FCMB-TLG Private Debt Fund can invest up to N2bn in mid-sized businesses – James Ilori

INTRODUCTION: FCMB Asset Management Limited (FCMBAM), a member of FCMB Group Plc, is bridging the funding gap in Nigeria’s private debt market through the FCMB-TLG Private Debt Fund, Nigeria’s first Naira-denominated Private Debt Fund, launched by the company in May 2024. Having successfully raised N10.4 billion under Series 1 of the N100 billion Fund issuance programme, FCMB Asset Management Limited has set its sights on supporting the growth of mid-sized companies in critical sectors of the Nigerian economy. In this interview, the CEO of the company, James Ilori, discusses the motivation behind the Fund and its potential to transform businesses engaged in impact-oriented activities.

Excerpts.

Can you give us a brief introduction about what you do and a general background of FCMB Asset Management?

FCMB Asset Management is the asset management arm of FCMB Group Plc, with offices in Lagos, Abuja, and Port Harcourt. It was established in 1997 and began operations in 2000 under the name First City Asset Management, later rebranded as FCMB Asset Management in 2019. We help our clients achieve their investment objectives by consistently innovating to create value. As of June 2024, our assets under management were over Three Hundred and Forty-Eight Billion Naira (N348 billion).

Initially, we focused on Traditional Investments like Money Market Instruments, Bonds, and Equities. However, we recognised the need to expand into Alternative Assets. These are more complex and cater to professional investors. This shift allows us to address critical challenges faced by both investors and borrowers in Nigeria. For example, Pension Fund Administrators (PFAs) faced negative real returns when their returns were adjusted for inflation. On the other hand, mid-sized companies, described as companies falling between the small businesses supported by microfinance banks and the large corporations served by traditional lenders, struggled to access suitable loans.

These challenges led to the creation of Nigeria’s first Naira-denominated Private Debt Fund, the FCMB-TLG Private Debt Fund. To manage the Fund, we partnered with TLG Capital Investments Limited, United Kingdom, a company with experience in Private Debts in Sub-Saharan Africa. The Fund has closed its Series 1 under its One Hundred Billion Naira (N100 billion) Programme. We intend to invest in sectors aligned with the UN Sustainable Development Goals (SDGs), promoting poverty reduction, improved healthcare, access to education, and clean energy while offering competitive, risk-adjusted returns to investors.

When do you expect to raise the full N100 billion?

Series 1 has closed. We successfully raised N10.44 billion, which is 104.3% above the N10 billion we sought to raise. Our plan is to launch Series 2 in the first half of 2025, followed by Series 3. Depending on the level of uptake, we aim to close the full programme by the end of 2025 or in 2026. However, as I mentioned, this is a new initiative and the first of its kind in Nigeria, so it largely depends on investor interest. Part of our focus is to educate even sophisticated local investors on the benefits of investing in the FCMB-TLG Private Debt Fund.

Who are your target investors?

Our target investors are Qualified Institutional Investors (QIIs), such as Pension Fund Administrators (PFAs) and Insurance Companies. We are also looking at Development Finance Institutions (DFIs), including the African Development Bank (ADB), the African Finance Corporation (AFC), and the International Finance Corporation (IFC). Additionally, we are interested in companies with long-term funds that are comfortable investing in a Closed-Ended Fund. Remember, this Fund has a 10-year lifespan, so investors must be prepared to commit for the entire duration of the Series.

We are also focusing on High Networth Individuals (HNIs), particularly Ultra High Networth Individuals (UHNIs). At FCMB Asset Management, we define UHNIs as those with a net worth of at least US$5 million or its equivalent in local currency, while HNIs are those with a net worth equivalent to at least US$1 million. We also target institutional wealth investors, such as Family Offices and Endowment Funds.

These are the two main categories of investors we are pitching this Fund to. The Fund is not designed for retail investors, as they typically lack the sophistication needed to understand complex investment products.

Why should anyone invest in this Fund as against, for example, investing in Treasury Bills?

Treasury Bills (TBs) are Money Market Instruments with maturities less or equal to one year, while this Fund has a 10-year lifespan. Although Treasury Bill interest rates are currently high, they fluctuate significantly. For instance, there was a time when the yield on the 1-year Nigerian Treasury Bill was just 0.90%, but rates have since risen. This volatility makes short-term instruments less predictable.

Currently, the 10-year FGN Bond yield is around 19%, and this Fund aims to generate 19% plus 3%, targeting a total return of at least 22%. This figure will fluctuate as the bond trades daily.

If interest rates fall, as many expect, with the Central Bank of Nigeria likely to hold rates steady for the rest of the year and possibly cut them next year, locking in a long-term instrument offers more stable returns. Short-term instruments can be volatile – today’s yield might be 20%, but it could drop to 5% tomorrow. Over time, short-term investments may only average around 12.5%.

