Demutualization of NSE: Innovative Products Key to Deepening Capital Market

With the Demutualization of the Nigeria Stock Exchange (NSE) concluded, innovative products that appeal to millennials and attract retail investors will go a long way in deepening the capital market.

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Mr. Patrick Ezeagu the Chairman of the Association of Securities Dealing Houses of Nigeria (ASHON) made this point in a conversation on the “Post-Demutualization of NSE: Opportunities for the Capital Market”.

Ezeagu noted that the process for demutualization took over 7 years before actualization and commended all the stakeholders involved for their resilience.

He said Nigeria now joins the ranks of South Africa with demutualized exchanges and opens opportunities for the growth of a more integrated African capital market.

According to him demutualized exchanges especially in Africa, could collaborate and operate as a single hub to attract capital and investments.

Speaking further he said brokers have to be innovative and strategic in developing products that appeal to all classes of investors and can improve the capitalization of the exchange.

The Chairman of ASHON agreed that the “Demutualization of the NSE” will improve the market in areas like technology, human capital, and processes.

“The three subsidiaries formed as a result of the demutualization of the Exchange are the Nigerian Exchange Limited (NGX), NGX Regulation Limited (NGX REGCO), and NGX Real Estate Limited  (RELCO), would bring efficiency to the market and make the exchange focus on its core mandate,” he said.

He added that Africa needs a connected capital market that can compete globally with the dispensation of the AFCFTA (African Continental Free Trade Agreement).

Looking at the sub-region he pointed out that there has been an existing model of the West Africa Market Integration, WAMI which can be expanded to the entire continent.

The capital market trade group leader said with the demutualization of the Exchange it was possible to achieve a market capitalization of about $200bn by 2022.

He advised the Federal Government to leverage the capital market to raise funds, liberalize state assets and corporations to be profitable ventures.

The Nigerian Stock Exchange (Formerly Lagos Stock Exchange) was founded on 15 September 1960 and began operations on 25 August 1961.

In a bid to catch up with the needed efficiency to take its place as the leading Exchange on the African continent, members had agreed at an Extraordinary General Meeting in 2017 to demutualize the Exchange. A decision that became more pronounced as the demutualization bill became law in August 2018. Demutualizing the Exchange changed it from its earlier status as a non-profit organization limited by guarantee into a public company.


Capital Investment

Do Startups Need Venture Capital Investment?

Venture capital investment refers to a type of private equity investment in which investors provide capital and mentorship in a startup that is still in its development phase in exchange for equity in the company.

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The rise in venture capital investments in Nigerian startups depicts how the investment process in companies has evolved. Before now, companies heavily relied on funds from commercial banks to run their business activities.

Sadly, this comes with a lot of unfavourable conditions such as high-interest rates on loans, banks demand for collateral and the pressure on companies to pay up the loan.

Thus, startups often opt for venture capital firms which often render financial, managerial, and technical assistance needed to build tech products and scale their operations.

In a report published by Techpoint Africa, Nigerian startups received 86.3% of over $1.8 billion venture funds that were contributed to “West African Millionaire Startups” within 2010 and 2019.

According to the 2020 Africa Tech Venture Capital Report, Nigeria remains the number one hub for venture capital investment in Africa as Nigerian startups raised a total of $307 million in 2020.

It suffices to mention that this report only covers Venture capital deals that worth over $200,000. Though some may belittle the amount of these funds and the number of companies targeted by comparing it to the amount being raised by startups in developed nations, Nigeria has come a bit far with fund raising.

These venture capital investments in Nigerian startups are a form of impact investment. Asides from generating financial returns on these deals, research shows that investments from venture capital companies tend to bring about a measurable social impact in the country. Most startups in the country focus on solving trivial problems with innovation. These solutions range from education (Andela, Utiva, ulesson), funding of agricultural production (ThriveAgric, FarmCrowdy), wealth management (Piggy Vest, Cowrywise), online payment solutions (Paystack and Flutterwave), healthcare (54gene, Lifebank, Helium Health) amongst others. More startups emerge every year all in a bid to solve a particular problem Nigerians are embattled with. For these startups to realize their potentials, they will need funds to scale their operations. Thus, funds gotten from venture capital firms contribute a great deal in helping these companies innovate their product and kickstart their operation.

