Nigeria needs to review tax regime on investment to boost other funds outside pension funds

Egie Akpata’s experience cuts across international banking, real estate and energy. In 2013 when Union Bank Plc decided it was going to simply be a commercial bank and sell off its subsidiaries, Egie and his colleague, Tunde Sarunmi, stepped up and took control of Union Capital Markets Limited, which had been in business since 1999. Last Wednesday in Victoria Island, Lagos, Egie welcomed PHILLIP ISAKPA to his office, where he fielded questions, starting with a broad look at the state of the Nigerian economy, the general investment climate and, of course, Union Capital Markets. Interestingly, he holds strong views on the state of the downstream petroleum sector, the lack of a good tax incentive regime for investment, among others. PHOTO CREDIT: JAYEOLA ISAAC

Anytime I come into a space like this and I see people who are doing investment banking, asset management and private equity, I get excited because I know they know how to make money. So, tell me, what is your take on this economy and the way it is going – we were in recession and came out of that, growth is projected at marginal levels, elections are coming, but the economy itself still gives concerns to many people; what is your take going forward, over the next year?

Well, as you said, marginal growth belie population growth, which means there would be negative per capita income growth, so the economy is crawling, it is not flying. Apart from increasing oil prices, there is nothing to catalyse the economy, and there are policies that should have been done, or are yet to be done, that would significantly change the trajectory of how our economy is doing – simple things like the deregulating downstream petroleum sector and removing the drain on government resources, and fixing the power sector, fixing the tariffs, just basic fixes that can be done that are slowing the economy down. So, I think those policy changes haven’t been made, and they should have happened by now.

And because elections are almost here, and when we get to Q4, the financial market starts to reverse, because of the foreign affairs, and marketing, people selling and moving their money out. So that is going to cause some imbalance in the system and would be most likely corrected by the Central Bank, jacking up interest rates to do some other things; but that means the economy is not likely to boom, given the current policies and government framework we have.

You talk about simple things that need to be done and then when we look at reforms. For a long time, we have been looking at reforms, multilateral organisations like the IMF and World Bank always harp on reforms; but economic reforms in Nigeria have not really followed a pattern that is steady. How can one achieve a steady flow of reforms that leads to an economy that becomes buoyant?

In other economies, governments are elected on philosophies, but we don’t have very strong philosophical foundation for the political parties that get elected or the government that are formed here. If we had that, we would have at least some fundamental ideas that are being pursued or you might say that under Buhari, the philosophy is no IMF, and that is the residual thing from his previous administration. Also, the level of intellectual discourse is not on the level it used to be, meaning that in most systems that transform themselves, they don’t do it without some very thought out ideas; there are administrative changes, but idea changes things. And in Nigeria, the level of intellectual discourse of where to go is very shallow now, compared to the past and some of those things need to come back. Things like what is the main implication of deregulating downstream? How much would it really cost the masses? Is it really serving the masses right now, if the government is taking a huge sum of money that can be used to educate the children of the masses to subsidize cars and others in urban areas? Nobody has quantified these things; we don’t have any economists who have conducted serious studies, saying we are better if the price doesn’t move much, and if it moved, the benefit on the poor people is more when quantified. We don’t have that, we don’t have research from our universities covering that, or big time researchers in the government; unlike before when we had PhD holders in government. How many do we have now? So, there is a big difference; we used to have people who had strong ideas they were pushing in the academic system, but how many do we have now? Government used to say, ok, you have an idea of how we can fix this area and you have been shouting about it for five years, come and implement it. But that kind of thing doesn’t happen anymore. So, until we go back to an idea based environment, we won’t see any significant direction, reform wise.

If you were to suggest, let’s say five big-ticket issues that this economy needs to deal with, what would they be and how might they completely transform this economy?

Well, number one, downstream petroleum deregulation, because of the cost to the government. There is no benefit , just no advantage; it is similar to the deregulation of the telecoms industry. Government should get out of downstream and that would save hundreds of billions of naira every year and would create tens of thousands of jobs and bring the whole downstream back to life. The money saved can be used for other things that only the government can spend on, like education, health, security and the rest.

The second is the power sector. Most of the problems in the power sector are self-inflicted. I don’t have a meter here and I can’t get one, it doesn’t make sense. Why would you say that meters are to be free? I’m ready to buy my meter, and I have money to buy something that is not available. That is what happens under communist economy, not free market economy. So, most people don’t have meters, the whole system is broken down, and the framework to have a working system is already there. The prices of these things have to move, certain things just have to be done and the whole system works; it would bring the operating cost of the economy down permanently and that sector would take off. It is not just cost coming down, but you create economic activities in that sector.

