Growth & Development Limited (GDL), a financial services group, is calling for the remodelling of the financial system, such that savers get more returns on their investments. Its Managing Director/CEO Kola Ayeye speaks with COLLINS NWEZE on how the firm seeks to create wealth for the middle class, the state of the fund market, foreign investors’thirst for profitability and why foreign firms should not be forced to list on the Nigerian Stock Exchange (NSE).
What role does Growth and Development Limited (GDL) want to play in the financial sector? Can you tell us about the company’s vision and what its priorities are?
At Growth and Development Limited, we take our visions, some what from our names. Our vision is creating wealth and transforming society. Our mission is to provide unique financial services solutions to strengthen and empower middle class. What GDL is saying is that a financial institution needs to create value for its customers. There are financial institutions that need to make money and impact society. So, essentially, GDL will do its best to ensure that in line with its asset management and finance house licences, it will create wealth that will expand the middle class, and thereby have a strong social impact that will transform society.
What will you be doing in the finance house and asset management units of the company?
The asset management company manages wealth with the intent of increasing the wealth of the customers in line with their investment objectives. The focus of most asset management companies will be the wealthy and the near-wealthy. We are not ignoring that market segment. But beyond that, we are interested in using our asset management licence to float funds which will offer investors average returns, but which, in addition, would channel funds towards the interventions in the education and health sectors.
It is hard to give all of the details. By the time our first social funds is launched, it will give life to what we are saying. Our big vision is that our asset management segment will float funds that will seek investment from retail savers, large high net-worth investors with strong social conscience and from international social impact investment funds. Now, when we float these funds, we will offer them average returns, and we will channel returns from the funds into social services, but it will not be done as Corporate Social Responsibility (CSR).
These roles will be embedded in the core mandate of those funds. We are working on something on the employment stimulation area, and also a framework, that will be pitched in six states and focused on education. The details will become clearer once we conclude the launch of the funds. In simple terms, what is going to separate GDL from other financial services companies is that we are going to do a number of things, including moving funds and investment into the social sector, largely education and health.
Can we classify the funds as Mutual Funds?
There will be mutual funds. They will pull funds from all the people buying the units, and distribute returns periodically. But in addition, part of the objective of the fund will include what is done with some of their profits. Some of the profits will go into some of these courses.
How is the mutual fund market doing? Are the grassroots keying into it?
Markets run through cycles. Before the global financial crisis, there was almost 100 per cent interest in the capital market. After the crisis, I think the retail investors had left, and I do not think they have returned. Mutual funds define its market segment. There are mutual funds that are focused on equities. Those ones have not recovered. But there are mutual funds that are focused in the money market. I think, those are much more popular. And I think the success of each fund depends on its sales strategy, and areas you chose to do so. There are some of those funds that have continued to grow. And some of those growths are focused on investors. The money market funds invest in government securities. It offers diversification. Being under a better management, you should be able to achieve a better yield than if you invested alone.
Yields on government securities are coming down. Does it show there is no much future in that market?
I do not think so. We should be careful. Twelve to 13 per cent on government securities are extremely high. But because we are coming from 18 and 19 per cent yields, it is looking low. A healthy economy needs to achieve single digit interest rate. I think the question really is sustainability. When oil prices are high, it easier to stabilise economy and keep interest rates lower. The challenge is when oil prices go down. And they will at a point because that is the life of commodities. But if you ask me, where are interest rates are now? They are not low. If you want to grow economy, especially the real sector, we should not say these rates are low. It will take sometime and then the investors will adjust.
How are you handling foreign investors in the mutual fund market?
You know the foreign investors are looking for returns. And in some of the international markets, they will get two to three per cent. There are times in Germany when interest rate was negative. You keep your money in the bank and you pay the bank for keeping your money. We are not competing with foreign operators. They bring the money, and buy, and when it is matured, they take their money. There was a law that required foreign investors to keep their funds in Nigeria for at least two years before they can exit. Now, we are taking our eyes off those rules. It is hot money. We are saying now that reserves are approaching $50 billion, quite a significant of that amount has come in as hot money. The challenge with such money is that if you do not put a collar around their neck to make it difficult for all of them to exit, at the slightest smell of trouble, they leave. They create a run on your currency and create a crisis. The concern is that we are exposing ourselves to a potential run. Take for example, there is a problem around Iran, and oil prices are above $80 per barrel, if something happens and oil prices become $25 per barrel, you will be shocked at the speed those foreign investors will sell their instruments and exit. And that puts your currency at risk.
We ought to be much more deliberate to ensure that the downside of having portfolio investors in our market is managed. I do not think we are doing enough to curtail portfolio investors.
Do we have foreign fund managers in Nigeria and how are local operators competing with them?
Well, the market is regulated not by foreign institutions but by Securities and Exchange Commission. So, if you want to invest, you do not need any licence. You just bring your money, they will collaborate with us. You bring a local fund manager and they buy whatever instrument you want, or you ask him for an advice and you invest based on the advice. However, if you want to operate here not only as an investor but as a fund manager who has set up shop, you get a licence and play locally.
