‘Investors education is very critical to return of confidence, participation in stock market’

Adejumoke Awolumate is the Head, Corporate Finance Advisory, Meristem Securities Limited. In this interview with Helen Oji, she spoke on how to increase investors’ confidence and participation in the stock market, albeit in recession. Excerpts:

Now, economic recession is on the lips of every Nigerian. As one of the top players in the capital market, how is the market responding to the recession?
Well, there has been a major lull in capital market activities. The volume witnessed before the recession is not the same as what we have currently, transaction volume has dipped significantly. Unfortunately, the Nigerian Capital Market seems to have suffered a double dip; firstly, as a result of global market crisis, and just as the world seems to be mustering a recovery of some sort, we then had our peculiar market crisis. The impact has been significant, but we strongly believe at Meristem that with the right strategies in place the economy will rebound.

What can be done for the market to rebound?
Like I mentioned earlier, economic crises generally lead to downtrend in asset prices and that is exactly what we are seeing today; tradable instruments like stocks, shares have witnessed major dip in prices. We have not seen much recovery for two reasons – one: investors’ confidence is yet to return fully to our markets. Again, these same companies who are issuers of these instruments are now contending with economic issues that are not very good for business such as exchange rates and high cost of borrowing. Unfortunately, many businesses source their input abroad and the decline in Naira value over the past few months has driven up input cost significantly, eroding profits. Moreover, difficulties in sourcing foreign exchange to fund importations have led to reduced capacity utilisation further hampering business performance. So on one hand, there is the issue of market confidence and on the other hand, company performances are on the decline. Every organisation needs to take a close look at the way they are currently structured and positioned to compete in the market place and make necessary changes to make themselves more adaptable to situations that confront them. This essentially means restructuring and re-engineering the business for survival. Even living creatures respond to environmental changes through processes like hibernation and relaunch themselves when situations become more favourable. So, a lot of organisations need to do some restructuring, some internal reorganisation for competitiveness in the market place.

If you are to advise the exchange on market recovery, what will be your suggestions?
I believe the Nigerian Stock Exchange, NSE, has been doing a lot prior to now. You would recollect when we had the global crisis around 2008/2009, most people felt it was partly due to market laxity and market manipulations. This has led to a review of many of the regulations and the NSE, as a member of the global exchanges has done a lot to improve the market framework, a critical aspect in restoring investors’ confidence.

Nobody wants to come into the market, invest money and find that it has disappeared into thin air because some people have mismanaged the funds or because the instrument purchased are not designed to deliver on objectives for the investors. The NSE has been doing a lot regarding that and I think that is what we need to push forward – tighter regulations, make sure that when we are offering instruments to investing public we understand the target investors and we understand the outlook on this instrument that we are offering to investors. Then as people have better experiences, confidence will be restored.

What is your ideal model for increasing domestic participation in the market?
It ties in with the question you asked about investors’ confidence. Increasing domestic participation means that people see the value proposition of the capital market; they see what they can do to achieve their own personal objectives. Now, it is what you know about that can ginger you to participate so there has to be market awareness. People need to be aware of what is going on in the market; so investors’ education is very critical.

Again, the NSE and the Securities and Exchange Commission, SEC, has been doing quite a bit in that regard. I know there was a time they even engaged with Nollywood actors to come up with movie sketches to engender market awareness and stimulate participation. I am also aware that several organisations including Meristem have organised seminars to let people see how the capital market or investments can help achieve individual objectives while guiding such potential investors on their choice of investments. It is a two-pronged approach.

On the other hand, we have to make the investors whether individual or corporate, comfortable with the capital market. You also want the companies worthy to receive investors’ funds. For instance, if a company producing X product is looking for investors, it does not want to go to bank to borrow money. You have to make that company have the right framework and the right structure to make investors confident enough to put their money and walk away knowing that their funds are safe; they will get dividends and that the investment will increase in value. You have to deal with the investible vehicles, which are the companies and securities; you have to deal with investors by creating awareness and helping them understand how this can help them meet their objectives.

Do you foresee new companies coming for listing on the NSE?
Well, coming to list is like saying the company wants to come and attract suitors to itself. Those companies have to be ready which means that they must be able to create an entity that everybody wants to buy. So between now and next year, it depends on if those companies have been put in what we call a ‘bankable’ state to attract investors and there is enough confidence in the proposed structure, in the story behind that company for people to put money there. Again, companies come to list for various reasons – one primary reason is to raise funds from public, now whether or not those companies are ready; it is a different ball game. There are things that needed to be addressed. If you look at the stock exchange, there are very few companies listed compared to what we have in the entire Nigerian market. Is it that other companies in the economy do not need funds? No. So, once we can make that transition, we would see arrays of companies coming to get listed.

