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Africa’s booming tech hub of Lagos braces as pandemic bites

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In one week last year, Lagos-based payments companies received nearly $400m of investment — roughly the same amount invested in such groups across the entire African continent in 2017.

Over the past five years, Lagos has become Africa’s fintech centre and the continent’s most vibrant tech hub, attracting large investment in financial networks across Africa.

“Lagos . . . is characterised by youthful energy and entrepreneurial drive, as well as a generous availability of tech talent,” says Mitchell Elegbe, chief executive of Interswitch, which last year became Nigeria’s first homegrown unicorn — a start-up with a $1bn-plus valuation.

“The steady stream of successful ventures that have attracted decent amounts of VC funding continues to serve as a catalyst fuelling the rise of start-ups,” he adds.

Interswitch CEO Mitchell Elegbe
Mitchell Elegbe, Interswitch chief executive © Taiwo Oyemade

Although Nigeria’s shoddy infrastructure, flawed governance and capricious regulation can make it a difficult market in which to operate, its population of nearly 200m makes it an enticing target for businesses that require scale. The annual gross domestic product of Lagos state alone — $136bn — is nearly the size of Kenya’s and Uganda’s GDP combined.

While Nigeria is home to the greatest number of extremely poor people in the world — 90m live on less than a $1.50 a day — it is also ripe with opportunities for start-ups. These abound, whether in the country’s weak healthcare system, its neglected electrical grid or among the roughly 60m Nigerians without a bank account.

“You can’t ignore the size of Nigeria alone — it’s a big market, and there are millions of underserved and unserved consumers . . . whether fintech or health or education,” says Omobola Johnson, a former Nigerian minister of communication technology and a senior partner at TLcom Capital, a venture firm. 

From 2014 to 2019, Nigeria’s fintech scene took in more than $600m in funding, according to a report by McKinsey, the consultancy. In the past three years, fintech investments in Nigeria almost tripled, while in 2019, Nigerian fintech took in one-quarter of all funding raised by African start-ups, the report said. 

Fintech dominates, but the sectors extend to ecommerce start-ups such as Jumia, a pan-African online retailer that has struggled to live up to the hype of its 2019 New York listing, and healthcare companies such as 54gene, a genomics company involved in Nigeria’s coronavirus response. Last month, US group Stripe acquired Lagos-based Paystack, a payments company, for a reported $200m.

Jumia, a pan-African online retailer, has struggled to live up to the hype of its 2019 New York listing © Issouf Sanogo/AFP via Getty Images

Graduates of Andela, the software developer school that last year raised $100m, have worked at, or founded, many other companies.

Facebook recently announced that it would open its second African office in Lagos to tap into the deep pool of talent and gain better access to the continent’s biggest market.

Nigeria’s government upset the country’s tech industry, however, when earlier this year it implemented new regulations and fees on motorcycle and car ride-hailing start-ups such as Gokada, ORide and Bolt, which have invested millions of dollars expanding in Nigeria.

In June, the government introduced regulations that hit both satellite operators and iROKOtv — dubbed the “Netflix of Nigeria” — which makes most of its money from subscribers in the west but has been trying to grow in its home market.

iROKOtv has been dubbed the ‘Netflix of Nigeria’ © Charlie Bibby/FT

“We’ve built these companies in spite of the support of government,” says Kola Aina, partner at Lagos and Abuja-based investor Ventures Platform. “It seems like every time you innovate, someone in some [government] agency pops up . . . a lot of agencies have largely taken a defensive approach to this new start-up ecosystem.”

Tech executives, investors and workers are hoping that government regulations ease as the industry copes with the economic fallout from the coronavirus pandemic.

Covid-19 led to a collapse in the price of oil — Nigeria’s biggest export — and sent the economy into its second recession in five years. The roughly 20 per cent drop in the value of the naira has also hurt the fintech industry.