A long-term instrument like this Fund, which tracks the yield on a 10-year FGN Bond, offers a more stable and higher return. Compared to one-year Treasury instruments, which are subject to reinvestment risk and volatility, investing in a 10-year Fund is more prudent. Given that inflation in Nigeria has averaged 13–14% over the past 20 years, a long-term investment strategy is more beneficial.

Why should any of the mid-sized businesses come to you instead of going to a bank?

In today’s environment, banks are facing many challenges. Banks build in regulatory costs in the pricing of their loans. Regulatory costs include the Cash Reserve Ratio (CRR), and the NDIC premium that banks pay. Banks are trying to be more efficient by adopting technology to reduce costs, but they still have huge, fixed costs. So, all these costs are built into the interest rates banks charge on loans. The FCMB-TLG Private Debt Fund does not have the regulatory costs stated above. So, the Fund, relative to a bank, is more efficient and can invest in activities at better rates.

You said the FCMB-Private Debt Fund is Nigeria’s first local Private Debt Fund. Why is it just being launched now?

Fundamentally, if you are looking to create a product, the first question is, is there a problem? Once you identify the problem, the next question is, what kind of solution can I come up with to solve the problem? Over the years, everybody realised that there was a problem. However, nobody could come up with a solution to address the issues I discussed. We took on the challenge about two years ago and contacted our industry regulator, the Securities and Exchange Commission, Nigeria (SEC), to discuss our ideas around an investment management solution structured as a Fund under Alternative Assets. The SEC in Nigeria has been fantastic. The regulatory support we received while registering the Fund was great. So, permit me to thank the Securities and Exchange Commission for the regulatory support we received. We worked on this Fund for over two years. Eventually, we developed a product that the regulator was comfortable with. So yes, it was challenging. Others probably felt that it would take too long to come up with this kind of product and decided not to proceed along that line, but we took on the challenges and surmounted them. Today, we are happy to say we have the first local currency Private Debt Fund in Nigeria available to investors.

How big is the Private Debt market?

If you look at Nigeria’s private debt-to-GDP ratio, it is around 15%. If you compare that with what Kenya has, Kenya has a private debt-to-GDP ratio of about 30%. Egypt has something close to 30%, around 27%. So, if Nigeria is at 15%, it shows, relative to Kenya and Egypt, there is a long way to go, but the market is ripe for growth. Nigeria’s large population and the government’s plan to create a US$1 trillion economy point to the immense potential of this market.

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While I won’t put specific figures on this, the upside and the growth opportunities are substantial. Also, if you look at what is happening in the developed world, for instance, the US, the top 200 Pension Funds in America have significant allocations to Private Debt, and they continue to increase their exposure to the Asset Class. It gives you a sense of how far we are in achieving the maximum potential available in Alternative Assets.

When you say the Private Debt market is about 15% of GDP, I didn’t know it was that big. What makes up the Private Debt markets in Nigeria?

The Private Debt-to-GDP is what I am referring to. Private debts are debt investments that are not provided by traditional lenders such as banks. They are also called shadow banking. So, in Nigeria, we have shadow banking. However, the entities involved in these activities have not approached the industry regulator to register what they are doing with mid-sized companies. Their loans are being given to companies, but a structure recognised by the regulator must be established.

Will the Fund lend to individuals?

The Fund does not intend to and will not lend to individuals.

If the Fund provides debt to companies, why is it the first? There are Funds/Instruments that provide debt to businesses?

Yes, if you look at Asset Classes, there are two major divisions – Traditional and Alternative Assets. Under Traditional Assets, you have Money Market Instruments such as Treasury Bills and Commercial Papers. Debt is provided via these instruments. You also have Bonds; Sovereign Bonds, Corporate Bonds, and Supranational Bonds which are vehicles for providing debt. These are Traditional Assets. Then, under Alternative Assets, you have Venture Capital, Private Equity, Private Debt/Private Credit, Real Estate, Infrastructure, Commodities etc. These are vehicles that pool funds from various investors especially Institutional Investors and provide long-term capital to companies in critical areas of the economy. Therein lies the difference.

What is the difference between a Private Debt Fund and a Money Market Instrument that also provide debt to companies?

If you are saying Money Market Instruments, remember that such instruments have short maturities of less than one year. For instance, if you issue a Commercial Paper (CP), the maximum tenor will be 270 days. You are still lending to companies via the CP. However, the maturity is less than one year. That is different from a Private Debt Fund, which has a longer maturity profile. It is also a Closed-Ended Fund with maturity of 10 years. This already differentiates it from Money Market Instruments. So, the types of investors who will provide debt to companies via both structures are different. Anybody investing in a CP knows that in less than one year, the CP will mature, and they’ll get their funds back. If you’re investing in a Private Debt Fund, you know you’re locked in for ten years. Also, a CP is a discounted instrument and interest is paid upfront. A Private Debt Fund is not a discounted instrument. It pays coupon or distribution at intervals. Intervals could be semi-annual or quarterly.

