As Elon Musk tries to add the social media mammoth, Twitter, to his expanding empire, it appears that pooling capital for one of the tech industry’s largest deals will keep him very busy. To help fund his proposed $44 billion takeover of Twitter, Musk has already secured billions of Dollars of new, private, financing commitments, including from billionaire Larry Ellison, a Saudi Prince, and venture capital firm, Sequoia Capital. The plan is to take the publicly-traded company private.
Even though Mr. Musk is turning to various sources of private finance, he has signaled plans to return Twitter to public markets by heading to the capital market to stage an Initial Public Offering (IPO) in as little as three years of buying Twitter – an IPO being that big step that provides organisations with access to raising vast amounts of funding, for growth and expansion, as well as enabling existing shareholders sell part of their shares.
Capital markets unlock growth
What more can we learn from Musk in terms of capital financing? In 2003, as the world looked to the future of sustainability and green technology, he, along with other collaborators, founded Tesla, an electric vehicle and clean energy company. In 2010, Tesla turned to the capital markets to fund expansion and bring green tech into mass reality ($17.00 a share, now $711.115 as at June 22, 2022). As at end 2021, the company employed 99,290 people, while posting $53.8 billion in revenue per annum.\[2\]
In a similar bid to raise capital, local privately-owned Nigerian companies such as Seplat Energy PLC (“Seplat”) have listed their shares on the Nigerian Exchange PLC (NGX), making their stock available for purchase by the general public. Following a successful IPO in April 2014, the share price of Seplat Energy rose from NGN297.85 in January 2015 to NGN1,350.00 per unit \[4\], as at May 30, 2022.
This is how fully functioning capital markets work – they are able to pool savings, which can be channeled as capital to fund local business growth (or government projects) and generate jobs, while simultaneously offering the public an opportunity to invest in returns-bearing assets.
Investing in an inflationary environment
Capital markets are important because they supplement financing of the economy, allocating risk, and supporting economic growth. They also serve as an essential organised system for the free flow of capital raised through debt or equity. Despite the intermediation and developmental role of capital markets, investors still aim to build or maintain portfolios that outpace inflation, by investing in some of the following instruments:
_The NGXASI has gained +24.43% YTD\* \[5\]_
Equity: Equities offer the best opportunity to outperform inflation, with professionals advising investors on whether these will be cyclical stocks, growth stocks or value stocks.
Funds: The general advice is to shy away from investing in individual stocks, but rather turn to funds. Funds are ready-made baskets of investments that offer competitive returns, and give investors exposure to many securities at the same time – an important ingredient for diversification and reducing risk.
These could be Exchange-Traded Funds (ETFs – a basket of securities and commodities that trades on an Exchange similar to a main Stock Exchange), or Mutual Funds (which include investment in various securities, as well as USD-denominated debt instruments).
Bonds: These are medium to long-term debt securities issued by companies and governments to raise large amounts of capital. In an inflationary environment, Bond Funds – a regular Mutual Fund with exposure to the bond market – are considered ideal for obtaining competitive returns over a three-four year investment period, as well as achieving appreciable liquidity via annual income payments. A Bond Fund would provide access to a diverse portfolio of long-term debt instruments issued by the Federal Government of Nigeria, state governments, and highly-rated corporate organisations.
Whichever instrument is chosen, investors need to be prepared for the value of their investment to fluctuate, and resist timing the market (which is difficult even for professionals). Rather, the longer one stays invested, the more the growth potential for your funds to recover from any setbacks, and appreciate in value over time. It is noteworthy that despite volatilities in the stock market, the NGXASI stood at +24.43%\* YTD (as at May 26, 2022).
Snapshot: Growth potential for the capital market in Nigeria
\[6\]
_Capital markets as an avenue for long term funds are considered a catalyst for economic growth. Therefore, e_xpanding and deepening of the capital market in Nigeria is vital to the next stage of the country’s development.
NGX market capitalisation, which shows value of the investments on the stock market, closed Y2021 at NGN22.3trillion (up from NGN21.1trillion at the close of trading YE2020). As at June 22, 2022, market capitalisation had inched upwards to NGN27.7 trillion.
_The market_ has sustained a bullish run year-to-date as a result of new listings, an evident oil price rally, and better-than-predicted companies’ full-year earnings for the first-quarter (Q1) of the year.
A snapshot of NGX data shows a breakdown of new issuances for Q1 2022[\[7\]](#_ftn7) worth NGN1.70 trillion and Eurobonds of US$4 billion, as follows:
BONDS
Instrument
Amount
Eurobonds
US$4 billion
FGN Bonds
NGN589.07 billion
Corporate Bonds
NGN35.3 billion
EQUITIES
Instrument (Equities)
Amount
Abbey Mortgage Bank PLC.
NGN3.03 billion
Access Holdings PLC.
NGN353.68 billion
BUA Foods PLC.
NGN720 billion
These types of listings across equities and bonds are essential for strengthening and expanding the Nigerian capital market, further boosting liquidity and tradability, increasing access to capital for funding growth initiatives, and providing opportunities for wealth creation.
CONCLUSION: Building for the long term
A high-functioning financial system permits an economy to fully exploit its growth potential, as it ensures that the best investment opportunities receive the necessary funding. Deep, liquid, and well-regulated capital markets play an important complementary role to bank financing for mobilising large-scale and long-term finance, and form the foundation for a thriving private sector – a key driver of jobs and growth.
FBNQuest is a leading Merchant Banking and Asset Management group in Sub-Saharan Africa that delivers a wide range of financial services through various businesses – Corporate and Investment Banking, Investment Management (Asset Management, Alternative Investments, Agency Services and Trustees) and Institutional Securities (Structured Products, Fixed Income, Currencies & Treasury and Equities) | https://questmb.com
\[1\] Adobe stock premium
\[2\] Numeris research/ CenterForward – https://center-forward.org/capital-markets-explained/ (October 2020) \*updated
\[3\] Numeris research/ Trading Economics – https://tradingeconomics.com/seplat:nl – as at close of business, May 30, 2022
[](#_ftnref4)\[5\] Bloomberg – www.bloomberg.com/quote/NGSEINDX:IND
\[6\] Adobe stock premium
\[7\] Proshare Q1 2022 SSS Quality Report