Why do companies need restructuring?
Companies need restructuring for different reasons because there are different types of restructuring. You could restructure your financials, assets, and ownership structure among others. Therefore, different arrangements trigger restructuring. The topic we have been discussing; recession and harsh economic climate is one major reason many firms restructure. Just like you do as an individual when you restructure your spending pattern; it is the same thing with companies. For instance, a lot of companies have debts on their balance sheet that need servicing; when there is a lull in the market, servicing these debts become pretty challenging and such companies explore the possibility of restructuring these debts. For instance, by changing the interest regime or repayment terms such as revising rates benchmarked to monetary policy rate, MPR, on deferring principal repayment. Once you notice significant changes in your circumstances, it may be a signal to restructure.

Ownership restructure may arise for different reasons; for instance, a planned capital raise may require new structure to the investment objectives. You may even consider restructuring to unlock hidden values. For instance, a single entity may decide that an aspect of the business will perform better as a ‘stand-alone’ and hence restructure for value creation. In some cases, a business, in an attempt to venture into a different line of business may decide to create a separate vehicle for that purpose, sometimes in conjunction with a business partner as a joint venture.

In my opinion, whatever the reasons for restructuring the business, it is obvious that some organisations embark on the process actively and work actively to achieve set objectives while others do it inadvertently. They may not even realise that they are restructuring. Others may even decide to reorganise their company for better efficiency. It is critical that an organisation identifies the objective for restructuring; determine the most suitable strategy to achieve the objective before embarking on such option.

Where does Meristem come in, do you have the expertise for restructuring companies?
Absolutely yes! In the course of advising clients on capital raising and listing activities, business/financial restructuring is many times inevitable for us to extract maximum benefit for such activities for investee companies and investors alike! Recall your earlier question on the possibility of more companies getting listed; many of these entities need to be better structured for them to access public funding or for them to exist as publicly quoted companies. So, restructuring is an integral part of what we do at Meristem Advisory.

We re-engineer the capital structure, governance framework and sometimes the corporate existence to ensure optimal value creation and projection. Moreover, some of our clients look to grow their businesses inorganically through mergers or acquisitions and this requires extensive restructuring as two independent entities are being merged into one.

Year in review: How was 2016 for Meristem, what is your expectation for 2017, for the company and market?
The year has been a very challenging one given the state of the economy; with significant drop in oil revenues, negative trends in macroeconomic variables like exchange, interest and inflation rates, there has been a major slow-down in performance across board. Manufacturers and traders alike are grappling with funding imports and capacity utilisation has declined significantly, while banks and other service companies feel the impact on their top and bottom lines.

The government and its agencies are developing a lot of economic initiatives targeted at arresting the decline and this should signal a positive turnaround in the coming year if properly followed through, howbeit some policies and actions may have a delayed impact on the economy. They are nevertheless essential steps to a positive recovery that we must painstakingly pursue to engender sustainable recovery that we all so desire as Nigerians.

What is the company’s profile and scopes of operation?
Well, our existence can be sub-divided into two, initially as Great Africa Securities, which subsequently became Meristem Securities Limited. For Meristem Securities Limited, we have been in operation for close to 14 years. On the scope of our business, I would like to say we are one-stop financial services and we do almost everything in the financial services, except banking and insurance. We are involved in stock broking, wealth/asset management services, trust services, company registrar and probate management services as well as financial advisory. We are information driven business and we leverage strongly on our research team to deliver on these services.

What are your products portfolios for domestic and foreign investors?
We are a service business and we offer generic services targeted at meeting a wide range of customer needs. We also offer tailored investment management services; Meristem, as an innovative organisation is constantly evolving in our deliverables to meet clients’ objectives. We do come up with products from time to time and the array is wide. So I am asking myself the ones to mention for this purpose. Is it our Meritrade platform, which is a stock broking platform targeted at our internet savvy retail investors for seamless execution of their mandates.

That is something we championed in the stock broking industry and today, there are several of such platforms to drive trading convenience of investors from any location. There are products targeted at the client’s investment objectives such as retirement planning products; we also have products for Nigerians in Diasporas; mutual funds with different investment objectives etc.

As a follow-up to that, how are you doing in the market bearing in mind competition?
Well, I would like to say that it has been both very challenging and very interesting at the same time. This is because the obstacles and challenges ensure that you are constantly evolving, getting better at what you do and as you surmount these challenges, you advance. I think that has been the story of Meristem. If you are familiar with us, we started first as stockbroking firm actually, what we did then was to offer stockbroking services to our clients-individuals and corporates, and we have since evolved into several other things to meet our clients’ demand. So, for every challenge we faced, we realised that there was an opportunity there to become better. That is what evolved us into what you see today.