Another one is the whole idea of education. It is 21st century, there is no reason why any country should have the no of children that are out of school like Nigeria does, and it can’t be an issue of cost, it is a priority thing – building all kinds of buildings in Abuja, while people are hawking stuffs on the road, it doesn’t make sense! There is no seriously developed country that doesn’t have a huge chunk of its kids in school. So, that is one that is not clear that it is a problem and it is not clear that the problem would be solved.

Again if you look at environments that have developed, education and healthcare are the two biggest budget items. In Nigeria, the two biggest items are not education and healthcare, whether Federal or states.

Also, the next one is security. The security structure is not designed for the current environment we are in. Probably a reason why Lagos is a little better than elsewhere, is because Lagos is a bit more secure than it used to be. If you have properties in a place where there is a lot of economic activity, there is bound to be more security.

You talked about health, education, and security as forming the social infrastructure of an economy, what about housing? I talk about housing not in terms of availability but access to mortgages, a lot has been tried but they tend to fizzle out, nobody is hearing anything about mortgage refinancing project anymore?

My view on that sector is totally at variance with other people’s views. A lot of problems are about people not following what is called ‘first principles’. In Nigeria, nobody cares about your views, the way it is, is the way it will always be. So you talk about mortgage finance, the idea that people can borrow money below a risk free rate is not conceptually sound. And so the idea was that money can be borrowed at a cheap rate. There is nothing like cheap money; if there was, the Nigerian government will go and borrow the money, so there is no cheap money. There was a time we were hearing that we would get cheap money, concessionary loans, the loans Nigerian government got, which is the euro bond, is the most expensive forms you can get and it is available today; they would just write you a cheque and you go. So fundamental problem – you can’t borrow below the government; it doesn’t happen anywhere. Once you create borrowing at rates below the federal government, below risk free rate, you would have shortage; you would never have enough, because people can make money by taking that money and invest at rate spread. So, you can’t have a sustainable system that would give cheap money. In the past they have tried, Federal Mortgage Bank issued a bond in 2007 or so in Abuja to finance mortgage, the mortgages were at 9.5 percent and the bond was at 9.95 percent, nicely spread, not too big. In five years you would have to refinance the mortgage at 16 percent, a problem. The point I’m trying to make is that in Nigeria, as long as the risk rate is high, borrowing costs will be high. The question is how do we bring the risk rate down? Policies, a lot of macroeconomic structural reforms have to be done to bring it down; but you can’t borrow below that rate. Right now that rate, depending on whose benchmark is being used, is between 13-14 percent. So, why would you get money at single digit? This whole idea of single digit is propagated heavily by CBN (Central Bank of Nigeria), BoI (Bank of Industry), through intervention funds. Most of that money, if properly audited, doesn’t go where it wants. If I’m an industrialist, and I can be financed at seven to nine percent, I’ll take that money, which is the logical economic thing to do; so cheap money route will not get us there.

When you look at the countries that are more advanced like U.S., despite their low mortgage rates, the U.S. government can borrow below those rates. There is that structural part and yes, you can have bubbles here and there where they just give you China, like the national housing funds; but the money can never be enough. You need a market based system, and if it is not market based, then we talk about it fizzling out; so how do you fix the problem? Step one is to increase the volume of housing stock, and not focus on who owns what. Someone might own ten blocks of flats, that’s fine; but just make sure there’s a system in place that those flats are occupied – because as supply goes up, the price will come down.

Again, the ownership system is an Anglo-Saxon concept, it is not a French system, where it is not a money making scheme, unlike Anglo Saxon U.K., where it is a money making scheme. Even in Canada that had probably the second highest home ownership in the world after U.S., if you go to Quebec, which is French, home ownership is far less in Quebec than other parts of the country. So, step one is to have quality homes if they have landlords or not, step two is to decide if I can buy.