“Despite the large population, and the potential that it portends, there are several other macroeconomic issues that make it very difficult to convert that population to the kinds of growth and performance that companies ordinarily should be able to record,” says Mr Aina. “It’s a lot of potential that hasn’t been converted.”

A survey by Endeavor, a non-profit group that promotes entrepreneurship, found that roughly 80 per cent of Nigerian start-up founders reported funding difficulties caused by the pandemic.

Eloho Omame, who leads Endeavor in Nigeria, says that if authorities do not or cannot support start-ups in the way that other governments have — such as the UK’s £500m Future Fund — the sector could wither.

“The challenge in Nigeria is that we also then have an oil price crisis, we have a broader economic challenge which makes [that support] pretty important,” she says. “This whole innovation layer is a bet on the future . . . [and] what we don’t want is instances where that entire layer is potentially decimated — not to be grandiose — because we didn’t treat it as strategic.”



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European stocks stabilise ahead of US inflation data

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European equities stabilised on Wednesday after a US central banker soothed concerns about inflation and an eventual tightening of monetary policy that had driven global stock markets lower in the previous session.

The Stoxx 600 index gained 0.4 per cent and the UK’s FTSE 100 rose 0.6 per cent. Asian bourses mostly dropped, with Japan’s Nikkei 225 and South Korea’s Kospi 200 each losing more than 1.5 per cent for the second consecutive session.

The yield on the 10-year US Treasury bond, which has dropped in price this year as traders anticipated higher inflation that erodes the returns from the fixed interest securities, added 0.01 percentage points to 1.613 per cent.

Global markets had ended Tuesday in the red as concerns mounted that US inflation data released later on Wednesday could pressure the Federal Reserve to start reducing its $120bn of monthly bond purchases that have boosted asset prices throughout the Covid-19 pandemic.

Analysts expect headline consumer prices in the US to have risen 3.6 per cent in April over the same month last year, which would be the biggest increase since 2011. Core CPI is expected to advance 2.3 per cent. Data on Tuesday also showed Chinese factory gate prices rose at their strongest level in three years last month.

Late on Tuesday, however, Fed governor Lael Brainard stepped in to urge a “patient” approach that looks through price rises as economies emerge from lockdown restrictions.

The world’s most powerful central bank has regularly repeated that it will wait for several months or more of persistent inflation before withdrawing its monetary support programmes, which have been followed by most other major global rate setters since last March. Investors are increasingly speculating about when the Fed will step on the brake pedal.

“Markets are intensely focused on inflation because if it really does accelerate into this time near year, that will force central banks into removing accommodation,” said David Stubbs, global head of market strategy at JPMorgan Private Bank.

Stubbs added that investors should look more closely at the month-by-month inflation figure instead of the comparison with April last year, which was “distorted” by pandemic effects such as the price of international oil benchmark Brent crude falling briefly below zero. Brent on Wednesday gained 0.5 per cent to $69.06 a barrel.

“If you get two or three back-to-back inflation reports that are very high and above expectations” that would show “we are later into the economic recovery cycle,” said Emiel van den Heiligenberg, head of asset allocation at Legal & General Investment Management.

He added that the pandemic had sped up deflationary forces that would moderate cost pressures over time, such as the growth of online shopping that economists believe constrains retailers’ abilities to raise prices. Widespread working from home would also encourage more parents and carers into full-time work, he said, “increasing the labour supply” and keeping a lid on wage growth.

In currency markets on Wednesday, sterling was flat against the dollar, purchasing $1.141. The euro was also steady at $1.214. The dollar index, which measures the greenback against a group of trading partners’ currencies, dipped 0.1 per cent to stay around its lowest since late February.



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Potash/grains: prices out of sync with fundamentals

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The rising tide of commodity prices is lifting the ricketiest of boats. High prices for fertiliser mean that heavily indebted potash producer K+S was able to report an unusually strong first quarter on Tuesday. Some €60m has been added to the German group’s full year ebitda expectations to reach €600m. Its share price has gone back above pre-pandemic levels.

