The last initial public offering (IPO) on Kenya’s stock market was eight years ago. Mindful of this, stock exchange officials are looking to reinvigorate this business by making the exchange more attractive for company listings. This may, however, prove more difficult than the officials think.
Capital News Africa: From the trading floor – Week 3-2023
It is a sorry state of affairs. The last IPO on the Nairobi Stock Exchange (NSE) was no less than eight years ago. Back then, capital market experts from the East African bank Stanbic organised an IPO for a property investment vehicle called Fahari-Iret.
Unfortunately, the IPO was a flop. While the emittent, namely Fahari-Iret, sought to raise KES 12.5 billion (EUR 104 million according to exchange rate at the time) with the IPO, it brought in just KES 3.6 billion (EUR 30 million per the then exchange rate).
In the years since the flop, the IPO business has not just dried up in Kenya but all over the continent. Between 2019 and 2021, there were just 24 companies that listed on African exchanges. By contrast, there were 17 IPOs on the exchanges in 2018 alone and as much as 30 in 2017. Even more worrying is the fact that more and more companies are leaving African stock exchanges. In Johannesburg, for example, more companies delisted from the city’s bourse than joined it last year.
So what is going on? Well, from the vantage point of an entrepreneur, it is often more enticing to get finance from private equity or venture capital funds. It is easier to raise the needed funds, and they are less dependent on unpredictable whims of investors.
On the other hand, entrepreneurs should be aware that when they choose private capital, they are often obliged to sell shares at a fraction of the worth that they could get if they sold those shares on an exchange. Private equity investors and venture capitalists use their strong position in fund raising true to the motto: The lower the purchase price, the higher the profit.
Another big reason why IPOs in Africa are falling out of favour is the lack of liquidity on its exchanges. As a result, the company, as was seen in the case of Fahari-Iret, cannot be guaranteed that the listing will succeed.
That is unfortunate, as IPOs are crucial to a stock exchange's vitality. For if the exchange fails to attract new companies, it begins to wilt. This is because new entrants have new business ideas which can excite investors. Investor enthusiasm can, in return, help those entrants reach their business goals. In short, an IPO helps an exchange to regenerate.
But back to Kenya: There are 66 companies listed on the NSE, and four of them – Safaricom, Equity Group, KCB and East African Breweries – account for three-fourths of the exchange’s market cap. As Kenyan investment bank Cytonn Investment recently calculated, the telecoms firm Safaricom accounts for 46.3% of the NSE’s market cap alone.
The huge weighting of these four companies on the Nairobi exchange is problematic, as it can cause excessive volatility. Moreover, their predominance leaves less room for other unique companies. Where else other than Kenya can investors bet on coffee and tea plantations?
Kenyan president William Ruto announced last September, or a few weeks after his election, that he wanted ten IPOs done in Nairobi each year. So far, it doesn’t appear that this goal will be reached in 2023. However, it is very positive that Ruto has identified the situation and is trying to do something about it. It should also be noted that, in 2016, Kenya’s Capital Markets Authority (CMA) unveiled a master plan whose goal was to attract four IPOs a year. Unfortunately, that plan has fallen 28 listings short.
That more must be done to boost the attractiveness of African capital markets is something that is well understood not just in Nairobi but elsewhere. For example, officials from the Johannesburg Stock Exchange (JSE) visited Europe last year to promote the JSE as a place of investment. Officials from Casablanca’s bourse also have unveiled a strategy aimed at getting local companies to seek more funding from the exchange and boosting long-term equity ownership.
It is also true that Africa’s exchanges have made technical improvements to modernise trading. But while they are to be commended for this, the success of these exchanges depends on finding attractive IPO candidates and investors willing to place their money with them.
In Europe, there are plenty of investors who are on the hunt for attractive investment opportunities. As a result, we feel that African exchanges should do more to forge links with, for example, bourses in Europe and North America. That way, western investors can become more familiar with African companies with interesting business cases. Indeed, profiling such African stocks was one big reason why we began publishing „Capital News Africa“ as well as this column “From the trading floor.”