Why East African companies prefer private equity, venture capital fundraising to IPOs

Many privately owned businesses fear offering shares to the stock market, largely because of the rigorous listing requirements and the demand for public disclosures relating to their financial position, management and governance structures.

Data by the East African Venture Capital Association (EAVCA) gathered between 2013 and 2023 paints a grim picture of the region’s IPO market, with most companies opting to raise private capital to support their growth and expansion programmes.

A report titled 10 Year Impact Report: Milestones and the State of East African Capital Markets (2024) shows show that companies in the region executed 550 private equity (PE) and over 1,000 venture capital (VC) deals during the period, raising $10.6 billion in fresh capital.

This fresh capital comprises $5.1 billion in PE and $5.5 billion in VC. These figures, however, compare unfavourably with the performance of the regional IPO market during the period.

For instance, during the period Kenya recorded only one IPO from a corporate entity -- the self-listing of the Nairobi Securities Exchange (NSE) Plc, Rwanda similarly recorded one (I&M Bank Rwanda in 2017) while Uganda had three (Airtel Uganda, MTN Uganda and Cipla Quality Chemicals Ltd).

Tanzania, on the other hand, raised Tsh584.3 billion ($224.53 million) through 10 IPOs during the period, including Maendeleo Bank Plc (2013), Swala Gas and Oil Company (2014), Mkombozi Commercial Bank (2014) and the self-listing of Dar es Salaam Stock Exchange (DSE) Plc in 2016.

But the amount of capital raised by Tanzanian companies through IPOs was much lower, compared with the $600 million raised through PE deals.

The EAVCA report notes that Kenya’s more favourable and diverse ecosystem attracted the majority of regional PE deals, receiving $3.7 billion over the decade, followed by Tanzania at $600 million and Ethiopia at $530 million during the 10-year period.

In the region, Kenya is the preferred destination for PE and VC investments, accounting for roughly 60 percent of the deals, followed by Uganda at 17 percent and the Democratic Republic of Congo (DRC) at nine percent.

The report says that the pace of private capital deal-making in East Africa has remained robust over the years, attracting a diverse array of investors and competition for deals has been steady, with consistent interest from both African and global firms.

“In the early stages of private equity (PE) development, most available capital came from foreign investors and development finance institutions,” the report says.

“To ensure the long-term sustainability of the industry in the region, it became imperative to engage the local market. Through strategic investor education campaigns and effective lobbying, the participation of local pension schemes in the private capital market has significantly increased.”

Kenya’s Capital Markets Authority (CMA) says the biggest challenge facing regional stock markets is the low uptake of investment products, including unwillingness by private companies to sell shares to the public and the unwillingness by investors to buy company stocks leading to, in most cases, undersubscriptions of IPOs.

In Kenya, for instance, rising interest rates have caused investors to shift to high-yielding government bonds from the equities market, leaving potential companies seeking to raise new capital through IPOs holding on for fear of undersubscription.

Kenya’s CMA disclosed last year that lucrative yields on government bonds, countrywide protests led by the youth against the Finance Bill 2024, and the borrowing options granted by commercial banks further complicated the IPO environment, leaving potential issuers with hard choices to make on their funding plans.

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“Initial public offerings (IPOs) are still on the table but you see now where the interest rates are going. It is a choice; if I have money, do I give you when you are issuing shares or should I go for government bonds,” said CMA chief executive Wycliffe Shamiah last year.

“If I was to raise money as a private company it is very unlikely that I would get people who give me money, because those people would just put their money in government bonds. So that is the discussion the issuers will have and still they can opt to go for, of course for bank loans because for a bank maybe you can negotiate for better rates.”

Jimnah Mbaru, chairman of the Dyer & Blair Investment Bank, said the flight to safety by equity investors seeking better returns in the fixed-income market is dimming the prospects of IPOs, a development that is being exacerbated by the fact that many companies now fear disclosures demanded by regulators as part of listing obligations.

“You know what happens when you have high interest rates the capital markets tend to fall behind,” he said.

“The capital markets and the stocks are not benefitting from this kind of situation. There is a capital flight from the equities to the fixed income and that has been the case for some time since the interest rates started moving up and it is tied up with this heavy government borrowing from the domestic market and the international market.”

“I think if they (capital markets) find any listing I think it will be by default or extreme lack. When you see the capital markets being depressed it is a reflection of the state of the economy and when you see it becoming vibrant, it is a reflection of, sometimes, optimism and hope and even the initial government policies which are positive,” he added.

Stanley Ngaine, chairman of Sterling Capital Ltd said: “We have seen companies that appear like they want to come to the market, but it has not been successful. We have tried the government to do a bit of privatization, but it has taken quite long.”