I think the starting point should be the urban areas; a place like Lagos, the housing density is very low, so a lot of infrastructure is wasted, the government spends a fortune doing few major roads and then you have people building on that road. So the government should be more tolerant and stop building on that road, since there are more people living in that axis. If you go to Toronto, the built-in subway line has not moved north since 1992, so what did they do? Around the subway line, there were houses, and now those bungalows have now become 40 story buildings, because if you want to get more people living on that subway line, you need more buildings lining on infrastructure already built. So that way, you get good returns on your infrastructure rather than if you had spread yourself thin. If you intensify the density in Lagos, we can probably have people in houses in smaller areas because people that are not rich can’t afford transport and if they live too far, the transport cost will be too high; so they need to move nearer to the core.

On this, there would be issues around land ownership, don’t you think so?

Well, Lagos is doing some urban renewal things and when, maybe those things come in place, new models might come up. What I said is that when you already have the structural plans in place, and you can’t massively expand your infrastructure, so what you do is to get more people to live around the existing infrastructure and the way you do it, is by building taller structures. Of course, in Lagos, the zoning laws will change, but they are not dense enough. We need to have way more places that have more density, because that is how money comes in, build taller buildings. I’m sorry, but some people will have to live in flats especially if one lives in a big city. But the point is to bring mor people into the transit corridors you have, into the infrastructure you already have, so that you don’t have to keep expanding your infrastructure forever.

The key issue is how do you finance that housing? If the density is right, then the issue is construction cost. I’m not saying build 40 storeys, there are places in Lagos that are zoned only three floors and some eight floors and they could get as many as three times the people living on that land. So density is feasible.

There is a lot of institutional money that can come to build. These people would be tenants. Yes, it is not ideal but the housing is close to where they work. By the time you do that for quite a while, if you look at most places in the Middle East, where there are land constraint, in Kuwait City, most people live in the city, not the desert; and only very rich people live in houses. That is eventually going to be done, but we are a long way from that.

All the government agencies we see how many houses did they build, in Lagos state, LSDPC, go there and ask how many houses they not just built but completed and people moved into? You would be shocked, very little. So clearly, government can’t do it, and it has to be private sector driven.

Let’s focus on that, because it cuts across many areas, not just housing, even healthcare, education, the issue of financing and growth, to actually structure it. so bring in the finance guys, like yourselves, who can really bring in the money; how do you start getting that and bringing people in to be interested in this, because government realizes it is impossible?

It is still the problem with the country. In the 1960s, it was ideology based; Awolowo decided education was the priority to western region, and 40 percent of the budget was for education. It was obvious in the budget what the priority was. I don’t think there is any country in the world where the foundation of the education or healthcare is private money, certainly not in the developed world; maybe in other places, because after the second world war, they decided that they were going to operate in a new way, nobody would be dying of cholera in the U.K., because it does not make sense. We already have solutions for these things, so we would take care of every one’s health, and you would pay more tax because of that and nobody would be uneducated. In Canada’s Ontario and Quebec, 40 percent of their budget is health care, because they said they won’t mind the cost but that everyone would have the same healthcare; so that is the starting point. Even the U.S. that people say is too private the bulk of their healthcare is carried by the government. All those private companies you see, their primary source of money is from the government. So the foundation of those systems is government, but the private sector is there to support or provide some services that government can’t provide. So, two things – the foundation is government and the amount of money spent. There is no shortcut; you can’t tell private companies to start doing schools when the average cost per child yearly is one million naira, while government schools are N1000 per child. When you go to other economies, you would see that what the government spends on each child is almost the same as what private schools charge. The gap is not that much. So if private schools are charging N2 million, government should spend N1 million, which means everyone’s taxes would be much higher, but the budget would be structured in such a way that you would see it. You won’t have private funds being the bulk as foundation.

My views are a bit different from that of other people. There is almost no serious long term healthcare investment in Nigeria that has ever been successful. At the hospital level, it is very hard to do. What are you going to do? Build one very big specialist hospital somewhere that cost so much; how do you get people to come there?

Which is why in Nigeria, the best hospitals today are the teaching hospitals. Consultants work in teaching hospitals. The best paid medical staffs today are in teaching hospitals, government owned; they pay more than private hospitals. So, it is going to be very hard to build a hospital in one location that has all the equipment there and for you to get enough patients from this huge geographic spread; very tough, unless the government is giving money to keep the place. So the money is from government and maybe, the periphery, is private sector, not that private is the foundation; it hasn’t been done.

Locally, there has to be a very big mental shift from how much it cost to do these things, and that hasn’t happened. When you look at the budget, you notice that nothing serious can happen, long-term.