What we have seen is that the investment space here has a number of Nigerian institutions, and some have foreign shareholders. We have many of them that have registered here and have local affiliates. I do not think they are a threat to the market. Leading Nigerian players are holding their own. We do not need any protection, this market is matured. The skills to compete are resident here.
Previously, we were seeing a lot of new listings in Nigeria. What is holding the companies back from listing?
One of the key things in listing in the market is timing. If you go to the market when it is soft, you will be selling at a discount. So, I think, essentially, what you are seeing is that market capitalisation is back to pre-crisis era, but it is going to take some kind of strong pick up to have companies that have grown, and not listed to want to access the market. Recall, many periods of huge listings in the market have always been regulation or government-led. In the 70s, to some extent, early 80s, indigenisation and privatisation led to listings. In the 90s, you have consolidation of banks. And many banks in the process of capitalisation listed because of the N25 billion minimum capitals. In the absence of such policy-led moves, there are companies that have done very well, and the management decided, that in order to monitise their wealth, they have to list.
Are there other measures that can boost listing in the market?
If government were to decide that all the telcos should list, that will be policy-led. Or if they said that Joint Venture Companies should list. I do not think that people should be compelled to list. We should rather create incentives and make them attractive for them to do what we want them to do. On the finance house side, one of the things we are concerned with is that not only in the developing world, the failure rate of small companies is still high. A company starts small or micro, and then grows. Then they reach a stage where they stabilise. By the time they stablise, it means they are big. Maybe in Nigeria, you are talking about N3 billion turnover. By then, you are not struggling, you have the right cashflow, the future is predictable.
You meet your expenditure on time. Unfortunately, most companies do not progress beyond that stabilisation stage. When you see a number of companies built by their owners, instead of moving from this stage to next level, they collapse. One of the interests we have is to identify those companies that are stable, and encourage them on the route of stablisation, which include for them to contemplate listing on the Nigerian Stock Exchange. That is one of the roles we want to play in the finance side. What we will do will be good for the economy. I think it will be tragic for you to name a dozen or two companies that have reached that level of stabilisation and disappeared.
I think Nigerian companies have to realise that after they have stabilised, the next state is to institutionalise. And one of the important variant of instutitonalisaion is getting listed.
Which segment of the market are investors likely to get the highest returns in the next six months?
You know, the market has to be watched very closely. My view has always been to try and stick with the best names. If you are looking at a short time horizon, 90 to 180 days you are really speculative. I think people who hop in and out may not make it. We are in for a long time investment.
What makes you think you can give the middle class more returns in a market where other players are giving them less?
The life of retail savers do not get transformed because of the yields they get. If you save N100,000 at three per cent, you get N3000. What does N3,000 do for you? At 10 per cent, you get N10,000. What does N10,000 do for you? Well, 10 is better than three, five is better than three. But you see, that is why we talk about three types of wealth: personal, transgenerational and the commonwealth. Personal wealth is the money the retail saver has in his house.Trans-generational wealth is about companies that have become institutions, so will last several generations. Common wealth are the things we need. When we are dealing with wealth in GDL, we are not just talking about personal wealth, we are also looking at trans-generational and commonwealth wealth. For those savers, the greatest thing you can do for them is to strengthen the common-wealth. Now, we are not a charity organisation, but we have agreed to create a framework where some of the savings come into our vault, and they get a little more than they are getting from other banks. We also want to invest and intervene in things that strengthen commonwealth. It is a new perspective and we are determined to make it work.
How do you want to do that? Are you going to partner companies already in the business? Or are you going to start businesses in that direction?
There are different classes of investors. There are governments, internationally social impact investors and high networth individuals. We are going to put that into network and we will create a framework.
What portfolio size are you looking at in the next five years?
We expect to grow very, very big. We have just started, but the things we want to do are audacious and we want to take them bits by bits. We also want to have some of the parties already doing some of those things do them better. We cannot take over education and health, but we want to act as an important catalyst in getting thiose services to the people.
What are the products you have that will help you realise your goals?
We have the money market funds, which we are going to launch shortly. The approval is with the Securities and Exchange Commission. We are working on employment stimulation fund, which will be a private fund. We hope it will be listed before the end of this year. We have a transformation fund, which will focus on both education and health. We manage small pool of funds for our investors.
The finance business allows us to do normal lending business that finance houses do. So, those are the things that are keeping us busy. The things that will differentiate us are funds like the employment simulation and transformation. Our first transformation fund will close in 2019; we do not see it closing this year.
Finally, what are the measures you have put in place to ensure that investors’ money is secured with you?
I think the first thing is to look at the character of the people. I do not want to blow my trumpet. The investors with whom I have been associated with, my colleagues I have worked with in the past 30 years know that one of my most important defining cover is ethics. And it is too late in the day to change. So, I am very big on character. I have strived hard to maintain a good name and I am going to continue to do that. The second thing is that we are a licenced and supervised institution. The third thing is that in the structure of our funds, we will always put safeguards. For example, when we float funds, we have trustees and custodians. Which means that our role as managers will be separated from the custody of the assets.