The difficulties Nigerian entrepreneurs endure in the hands of foreign private equity firms and venture capitalists have been blamed on the clever tricks deployed by investors.
Sources on the Nigerian business landscape disclosed that the tricks used by equity partners easily deceive Nigerian business founders into their embrace and eventual takeover of such businesses from founders.
A source familiar with relationships between foreign equity firms and Nigerian businesses revealed that private equity companies are adept at using tax avoidance entities, registering their investment vehicles in places such as Mauritius.
The source also explained that the equity firms insist on the initial investments being in tranches, so as to enable them to scoop shares at much lower value via rights issue.
Another business source explained that foreign equity firms deliberately concede to having a Nigerian founder as Chief Executive Officer for a few years, during which they milk the reputation, goodwill and connections of the founder as a prelude to his/her eviction from the business or being rendered a peripheral figure (such as chairman).
“Once they fully grasp the business model and have acquired sufficient nous on the business landscape, they would quickly remove the founder and take control of the Board and Management,” said the source.
After gaining control of the Board and Management, he stated, foreign equity partners tend to borrow locally against the company’s cash flow, taking advantage of subsidized funds, like intervention funds, to drive growth before selling at a premium to the highest bidder.
In recent times, Nigerian businesses such as fast food chain, Chicken Republic; travel firm, Wakanow; pathology laboratory, Pathcare (now Synlab), telecoms concern, Starcomms; FilmHouse/Imax and pharma retail chain, HealthPlus; have seen equity partners dueling with the founders for ownership.
The issue has become one of huge concern in the business and investment circuit. Last week, Nigerian business owners, under the umbrella of the Business Founders Coalition, called the attention of the Federal Government to the plight of local business founders. The coalition, at a press conference held in Lagos, said: “Our experiences have largely been ‘tales of woes’ which have the possibility of stunting the growth of indigenous businesses like ours. We are also hoping that through this coalition, the government can enact policies and laws that will correct that apparent lop-sidedness.”
Led by its coordinator, Dr. Richardson Ajayi of Synlab, the coalition said Nigerian business founders are forced to go shopping for foreign investor partners because of unfavourable or unavailable access to local finance to grow their business.
The coalition added that venture capitalists usually demand controlling rights as a condition to invest and often seize on this wrest control from the founders.
While admitting that investor partners are crucial for national growth, adding that there are many good equity companies patient enough to see the equity transactions blossom, the coalition said others are simply predatory in their transactions.
“Our objective is not to deride it or even paint everyone with the same ‘tar’. There are many good private equity companies and many successful private equity transactions as well as patient private equity players that understand the challenges of this market. But unfortunately, there are some who come into Nigeria literally to hijack our companies. Our intention therefore is to lead the charge in drawing attention to this unwholesome practice and advocate for a better investment climate for Nigerian entrepreneurs,” said Dr. Ajayi.
He noted that Nigerian entrepreneurs’ options for growth capital are severely limited, as bank loans are hugely expensive where available.
“So, when you are talking to only one investor, which is usually the case, you really are between the ‘rock and a hard place’. You either take the money on the onerous terms or you watch your business dreams evaporate like many have done,” he further stated.
Ajayi noted that foreign investors tend to make sweet promises beyond funding, but do not deliver at the time of the growth, forcing local entrepreneurs to endure the breaches in a bid to ensure their dreams do not go up in smoke. This, he said, often never works and leads to boardroom tussle.
Ajayi noted that the latest victim of the investor/business owner clash is HealthPlus, whose Founder & CEO, Mrs. Bukky George, has been having a raging battle with Alta Semper Capital, a United Kingdom private equity firm that wants to take control of the company, following a breakdown of the investment deal between both firms.