Let’s leave government, and talk about the market. Let’s start with the equities market. There was a time, the notion of creating a $1 trillion dollars market was the buzz, but they no longer talk about that, and the market hasn’t been exciting for some time. What or how do you think the Nigerian equities market can become lively again?

Well, I think a lot of things have happened that led us to where we are now, and people need to bear that in mind. A lot of companies listed today were listed because of indigenization; they were forced to list. So the no of companies listed might be inflated because they were forced. But for the past ten years, they’ve been having delisting, companies going dormant, companies going out of business, banks merging with other banks, and that is because nobody has been forced to list. So now, who are the people who should volunteer to list? One, Nigeria, when we had indigenization decree, you really couldn’t have 100 percent foreign companies, until that changed in the 1990s. Now, there are companies that you see around that are doing serious stuff and are not Nigerian owned, but foreign owned, and so their need to list in Nigeria is far less; they prefer to list in domiciliary countries. It is the exciting companies that make the market also exciting. Where are the exciting companies, are they already here, if they are, who owns them, if they are foreign owned, then they are less likely to list, if they don’t exist then that is the problem? If you look at the U.S. for instance, when the stock market crashed in 2000, NASDAQ took over the companies and that market peaked in March 2015, at 5000 from the low of 1000 at 2000. It took 15 years. In that period the main guys who were carrying the company, of all the main companies, just Microsoft and Oracle were left and Microsoft market capitalisation dropped by 150 percent before it came back to where it was after 15 years. All the telecoms companies were all gone, then a whole new set of companies have come on board, Facebook, Google, Amazon, Netflix, and you need to have those new set to replace the old.

In Nigeria imagine if there was no Zenith Bank or GTB, what would The Stock Exchange look like? I’m just saying. These are the new companies that have come and replaced AFRIBANK and some old names, so you need to have a bit of that. It always seems to happen in financial services, we haven’t seen it happen in other industries. Or maybe it is not as exciting for those companies to list for many reasons. Right now, in the market today, most listed companies have a much lower valuation compared with private companies in their industry. You have a situation where a company is listed and they say your price ratio is five, and I don’t know why my company’s price ratio is at five, while in a private company they are doing trades at 10 for instance. So being listed becomes a liability from a valuation point of view, because it is an observed price, and that price is generally lower than for the private company; and that is a disincentive for private companies to list.

But I think what has to happen is that it has to be very clear what the advantages of listing are. And the big advantage, which seems to exist more, is the ability to raise new money for a real IPO. Yes, MTN can do an IPO and raise big money; at inception, at least, most private companies cant. And that is the problem, because the way the market is now, the retail sector has almost disappeared, as most of the monies is institutional, which means Pension Funds, and Pension Funds are not buying any unknown IPO. They see no reason to do so; it is not worth the risk. That is part of the structural problem and it is not just in the market, in the economy you don’t really have a pool of investors’ money, outside Pension Funds.

Good that you talk about institutional money. In other markets, you would find that it is not just Pension Funds, they have managed to build other institutional leverage points for these institutional monies; why is it different here to build other pockets of institutional monies, aside from Pension Funds?

Again one has to go back and look at the history. Before, there was a time when banks could make equity investments, banks could buy equity funds, but that was stopped. Before when you wanted to raise money or equity, the bank was an option because it could make those investments directly or through its subsidiaries. Now, you have a situation where the banks are out of the game totally by law, they can’t do it, yet the pension funds have become big and a lot of them, in its current forms, came out of other companies, so one big problem is tax rules. As far as I know, the only tax-free savings or investments you can do in Nigeria, is pension fund. Now, I think you can do annuity on some insurance, but really the main one is pension fund.

You can’t buy mutual funds tax free, in other countries you can. So that is part of the problem, the tax codes doesn’t favour the other pockets of money. Primarily, banks have mutual funds and also, the insurance companies in Nigeria, but because the insurance companies in Nigeria never really became strong and are probably not as old as the banks; in other countries it is the reverse, the insurance companies got so big and created banks. In Nigeria the insurance companies never got big enough. And that problem hasn’t really gone away. So that sector hasn’t lived up to its potentials.

Also, another problem is that the tax rules favour pension funds over others. And all other sectors have not been given the focus and support pension funds have been given, so that they too could be substantially large.

Yet, when you look at asset management companies, hedge funds, private equities, what do you see?

