread rapidly. Regulators like the Central Bank of Nigeria (CBN) and SEC face the challenge of crafting nimble regulations attuned to real-time finance.

For RTPs, focus areas could include setting limits on transaction values and enhancing monitoring of suspicious transactions. Data privacy laws will need to evolve to cover issues like informed consent for data sharing from bank APIs. Consumer protection will require ensuring ease of dispute resolution and liability apportionment for instant payments.

Keeping regulations timely will enable Nigeria to harness the efficiency of real-time finance while safeguarding user interests and financial stability. Close collaboration between regulators and industry stakeholders will be key to developing win-win solutions. The future may be real-time, but thoughtful real-time regulation will be critical.

Catch-Up Strategies

As a Stakeholder, you should ensure that you operate in this innovation-finance space within the operational standards as stipulated by the regulators, (e.g, the CBN Regulation for Electronic Payment and Collection for Public and Private Sectors in Nigeria 2019, the CBN Guidelines on Operations of Bank Accounts for Virtual Assets Service Providers 2023); ensure that the legal requirement to obtain consent and maintain the privacy of data subjects are observed; ensure compliance with cross-border data protection regulatory frameworks (where applicable), and be abreast with the legal implications that may arise from failure to adhere to regulations. are critical aspects that demand attention.

As a daily user, you can explore the goodness in mobile banking apps and/or digital wallets; blockchain-based remittance platforms (open-banking); and predictive AIs. Familiarizing oneself with these technologies and opting for providers that embrace innovation can lead to better financial decisions and transactions. While exploring, you should be cautious about sharing sensitive information to and from these platforms and ensure that your chosen platforms adhere to stringent security and privacy standards.

As regulators, regulations emphasizing the encryption of customer data and the implementation of robust cybersecurity measures for remittance, RTPs and real-time data analysis services should be adopted; we can take a cue from the United Kingdom's National AI Strategy, the European Union's Markets in Crypto-Assets Regulation (MiCA) and the European Union's Artificial Intelligence Act 2023 to update our regulations. The recently released Guidelines on Operations of Bank Accounts for Virtual Assets Service Provider by the CBN is a step in the right direction. Regulators may need to work closely with industry stakeholders to establish standardized security protocols that are well customized. Specifically for remittance, given the global nature of its technology, there is a need for harmonized regulations to ensure consistency.

Rapid technological advances are transforming Nigeria's financial landscape, bringing innovations like instant payments, decentralized finance and AI analytics. These innovations promise greater efficiency, access and insights.

However, risks around data privacy, consumer protection and financial stability remain. As regulators like CBN and SEC enable innovation, they must craft nimble regulations to safeguard users and the financial system. Areas to focus on include setting transaction limits, enhancing identity verification, ensuring accountability of new providers and boosting data security.

Nigeria stands to gain tremendously by harnessing emerging technologies to expand financial inclusion and efficiency. But this requires balancing innovation with thoughtful regulation centered on protecting consumers and maintaining integrity. Proactive collaboration between regulators and innovators will be key to realizing the promise of an innovative yet stable financial future.

2024 COMPLIANCE OUTLOOK AT A GLANCE

Introduction

The regulatory framework governing businesses in Nigeria has undergone notable transformations with the introduction of new laws and regulations in 2023. These statutory and regulatory changes have either modified existing compliance requirements or ushered in new obligations to align with emerging trends.

Considering current statutory and regulatory provisions, we have highlighted below some key compliance requirements for 2024.

* This is further to the circular issued by the Corporate Affairs Commission on the 5^th of December 2023. However, this is subject to further clarification from the Corporate Affairs Commission.

**The above industry-specific compliance requirements are not exhaustive and may vary depending on your company's subsector or specific license held.

Conclusion

The compliance requirements for each organization may vary based on its industry requirements, business strategy, and operational plans for 2024. Also, laws and regulations are bound to evolve with the changing trends in each industry and sector. In 2024, we anticipate a heightened focus on the regulation of emerging sectors such as finance and technology considering the continuous advancement of financial services and the global shift towards a more digitalized environment. To minimize compliance risks and liabilities, it is important to pay attention to the trends and changes in applicable laws and regulations that may occur in 2024.

Footnotes

1. *Impact-Report-on-the-Nigerian-Green-Bond-Market.pdf