Venture capital firms also provide funds for startups to invest in branding and marketing of their products. In the words of Tara Nicholle Nelson, “you cannot buy engagement, you have to build engagement.” Thus, building a product is not enough. Startups do engage in implementing a lot of marketing strategies for user acquisition, engagement, and retention. This requires a lot of funds which most tech entrepreneurs do not have. This is more difficult to do in a market like Nigeria which is reported to have a population of over 200 million people. Thus, making the product a well-known brand and preserving the same, costs a fortune and also requires establishing partnerships with stakeholders in key areas. These are issues venture capital firms can help with as they have the right resources and network.

Additionally, companies that have received funding in the past through venture capital investment are equipped with the means to expand their operations and create new market opportunities for their product. Subsequent funding received by startups also confers a form of goodwill in terms of financial capabilities and human capital which is often needed to expand operations and improve their technological innovation.

Thus, it is no doubt that Nigerian startups stand a lot to benefit from the investment opportunities, mentorship and the network, venture capital firms do offer. Sadly, most of these investments are foreign venture capital funds. However, the recent efforts of companies like Future Africa through the Future Africa Collective and Co-Creation Hub through the CcHub Syndicate programme must be commended as these are innovative funding models through which more tech startups can be backed. Though there is the need for more venture capital investments in Nigerian tech startups as techpreneurs in Nigeria never stop to serve their fatherland with all their talents and hard work in a bid to fix the deep-lying issues that are affecting the various sectors of the Nigerian economy.

Would it not then be a smart decision for more high-net-worth individuals and enterprises within the country to invest in these innovative ideas? Would it not then be right for the Nigerian Government to create more strategic policies and enable the environment to attract more funding in the tech ecosystem? These are the multimillion-dollar questions that demand attention.


Investment Risk Capital Market

Capital market investment: Managing Risks…

The capital market is, generally, regarded as a safe haven for investment. There, your money works for you.

The market is a setting for income without stress.

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Smart and daring speculators can make fortunes there and can also lose a fortune through poor judgement.

Despite its attractiveness, the capital market is volatile.

In fact, volatility in price of securities is the hallmark of every capital market.

Increased risk can emanate from increased volatility.

Everyday, stock prices go up and down in reaction to any number of issues involving business, the socioeconomic and geopolitical events.

The field of behavioral science has contributed an important element to the risk equation, demonstrating asymmetry between how investors view gains and losses.

Investors usually put roughly twice the weight on the pain associated with loss than the good feelings associated with a profit.

Every investor wants to play safe with his investments.

Often, investors want to know just how much the value of an asset may deviate from it’s expected outcome, and also how bad things may look way down on the negative side.

Value-at-Risk (VaR) attempts to provide an answer to this question.

The idea behind VaR is to quantify how large a loss in investment could be with a given level of confidence over a defined period.

Due to the high volatility and frequent downturns in the capital market, uncertainties characterize the predictability of returns on investment.

As a result of uncertainty, it is extremely difficult to predict the future price of a security and by extension, direction of the capital market.

Uncertainty and risk are synonyms but they are not quite the same. Uncertainty must be taken in a sense radically distinct from the familiar notion of risk, from which it has never really been properly separated.

The term “Risk” as loosely used in everyday speech and in economic discussion, really covers two things which functionally at least in their causal relations to the phenomenon of investment, are categorically different.

Uncertainty is the lack of complete certainty. It is a situation where the future outcome cannot be predicted with any confidence from knowledge of past or existing events.

Uncertainty presents more than one possibility whereby the true outcome or result is unknown. Uncertainty is immeasurable ie, not possible to calculate whereas, risk is a state of uncertainty where some of the possibilities involve a loss, catastrophe or other undesirable outcome.

It is a set of possibilities each with quantified probabilities and quantified losses. One may have uncertainty without risk but not risk without uncertainty. We can be uncertain about the winner of a contest but unless we have some personal stake in it, we have no risk.

If we bet money on the outcome of the contest, then we have a risk. Consequently, the measure of uncertainty refers only to the probabilities assigned to outcomes while the measure of risk requires both probabilities for outcomes and losses quantified for outcomes. Uncertainty presents both risk and opportunity, eroding or enhancing value.