Financial access for companies is one of the biggest obstacles to economic growth in Africa. Private equity firms, venture capitalists and other altruistic investors are not, in our view, the answer to the problem. African stock exchanges, on the other hand, could be the solution - but only if they mature.
Capital News Africa: From the Trading Floor – Week 2-2022
Companies in Africa often face big obstacles when it comes to funding further growth. Bank loans, for example, are only available to those few established corporates that can provide the necessary collateral. Most African companies do not have any collateral to offer.
Getting finance from investors abroad can also be problematic, as they usually are based in Europe or the US. Should an African company not fit with the current political fashion in those regions, it will have a hard time getting finance from private equity or venture capital firms.
Let us explain: The list of big international investors active in Africa is long. It includes such names as the Gates Foundation; the UK development finance institution CDC; Norway’s sovereign wealth fund (Norfund); the International Finance Corporation; Helios Investment Partners; and the African Women’s Development Fund.
But one sure way to preclude any financing from such investors is to start a company in Africa that employs only men and wants to focus on the mining of black coal. This is because these investors in the US and Europe are pursuing what they see as altruistic goals. African entrepreneurs looking to secure financing from them have shared their frustration with us. They often are not even given the courtesy of a call back after enquiring among these investors.
It’s also been our experience that private equity firms and venture capitalists are not an ideal alternative for African companies. This is because they often think about how to exit a certain company before even investing in it. Their business model is such that an African company cannot rely on them to be a long-term partner as it seeks to grow.
Meanwhile, Africa’s equity markets are, currently, also not very attractive for corporate finance. Let’s see why: An initial public offering (IPO) used to be exactly what it stands for: An offer to investors to become shareholders in the company and finance its growth. For the IPO, the candidate would, with the help of an investment bank, locate the necessary investors for the day of its inaugural listing.
Today, however, the candidate has to often find enough investors willing to commit long before the listing in order for the IPO to succeed. This is increasingly the case among the established international stock exchanges. In the past, companies could collect capital via a public offer to subscribe their shares. This is not the case anymore on developed stock markets. And in Africa too, it’s a downright illusion to believe that a capital hike will be subscribed to via a public offering.
Indeed, one can say that the purpose of a stock exchange has changed. In the past, an exchange's first job was to enable companies to find capital. The second task was to offer investors a safe environment for their investment. Today the task of an exchange is reduced more and more to providing a reliable regulatory framework.
For a listed company enables investors to participate in its growth even with relatively small sums of money. The investors also may estimate the company’s worth on a daily basis and sell their holdings at will. The listed company, for its part, has the opportunity to raise fresh capital as needed.
It is because of such advantages that we, again, believe that capital markets are key to further economic growth in Africa. If the continent’s politicians continue to neglect further development of such markets, corporate finance there could become a bottleneck that would hold down further growth. African exchanges must return to their original function for the economy: That is to be the central place for financing companies and, hence, further economic growth.