But bear in mind that there are no hedge funds in Nigeria. Private equities funds invest in private equities so what they are investing in is different. Again, the same problem of having Nigeria owned private equity funds is there; I can count Nigerian-owned equity funds, they are very few, I can count on one hand – African Capital Alliance, (and some would argue Dick Kramer is not Nigerian and has been heading African Capital Alliance for a long time, he is the founder of the company); Synergy, Verod Capital, Sahel and ARM Capital Investment Bank, and that is pretty much it. So, the amount of private equity controlled by Nigerians is very small, it is probably not up to a billion dollars. And the other ones, like Helios and Actis, are not controlled by local people.

You see an active market when there is a focus on a sector. How do you grow that, because you just said you can count Nigerian owned PE Funds on the fingers of one hand, what are the problems hindering the growth of these locally owned PE Funds, because I used to talk to some people in the private equity space and there was some excitement during the Obasanjo regime, and suddenly it stopped; are there things that can be done, either by the regulatory authorities or government to give it a push?

Yes, so again, the popular notion is, private equity is a very tricky area, it is highly specialized area, very elitist area, so when you look at it. So, one, for you to raise a private equity in the classic structure, which is really American structure, in Nigeria, you need FDIs to back you; without the FDI fund’s backing, you can’t raise a fund successfully. Or it would be almost impossible. And who is a FDI? FDI is a foreign person, so you can imagine the kind of hoops you have to jump through to get a foreign person to back you.

That might not necessarily work here, so that is the first problem. Then you look at if you can get FDIs to successfully launch your equity fund. There are things that are self-inflicted because these pension funds regulations that back this money are written in such a way that they actually give a lot of weight to the FDI backing.

So, if you really want to successfully get money from Nigerian pension fund, you basically have to have FDI money backing you. Now, to get FDI money to back you is very hard, very few people have succeeded in doing it. So that is another problem. Also, the way pension regulators are regulating, technically, in such a way that for you to raise a private equity funds all from pension funds, is almost impossible. Just because of the way the rules are written, like the maximum amount one pension fund can give you, and you break it down, it is almost technically impossible and then, one might ask, why pension funds, why can’t money be gotten from other people?

Well there are other pools of money like HNIS, but you can’t rely on HNIS, they are not a structured group of people. Yes, there is a lot of HNIS money in private equity funds, but you can’t rely on them. Part of the problem is just the way private classic equity funds were created, and the requirements that the foreign person you need to have. There are certain requirements about what you have done in the past, where you work and others like that, which they use as requirements before getting money from them. And very few people in Nigeria can do that, and it is not only the requirements; also, the process to get escape velocity is so expensive and grovelling, but only a few Nigerians can take the time and money to go through those hoops. It is very difficult, you could spend up to a million dollars raising a fund, your total cost in two years and you might not succeed.

But how do you build a local market for what you are talking about, because if getting FDI backing is like a camel walking through the eye of a needle; and there is a market but there’s no money in it, is that your blunt response?

It is a two sided thing. One, of course, there is not enough money here really, we need money to come in here, and that is the FDIs. But what should happen is that you get into a tricky thing on how you select the chosen few, and all you have to do, which the system had done in the past, is to empower some people who look like they can make it happen. So, people would be coming with very little financial muscle to take them, but you are bringing financial expertise and a whole bunch of things and you are basically going to create a system which would raise them up, which is what happened with pension funds. The capital requirement for pension funds for starting was N150 million, a lot of local people set up pension funds; now, those funds are managing N500 billion. So, that kind of thing where you make a system, you know money is coming, and you allow people who have the expertise, and of course, it would be well-governed, get the funds. Things like Nigerian government has money and why doesn’t the government say that look, every year, we are going to give X amount to certain people to manage and I’m saying that kind of idea to back people to grow. That has to be done, we can’t be giving money to foreign people to manage; yes, you do some of that, but you back local people. Yes, there is enough money here to build some of these funds but the way the pension funds rules are written, and rightfully so to an extent, the fears of the pension managers are such that Mr. A says he is doing a fund, so if you are so good, go and get money from FDIs, if they give you money they know you are good, but then when you go to FDIs, and they say: “Are people in your country backing you?” And you say no, they reply that these people know you better than I know you and if they’re not backing you, why should I back you? So what I always do is to give this classic example of the local bond market, where you do a bond transaction and local people invest in these bonds, local money, there is nothing like foreign money involved, so if they can back the deals of these transactions, and they know the cycle of the transactions, that is the solution in any environment where this has come up. The local money back the local people and, yes, you make some people rich and big, but someone is going to make money anyway, whether it is a local or foreigner; so you might as well back the local people and create people from the system.

