I recently came across some investment clubs where members pool resources to invest in startups, businesses, or other causes they deem fit. I thought more people, especially those in the Nigerian diaspora, should adopt this model.
Adopting co-investment models, where multiple diaspora investors combine resources for larger projects, transforms the investment landscape. Instead of one person risking $50,000 alone on an uncertain venture, ten investors contribute $5,000 each, spreading risk while accessing deals requiring significant capital.
This isn’t theoretical. The 2024 Nigeria Diaspora Investment Summit saw 236 investors commit ₦673 million across 50+ businesses – many through informal co-investment groups forming at the summit itself.
This article details the steps you can take to start your co-investment group and increase the odds of success as a Nigerian in diaspora.
5-Step Process to Starting Your Co-Investment Group
Step 1: Start By Recruiting the Right Members
The foundation of any successful co-investment group is its members. You need 6-12 diaspora investors with aligned interests and compatible risk tolerance. You have to remember that in recruiting members for this, quality matters far more than quantity; better to have 6 committed, financially capable members than 20 casual participants.
Start by sourcing from trusted networks where baseline trust already exists: university alumni groups, professional associations, church communities, or hometown associations.
And screen for potential members based on financial capacity, ensuring each member can comfortably contribute $5,000-$10,000 minimum without financial strain. Assess professional backgrounds, prioritising members with relevant expertise in finance, legal, operations, or industry knowledge.
But their capacity or expertise is not enough; you need to conduct reference checks by verifying professional credentials and speaking with mutual contacts about reliability and character.
Once you’re satisfied with the findings, you can hold an initial virtual meeting to present the co-investment concept, gauge serious interest, and establish preliminary expectations.
Some red flags to watch for include – members who can’t commit to minimum investment amounts, those seeking “get rich quick” returns, people with no investment experience unwilling to learn, or individuals unable to accept that losses are possible.
Step 2: Establish Legal Structure and Governance
Create a formal legal structure and governance framework that prevents future disputes. This upfront investment in a professional setup saves enormous headaches later.
We’d recommend that you engage a lawyer to draft operating agreements and register entities. Choose the legal structure that fits your goals: Special Purpose Vehicles work best for single, large investments like real estate or infrastructure; Limited Partnerships suit ongoing investment activity with active management; Investment Clubs offer the simplest structure for informal groups starting small.
Your lawyer would draft an operating agreement covering capital contribution requirements and schedules, decision-making processes including voting thresholds and veto rights, profit and loss distribution formulas, exit provisions explaining how members can leave or new members join, management roles and responsibilities, and meeting frequencies with quorum requirements.
And register your entity with the Corporate Affairs Commission to get your Tax Identification Number and a dedicated Nigerian bank account for capital contributions, keeping group funds separate from personal finances.
Step 3: Pool Capital and Set Investment Criteria
Next, you want to collect committed capital from members and establish clear investment parameters that will guide all future decisions.
To do that, you first define your investment criteria explicitly. What 2 or 3 sectors do you want to target your investments in? What specific sums do you want to set as minimum and maximum investment amounts?
You can choose 2-3 target sectors such as real estate, agriculture, manufacturing, or technology. Set investment size parameters with minimums and maximums per deal, perhaps $10,000-$50,000 per investment. Establish return expectations based on research, typically targeting 15-20% annual returns with clear risk acceptance.
Then agree on the investment time horizons, usually 5-7 year hold periods, understanding that shorter exits may not be possible.
You could also specify due diligence requirements, including mandatory site visits, financial audits, and reference checks, before any investment.
Then establish clear communication protocols with monthly virtual meetings plus WhatsApp groups for ongoing discussion and quarterly financial reporting.
Step 4: Evaluate Investment Opportunities
It is now time to develop a deal flow process that identifies quality investment opportunities matching your criteria, then conduct rigorous due diligence before committing capital.
A good way to build deal sources is by attending the Nigeria Diaspora Investment Summit to see 50+ vetted businesses pitch annually. Or engaging business incubators like GAIN, Wennovation Hub, and CcHUB that present portfolio companies seeking capital.
You could also partner with Nigerian lawyers and accountants who often know businesses seeking investment. And leverage member networks or government programmes where each member brings 2-3 opportunities annually for group evaluation.
Implement a screening process where the investment committee reviews all opportunities against your criteria.
Conduct rigorous due diligence covering financial review of 3 years of audited statements, cash flow analysis, and debt obligations. Verify legal aspects, including CAC registration status, ownership structure, and existing shareholder agreements. Validate the market through customer interviews, competitor analysis, and verification of growth projections. Assess management with background checks on founders and reference calls with previous investors or partners. Conduct site visits where 2+ group members physically inspect assets, facilities, and operations.
The investment committee creates a detailed memo with their recommendation to invest or pass, along with proposed terms. Expect to evaluate 15-20 opportunities to make 1-2 actual investments.
Step 5: Execute Investment and Manage Portfolio
Once an opportunity is identified and vetted, you would need to structure the investment properly using term sheets that define all terms before legal documentation begins. Ensure your legal counsel drafts relevant documentation and agreements.
And with the deal done, you want to ensure that you’re implementing active management by assigning 1-2 group members as point people for each investment who maintain regular contact. Set in place plans to review monthly financials against projections, and quarterly meetings with management teams to flag variances quickly and address problems early.
A good strategy is to make provisions for reinvestment or distributions by deciding whether profits get distributed to members or reinvested in new opportunities.
Remember to separate emotion from business decisions. If an investment underperforms despite multiple interventions, cut your losses and preserve capital for better opportunities.
Action Steps
The need for starting or joining a co-investment group is not limited to just resource sharing; it significantly improves the odds that your investments succeed, thanks to the diverse access, experience and perspective each member brings.
Hopefully, this article helps you want to get started with one. Book a one-on-one with Mr Ted today to discuss co-investment groups, investing in Nigeria and more.
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