Stockmarkets face dry season as investors look elsewhere for capital

Thursday March 28 2019

A broker at the Nairobi Securities Exchange monitors online trading. Investors who had been active in issuing IPOs have exited most markets in the region, leaving the exchanges in the hands of foreign investor. PHOTO | SALATON NJAU | NMG


East Africa’s stockmarkets are no longer favourites of investors seeking to raise capital for growth and expansion.

Initial public offerings, which are usually associated with booming markets, have dried up and analysts say the unwillingness among new companies to offer shares to the public is a ticking time bomb heralding the eventual demise of the exchanges.

The latest developments casts doubt on the future of stockmarket listing in the region with some of the listed counters such as Kenya’s national carrier Kenya Airways considering a delisting option.

The EastAfrican has learnt that stringent market regulations, the high cost of listing, increased disclosure requirements, tough operating environments, falling corporate earnings and trading malpractices such as insider trading and front running of bonds by dealers in Kenya have eroded investor confidence and kept potential issuers away from the stockmarket and bond market.

In addition, local investors who had been active in issuing IPOs have exited most markets in the region, leaving the exchanges in the hands of foreign investor.



Companies are now shifting focus to private equity and private placements to raise capital outside the stockmarket.

“I think to some extent there is a tendency by private firms to shy away from the disclosures required in the market. There is also increased competition from private equity funds, that are offering an alternative source of capital which does not require the kind of public exposures the stockmarkets require,” said Paul Mwai, chairman of the Kenya Association of Stockbrokers and Investments Banks (KASIB).

According to Mr Mwai, who is also the chief executive of AIB Capital, PE funds often exit to other PE funds after five to seven years, adding that incentives should be offered to attract them to the stockmarkets.

“There is a needs for incentives for PE funds to exit into the stockmarket,” he added.

According to Daniel Kuyoh, an independent market analyst, the attractiveness of private equity and debt is driving firms away from the stockmarket adding that the trend is likely to persist until the listing requirements are relaxed.

“Unless there are greater incentives for public listing, companies will continue to seek alternative capital sources, so unless there is a more concerted effort by the stockmarket and regulators to incentivise private companies, they will remain private,” said Mr Kuyoh.


The EastAfrican has also learnt that regulations and tax compliance have become a thorn in the flesh for potential issuers, who fear being on the radar of the taxman after making their books of accounts public.

“There is of concern about regulations and the issue of tax payments,” a source said.

Fund managers at Sanlam Investments East Africa said investors are shifting their focus towards PE investments rather than listed firms amid falling corporate earnings, a deteriorating business environment, declining shareholder wealth and a surge in profit warnings.

Regional exchanges face a scarcity of IPOs largely due to waning investor interest and the reluctance by family-owned businesses to open up their books for public inspection and for fear of stringent regulation.

According to Sanlam, PE investors are looking to put money in key sectors such as financial technology, energy, education, consumer products and services.

“Investor interest in PE suggests increasing appetite for private equity investments, considering the limited opportunity in listed equity markets,” the fund managers said in their investment outlook report for East Africa for 2019.

The Ugandan stockmarket had gone through an IPO drought for six years until August last year when Indian drug-maker Cipla Quality Chemical Industries came to the market to sell 657 million share (an 18 per cent stake) to the public.

Prior to that, the last IPO was in 2012 involving utility firm Umeme.

Rwanda Stock Exchange saw only one IPO in 2017 with the listing of I&M Rwanda.

The bank had to wait for five years before the government offloaded its stake in I&M Rwanda.

Last year, the Bank of Kigali cross-listed on the Nairobi Securities Exchange (NSE), exposing the group to increased capital as well as major international investors who had previously experienced difficulties of obtaining access to the Rwandan market.

In Tanzania the government has removed a ban on foreign investments allowing foreigners to buy shares in telecommunication firms listed on the Dar es Salaam Stock Exchange.

The ban was lifted in 2017 after an IPO by the country’s largest mobile operator Vodacom, failed to attract local investors. Tanzania has enforced a law that requires telecoms operators to float at least 25 per cent of their shares to the public.

In Kenya, the Nairobi Securities Exchange has not attracted an IPO from a corporate entity for more than 10 years, the self-listing of the NSE itself in 2014, while the Growth Enterprise Market Segment (GEMS) market, the trading platform for small and medium-sized firms, has only attracted five companies since it was launched in January 2013.

These are Atlas, Flame Tree, Home Afrika, Kurwitu and Nairobi Business Ventures.

In January this year, a private equity firms AfricInvest and Catalyst Principal Partners jointly acquired a significant minority stake in a second tier Kenyan lender, Prime Bank.

Fanisi Capital has also signed an agreement to sell Kenya’s Hillcrest International Schools to Dubai-based GEMS Education for Ksh2.6 billion ($26 million).

Fanisi owns a 55 per cent stake in the school, with 45 per cent held by businessman Anthony Wahome.

Last year, PE activity was spread across multiple sectors in the region including education, where Fanisi Capital has invested up to Ksh400 million ($4 million) in Kitengela International School.

In Tanzania’s health sector, the emerging markets specialist private equity fund manager LeapFrog Investments has put up undisclosed amount into Pyramid Group, a Tanzania-based medical equipment and pharmaceuticals distributor serving customers across Sub-Saharan Africa.

Meanwhile, Kenyan-based private equity firm Catalyst Principal Partners acquired Kenyan top tier mattress manufacturer Superfoam.

The firm also bought Uganda mattresses maker Euroflex Ltd and Malawian mattress manufacturer Vitafoam.