We have billionaires in the country and I don’t know whether they are doing it, but they must have assets under management, but would you support a view, where the billionaires put down big money and have this channelled in the way of private equity funds?

Well, when money is private, you can’t force them, people that have private money, like many Nigerian billionaires, that have family offices in London, where they have people in London managing their money. The idea of giving the money to third parties to manage is where it gets tricky; then if this third party doesn’t have the track record, there is a problem of track record. When you have a new economy, you are not going to have people with track record, because the economy is just too new. When the telecoms sector started, Mike Adenuga had never run a telecoms company, he could not have, nobody had. That is the problem with the power sector. There are people, who didn’t have power companies before, but nobody had power companies before, the government had the power companies. So that first manoeuvre is always tricky, how you would catalyse and back it without using your money. For private people, it is tricky, to say that they should push their money in something, unless there are tax benefits and things like that. I’m sure, it would eventually get to a point where some of these endowments and foundations will have so much money, and they would have to give their money to private people to manage.

It happens in the U.S., all those big schools that have big endowments money, are in managing houses or given to people to manage. So, I think it is the track record building, where we are in this chicken and egg situation: which comes first, the backing or the track record. I think in a country this new, the backing comes first, because that is the only long term way, not for free, where the government would be giving money for free to people who lose their money. But the primary starting point for something like that has to either be up to a point the government’s money has to come in. The Nigerian Sovereign Investment Authority (NSIA) actually invested in some PE funds; they are in Verod, Sahel and Synergy.

So through some ways,   government money in NSIA goes to PE funds. We need more of that, where government money catalyzes private companies to a point where they no longer need government backing.

I want to talk about asset management because it is still developing in the country, it has not received much traction, maybe because they are few people in it, but I know that it is something they talk about a lot in London, New York, Tokyo etc. What is the state of asset management in Nigeria, how has it played out in this economy?

Well, technically, pension funds are asset managers, private equity funds are asset managers, we have different parts of asset management in the universe, but clearly the pension side has shown success in Nigeria, where many of these PE funds, before the Pension Reform Act, we had asset management funds managing pension money, they just formalized it, they changed the structure. For you to go outside the PE and private equity funds, what do we have left, we have portfolio funds who are managing money for other companies; we have the trustee funds, which is growing, because we have a lot of family trusts and things like that and they are managing assets also but, I think it is not where it should be. One reason is because of the collective investors’ scheme, mutual funds have not done very well. Now a few people have very large money market funds, Stanbic, FBN, but when you look at the scheme as a whole, it has not done well as hoped, for a number of reasons: one, there is no tax benefit for investing in it, others have tax benefits, and if we had that in Nigeria, that sector would change, it is the major reason, so if you have the option of saving money for the future, the best place to save your money is pension funds, because you can put that money in tax free, you can’t buy mutual funds tax free, that has to be fixed.

Secondly, the regulatory and cost structures of this fund is on the high side, making it less attractive for investors, also that sector hasn’t built up enough of what I call “superstar personalities” like in the U.S., where you know who Mr. A is and on long-term you know his returns. I can’t name three managers in Nigeria; I don’t know them, or what their track record is. So when you have someone who has outperformed the NSE and is an equity funds manager, of course, people would move money to him; we need a bit of that, a ranking system – who are the best funds managers and that hasn’t really happened to the level it should. So the people on the street can’t tell who the good person is and there is not enough information for them to differentiate. Also, Nigerians don’t like to pay fees; you can’t have people managing your money for free. But for that, I think there have been some improvements, but the tax issue has to be fixed, otherwise the sector will continue to be smaller and smaller, when compared with pension funds.

We saw investment banking in the light of merchant banks in those days, because of the way the financial system was categorised in Nigeria, but merchant banks are coming back. What do you think is behind this re-emergence?

Well, merchant banks are banks firstly, and they are CBN regulated. The securities investment banking in Nigeria is regulated by SEC not CBN, so things like mergers and acquisitions, primary market, capital market and security market are all SEC not CBN. A merchant bank is not set up because we want to do investment banking, it is set up because it wants to be under CBN regulations and do FX (foreign exchange), corporate banking and some other things. Now, the regulations allow merchant banks to also do SEC stuff, which commercial banks are not allowed to do, so I don’t think there has been a re-emergence of merchant banks. I know of just five in Nigeria, three were discount houses that converted, the fourth is a foreign person that came in with his money and the fifth is the first brand new bank in Nigeria since 2002, so there is no boom in that sector yet.