Demand for agricultural commodities has pushed prices for corn and soyabeans from decade lows to near decade highs in less than a year. Chinese grain consumption is at a record as the country rebuilds its pork herd. Meanwhile, the slowest Brazilian soyabean harvest in a decade, according to S&P Global, has led to supply disruptions. Fertiliser prices have risen sharply as a result.

But commodity traders have positioned themselves for the rally to continue for some time to come. Record speculative positions in agricultural commodities appear out of sync even with a bullish supply and demand outlook. US commodity traders have not held so much corn since at least 1994. There are $48bn worth of net speculative long positions in agricultural commodities, according to Saxo Bank.

Agricultural suppliers may continue to benefit in the short term but fundamentals for fertiliser producers suggest high product prices cannot last long. The debt overhang at K+S, almost eight times forward ebitda, has swelled in recent years after hefty capacity additions in 2017. Meanwhile, utilisation rates for potash producers are expected to fall towards 75 per cent over the next five years as new supply arrives, partly from Russia. 

Yet K+S’s debt swollen enterprise value is still nine times the most bullish analyst’s ebitda estimate, and 12 times consensus, this year. Both are a substantial premium to its North American rivals Mosaic and Nutrien, and OCI of the Netherlands, even after their own share prices have rallied.

Any further price rises in agricultural commodities will depend on the success of harvests being planted in the US and Europe. Beyond restocking there is little that supports sustained demand.

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Amazon sets records in $18.5bn bond issue

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Amazon set a record in the corporate bond market on Monday, getting closer to the level of interest paid by the US government than any US company has previously managed in a fundraising. 

The ecommerce group raised $18.5bn of debt across bonds of eight different maturities, ranging from two to 40 years, according to people familiar with the deal. On its $1bn two-year bond, it paid just 0.1 percentage points more than the yield on equivalent US Treasury debt, a record according to data from Refinitiv.

The additional yield above Treasuries paid by companies, or spread, is an indication of investors’ perception of the risk of lending to a company versus the supposedly risk-free rate on US government debt.

Amazon, one of the pandemic’s runaway winners, last week posted its second consecutive quarter of $100bn-plus revenue and said its net income tripled in the first quarter from the same period a year ago, to $8.1bn.

The company had $33.8bn in cash and cash equivalents on hand at the end of March, according to a recent filing, a high for the period.

“They don’t need the cash but money is cheap,” said Monica Erickson, head of the investment-grade corporate team at DoubleLine Capital in Los Angeles.

Spreads have fallen dramatically since the Federal Reserve stepped in to shore up the corporate bond market in the face of a severe sell-off caused by the pandemic, and now average levels below those from before coronavirus struck.

That means it is a very attractive time for companies to borrow cash from investors, even if they do not have an urgent need to.

Amazon also set a record for the lowest spread on a 20-year corporate bond, 0.7 percentage points, breaking through Alphabet’s borrowing cost record from last year, according to Refinitiv data. It also matched the 0.2 percentage point spread first paid by Apple for a three-year bond in 2013 and fell just shy of the 0.47 percentage points paid by Procter & Gamble for a 10-year bond last year.

Investor orders for Amazon’s fundraising fell just short of $50bn, according to the people, in a sign of the rampant demand from investors for US corporate debt, even as rising interest rates have eroded the value of higher-quality fixed-rate bonds.

Highly rated US corporate bonds still offer interest rates above much of the rest of the world.

Amazon’s two-year bond also carried a sustainability label that has become increasingly attractive to investors. The company said the money would be used to fund projects in five areas, including renewable energy, clean transport and sustainable housing. 

It listed a number of other potential uses for the rest of the debt including buying back stock, acquisitions and capital expenditure. 

In a recent investor call, Brian Olsavsky, chief financial officer, said the company would be “investing heavily” in the “middle mile” of delivery, which includes air cargo and road haulage, on top of expanding its “last mile” network of vans and home delivery drivers.



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