Since this is the first Fund of this nature in the country, what are the similar Funds outside that one could refer to?

This Fund is the first of its kind. While other Alternative Asset Funds, such as Private Equity Funds, Infrastructure Funds, and Real Estate Investment Trusts, have been launched, none has focused on Private Debt. This is the first Naira denominated Private Debt Fund in Nigeria.

Outside Nigeria, are there Funds with the same characteristics as this one being said to be first in Nigeria?

Yes, there are lots of Funds. If you look at the U.S. market, you will find that many Fund Managers in the U.S. have Private Credit Funds. We have a list of some of them. A Fund Manager launched the first Private Debt Fund in Angola this year. South Africa already has Private Debt and Credit Funds, and you see similar developments in countries like Egypt and possibly Morocco. So, Private Debt Funds are becoming familiar across Africa.

You mentioned a technical partner. Could you shed more light on that and explain what they do on this Fund?

The name of our technical partner is TLG Capital Investments Limited. The company was established in 2009 as a private London-based Alternative Assets Investment and Management Company. They specialise in investing in sub-Saharan Africa. They have about US$130 million in Assets Under Management (AUM) and over US$200 million invested in structured transactions. TLG Capital’s extensive experience in sub-Saharan Africa, particularly in the Nigerian environment, is why we have chosen them as our technical partner. TLG Capital’s expertise is an important factor in the FCMB- TLG Private Debt Fund we are offering to investors.

Do they also invest money in the Fund?

No, they are our technical partner and not expected to invest their money. By regulation, FCMB Asset Management, as the Sponsor and Fund Manager, is expected to take up at least 3% of the size of any Series we launch. For Series 1 of N10 billion, we invested about N312 million.

What type of technical assistance does TLG Capital offer?

They are on the Fund’s Investment Committee (IC). So, they have two representatives with a lot of experience. The Fund Management Team will look at investment opportunities and go through the investment review and due diligence processes, and then present an investment proposal to the Fund’s Investment Committee. The Fund’s IC will then review the debt investment request and either approve or decline the request. There is a lot in terms of the credit review process, risk management, operations, and many of those things from which we are benefiting from the expertise of TLG.

Okay, and you said there are prospects you would want to grow the Fund further; is that correct?

That is something that we will consider before we launch Series 2. We will then decide whether to stick with the current programme size approved by the SEC. Remember, for us to change the programme size, we must approach the SEC for approval. But that is something that will be considered at the appropriate time.

When do you intend to start giving the first credit?

We already have activities that we are looking to fund so we will start almost immediately. The process is that once you have concluded the capital raise, you send documents to the SEC. The SEC must approve the outcome of the capital raise, and that process takes two weeks. So we are looking at September.

The companies that have shown interest, which sectors are they operating?

They are spread across six sectors right now; Healthcare, Education, IT/Technology, Agriculture, Clean Energy, and Transport & Logistics.

What is the primary motivation for setting up this Fund now?

We realised there was an issue, and we decided that we could develop a solution to address that issue. The problem for the investors was that their real return was negative given the rate of inflation. On the other hand, some companies, especially mid-sized companies, needed access to suitable capital which are affordable. So, there were two issues – one was from investors, and the other was from mid-sized companies. This led to the creation of the FCMB-TLG Private Debt Fund.

Is there a maximum amount to be accessed by eligible companies?

Yes, the single obligor limit is 20% of the portfolio as stated in the Transaction Documents approved by the SEC. For Series 1 of N10 billion, the maximum amount available to any eligible company is N2 billion

What is the investment size?

That would be difficult to say right now because it depends. We have received requests of N500 million to over N2 billion. However, we would invest at most N2 billion, being the single obligor limit as approved by the SEC.

As a pioneer in this area, do you believe that if the FCMB-TLG Private Debt Fund is successful, it will motivate others to replicate it?

That’s the typical cycle. You enter a sector, pioneer an activity or introduce an innovation, and then others follow, copy, and replicate. The key is to remain innovative, continually raise the bar, and stay focused on addressing identified challenges in the Market. By doing this, we’ll consistently create value and stay ahead of our peers.

Are you optimistic about completing the One Hundred Billion (N100 billion) Naira programme by the end of next year?

Yes, we are optimistic. If, under Series 2 and 3, we raise N90 billion, it means we are done with the Programme.