In terms of the state of the market, the SEC regulated firms, which are doing the investment banking, is a reflection of the state of the economy and the market, so most transactions on the primary issuance are the bond transactions. If you are an investment bank and you are not doing bond transaction, you are not doing much capital market. M&A sector is a bit tricky because it requires specialization and lots of experience and not a lot of firms can play in M&A. There is not just enough transactions as it was in the past, so the market is not as big as it used to be. But going forward, clearly, a lot of more activities will be on the debt side and the less serious people will fall away. The number of transactions has gone down and how everyone is surviving is a mystery to me. But I think the debt side is a growth area, we focus heavily on that, and going forward, I think what would eventually change is that the investment banks need to have a lot more capital, not capital to do the business they are doing now, but capital to catalyze the market. That has to be done carefully, obviously, as a lot of companies in the past ran into trouble because they took on proprietary positions that went against them; but going forward I think there is going to be fewer known names in the space because of the fewer transactions.

Union Capital Markets, I see the horse from being a member of Union Bank group, is there still an association?

Union Bank, like many other banks chose to be purely a commercial bank, so it had to dispose of all its subsidiaries. Most of the disposals happened in 2013, so this subsidiary was acquired by my colleague and I from Union Bank. So, there is no ownership link to Union Bank. Of course, we still bank with them as we have been doing for the past 20 years, but in terms of branding, we are looking to rebrand soon, so that would change. For the blue colour, I like the colour, I don’t see any reason to change it, but we will rebrand.

Let’s talk about the company’s business, what are you guys about, what niche areas are you playing in?

We are a full service investment bank, so we do traditional investment banking, M&A, capital market, issuing of bonds, and others. We have a stock broking dealership, and we are also a member of the FMDQ. So we are in fixed income trading and this area we are trying to grow, because we know that fixed income trading is far bigger than to be a securities firm; you have to be in fixed income, you don’t have any choice, we are already in fixed income on the primary side, we have done a lot of transactions on the private bond side, and there are a number of transactions we are working on right now. When we took over this company, there was no investment banking transactions, there were zero EUM transactions and those two areas now substantially make us more money than stock broking side, so we plan to keep moving in those two areas and introduce new areas in real estate and private equity, but down the line, for a firm like ours, the end objective is to become a merchant bank. So that would mean adding the FX, corporate banking, on what we do now, so it is a natural evolution and it is the end game. In the areas we play, which are predominantly asset management, security trading and investment banking, we want to be the top leaders in that space because the market is too small to be a part-time player. You have to be at the forefront of what is going on. And we also have to do a lot of work to change things, when you see developed markets, they are developed because they have been incrementally improving over years; so there is no point in saying things are not good now and fold our arms. We can work to change the system and the system is open to change if people are ready to work. It is not something that would change itself automatically, someone has to pick the mantle and push things, be it, the regulators, markets and all that. So we hope to be part of that change and that is why we actively spend our time and energy on some activities to change our market.

What is the big ticket thing that we should expect from Union Capital Markets, are you structuring anything at the moment?

Well, there are two kinds of things you do in this business, one you work for clients, the transactions we are working for some clients will come to the market soon, bond transactions, one or two very big and mighty transactions. But from our point of view, later this year, we would start to push out our own products, where we would be able to raise money from the institutional markets. That is what would differentiate us from our peers. So yes, we work for clients, but we also work for ourselves, because the way the market is structured now, firms like ours in other environments are also doing their own proprietary things, and most firms now don’t just work for other people; we also want to work for ourselves, rather than sit around and wait for people to employ us, we employ ourselves. So later this year, you would see one or two transactions that are Union Capital Markets transactions, that would be targeted at investors.

What is your hope for the economy?

I think this year the economy should do better than last year. I mean it is subject to what happens to oil, as long as oil remains around this level, and nothing unusual happens in the political side, apart from what is planned, this year would be better, then we would slow down towards the end of the year, because of elections; but the economy will keep moving ahead.

I believe that we’d (Union Capital Markets) probably do better than last year, particularly if we can execute our own in-house transactions in the general market.