Analysis: TA Associates Acquisition Of A Stake In Interswitch
Nairametrics | The internet revolution in Nigeria has been a massive catalyst for the economic development of Nigeria. It gave rise to an online consumer economy that is being serviced an emerging e-finance industry.
Presently, 99% of all transactions in Nigeria are done with cash. This presents an enormous opportunity for e-payment businesses to tap into. However, there are two major obstacles –trust and technical expertise that stand in the way of the industry achieving its full potential. There is a lack of knowledge in the Nigerian economy that precludes it from producing goods that are of global standard. Often, this gap has to be filled with foreign investment, technology, and expertise. Trust, on the other hand, is a more entrenched problem. Lack of trust can be seen operating on two levels. On one hand, consumers will not use a product they do not trust. And on the other hand, foreign investors would be unwilling to enter a market it does not trust. To be fair to the industry, these problems are a running theme in the entire Nigerian space.
According to a McKinsey & Company Report, Interswitch occupies a leading position in the emerging market, especially in debit cards, which comprise 99% of all cards in Nigeria. Interswitch is a recognizable brand in Nigeria. It owns and operates Nigeria’s principal domestic debit card scheme, Verve; it also operates Quickteller, the leading B2C bill payments and digital commerce platform in Nigeria.
TA Associates a global private equity firm recently acquired minority equity interest in Interswitch. The deal (amount not disclosed) will see TA Associates take up a stake in the company by buying some of the shares owned by Helios Investment Partners, majority shareholders in Interswitch. Ajit Nedungadi, a Managing Partner at TA Associates who will also join the Interswitch Board of Directors
TA Associates is ranked among the top 50 private equity firms in the world, and it has raised $24 billion in capital so far. This investment is its first investment in Africa, and as Babatunde Soyoye, Helios’s Co-founder and Managing Partner said
“For TA Associates to have made Interswitch their first investment in Africa we believe is a testament to Interswitch’s successful growth trajectory to date and the quality and resilience of its brand and business model. We are confident that TA’s domain expertise and global reach will benefit Interswitch as we move forward together in partnership.”
Not limited to card and bill transactions, Interswitch serves as a third-party transaction processor for many of Nigeria’s largest banks. In addition, Interswitch offers a number of B2B electronic payment services to public and private sector organizations and businesses, including government entities, hospitals, telecommunications companies and utilities. The investment is beneficial for both parties because it will expand TA Associates’ longstanding presence within the global payments industry. And it will also help Interswitch in its expansion drive. Interswitch also operates in Kenya and Uganda through add-on acquisitions.
In the long term, there is also some benefit for Nigeria. To take full advantage of the internet and capital, Nigeria must have the technical expertise and manpower to work both effectively and efficiently. Thus, working with a firm like TA Associates that has a long history of helping companies in the payment transaction business grow and making money from it, will help to bridge this technical knowledge gap. An advantage of partnering with reputable global firms is an increased reputation with goes a long way in building the confidence of consumers and investors.
This is a strategy that PE firms seem to take in Africa, for example, Araaj teaming up with Mouka to enhance the company’s product offering and distribution. Nigeria is a risky market for PE firms because of the trust issues with forex and other issues like Nigerian firms being riddled with corruption and reckless financial mismanagement. But, these are risk factors that could easily be mitigated with fine due diligence – as seen with how Araaj handles its companies – conducting reviews annually and semi-annually at fund levels.
The FG is not resting its oars either. It is really fond of the telecommunications industry. It has been busy enacting legislative tools to ensure that the telecoms companies operate smoothly. CBN’s recent Cashless Policy could create a boom in the e-payments industry if it is strictly implemented. With 99% of all transactions still done with cash, then imagine how big e-payment could become overnight. But alas, the Nigerian government has a problem with implementation and has started and stopped it a few times now. Nonetheless, e-payment companies might have to accept the gradual but consistent growth they are currently experiencing. Internet users went up from 3.1% of the population in 2006 to 16.1% in 2009.