By Chukwuma Umeorah
The ongoing banking recapitalisation exercise is revealing a new set of dynamics. As banks work to meet the Central Bank of Nigeria’s (CBN) statutory capital requirements, a noticeable shift in investor participation is becoming apparent. Unlike the 2005 recapitalisation, which saw a substantial role for retail investors, this round is increasingly characterised by the involvement of institutional and high-net-worth investors (HNIs).
According to market operators, the shift is largely attributed to the country’s struggling economy, which has severely eroded the purchasing power of retail investors, placing them at a competitive disadvantage. High inflation, soaring food prices, and the increasing cost of fuel, among other economic pressures, have significantly diminished the investment capacity of many retail participants, further widening the gap between them and institutional investors, who are better positioned to absorb the financial pressures and take advantage of the public offerings.
David Adonri, Vice Chairman of Highcap Securities, in a conversation with Daily Sun, provided valuable insight into the shift.
He noted that while there has been considerable enthusiasm from investors towards the banks’ public offerings, it is institutional and high-net-worth investors who are expected to play a more significant role in the recapitalisation process.
According to him, investors have so far shown enthusiasm for the public offerings being made by banks to raise fresh capital. “The public offerings have been well embraced by investors. They have demonstrated a lot of enthusiasm towards the recapitalisation exercise, and many investors are taking up their rights and public offerings as well,” Adonri said. However, he tempered this optimism by noting that while responses are encouraging, the full outcome will only be clear towards the end of the offering period as many investors, especially retail ones, tend to delay until the final days to submit their applications due to cash flow management issues.
In contrast to the previous recapitalisation, when the economy was relatively healthy but banks were struggling, the current situation presents a paradox with banks now posting record profits, but the broader economy is faltering. Retail investors have been the most affected by this economic downturn, making it difficult for them to participate in capital market activities as they did in the past.
“The people who have been incapacitated the most are retail investors. Their purchasing power has suffered severe erosion as a result of the economic situation,” Adonri explained.
“However, the expansion of the Nigerian capital market and advancements in its infrastructure have created new opportunities for investors, both locally and internationally. Through improved capital market technology, investors can now participate in public offerings from anywhere in the world.
“We are not just looking at Nigerian investors; these offerings are being advertised to the global investing public,” he added. Despite these advancements, the reality on the ground is that the Nigerian capital market is no longer dominated by retail investors. Since the global financial crisis of 2008/2009, the character of the Nigerian capital market has shifted. He explained that while retail investors will still participate in the recapitalisation process, the large-scale investors are better equipped to absorb the offerings, helping banks and companies meet statutory capital requirements.
Data from the Nigerian Exchange Limited (NGX) reveals a fluctuating trend in investor participation this year. Retail investor participation stood at 49 percent in May, declining further to 42 percent in June. However, by July, retail investors rebounded, surpassing institutional investors with a 63 percent share, compared to 37 percent held by institutional investors. This movement reflects the ongoing shifts in market dominance during the recapitalization process.
The competitive disadvantage faced by retail investors in the recapitalization process is not limited to purchasing power. A recent report highlighted other challenges, such as the difficulties in recovering funds trapped in private placements. Shareholders have been making efforts to recover over N700 billion in funds locked in such placements since the 2008-2009 global meltdown. This has created further hesitation among some retail investors when it comes to participating in new public offerings.
Additionally, the lack of incentives for retail investors in the current recapitalization process has exacerbated the problem. According to Adonri, there have been cases where the prices of shares offered in the primary market are higher than those in the secondary market, discouraging retail investors from subscribing. He pointed out that while the new offerings are better priced, this pricing issue remains a concern that regulators need to address.
On the regulatory front, Adonri believes that there is room for improvement, particularly in policies that could incentivize broader participation in the recapitalization exercise. One of the key areas of concern was ‘technical suspension’, a practice that allowed companies raising capital to offer their shares below market prices, thereby attracting more investors.
“In the past, when companies raised capital, their stocks were placed on technical suspension to allow them to come in at a price below the market price, which served as an incentive for investors,” Adonri said. However, regulators have since abandoned this practice, citing its potential for market manipulation. While Adonri acknowledges the validity of these concerns, he argues that abandoning technical suspension has led to the sacrifice of capital formation. He suggests that the practice could be reinstated with more robust regulatory safeguards to prevent market abuse while encouraging participation from all investor categories.
