Private equity firms boycott IPOs over stockmarket liquidity

Saturday April 09 2022

A report on Africa’s private equity market shows that a majority of firms now prefer to exit companies through trade, financial and management buyouts. PHOTO | FILE


Africa’s private equity firms have boycotted initial public offerings (IPOs) as a means of exiting companies on the continent over illiquidity in the stockmarkets.

A report on Africa’s private equity market shows that a majority of PE firms now prefer to exit companies through trade, financial and management buyouts, with initial public offerings (IPOs) remaining the least popular.

“IPOs represent the least popular exit route on the continent, mainly because of the illiquidity that characterises African stock exchanges,” says the report by investment and advisory firm Riscura and titled Bright Africa (2021): Private Equity in Africa.

This has added pain on several stockmarkets that are struggling to attract new listings, with only $900 million of fresh capital raised through eight IPOs in the continent in 2021 and $644 million raised in 2020. This is compared to $8.1 billion raised through 71 IPOs between 2017 and 2021. Trade buyers remain the most popular African private equity exit route. Trade buyers represent existing businesses wishing to synergise the PE company with their current operations.

This is followed by exiting through other PE and financial buyers, with the third most popular exit being management buyouts (MBOs),” the report says.

Trade vs financial buyers


A trade buyer is a company that buys another company, usually in the same line of business, while financial buyers are long term investors looking to buy well-managed businesses for long term gains.

Management buyouts on the other hand are transactions where company managers buy assets and operations of the businesses they manage while an IPO refers to the process where private companies sell shares to the public through the stockmarket.

According to the report, African PE firms had an average holding period of 6.4 years between 2010 and 2021, with the holding period reaching its maximum at eight years in 2020.

The liquidity of Africa’s exchanges took a significant knock in 2019, with average daily turnover dropping by 30 percent, largely due to the emerging markets contagion in the second half of 2018, which led to an overall withdrawal of capital by investors from emerging and frontier markets

Despite a global surge in IPOs on the world’s stock exchanges in 2021, Africa has seen companies systematically pull away from the equity markets, signalling that the continent may be falling behind the international market’s ability to leverage the private sector to create investment and wealth.

Last year sub-Saharan markets, specifically South Africa, reported a 73 percent reduction in equity capital raised compared to 2020.

The trend that has been seen over the past five years has seen the number of delistings outweigh the number of listings on the Johannesburg stock Exchange.

“The same trend is being experienced throughout the rest of Sub-Saharan Africa,” says PwC.

Consultancy firm PricewaterhouseCoopers (PwC)’s report “Africa Capital Markets Watch (2021)” shows that most companies prefer issuing debt rather than floating shares largely due to low valuations in the equity markets and a high cost of listing.

The number of African companies that issued debt in 2021 more than doubled to 27 in 2021 compared to 11 in 2019, with total proceeds accounting for 10-year high of $15.2billion — almost double the highest annual value in the past ten years.

2021 market contraction

According to Riscura, PE fundraising activity across Africa showed strong growth between 2016 and 2019 before the remarkable market contraction in 2020 and 2021.

In 2019 the total value of PE fundraising reached $3.88 billion, the second-highest year of fundraising since 2010.

However, the pandemic-induced international lockdowns disrupted trade and economic activity and combined with downgrades, currency devaluations and revised investment sentiment towards Africa, all these adversely affected fundraising initiatives

Total PE transactions rebounded strongly by June 2021, resulting in a 19 percent increase from June 2020, with IT and consumer discretionary sectors attracting the highest interest followed by the financial sector. The energy sector had the highest spend.

But Riscura says that while the quantum of transactions increased, the value per transaction did not. For instance, average transaction value between 2016 and 2019 was $40.44 million, whereas between 2020 and 2021 it shrunk to $11.1 million.

The Johannesburg Stock Exchange remained Africa’s largest and most liquid stock exchange with $1. 43 billion traded daily in 2019 followed by the Cairo and Alexandria Stock Exchange (CASE) with a daily turnover of $ 44million, Casablanca Stock Exchange with a daily turnover of $19 million and Stock Exchange of Mauritius with a daily turnover of $ 15million.

In 2021 Africa saw the lowest equity capital markets activity in five years with a decline in value and volume by 28 percent and 23 percent, respectively, compared to 2020.

The largest IPO in 2021 by value was the listing on the Egyptian Exchange of e-finance for Digital & Financial Investments SAE, raising $371.6m

In 2019 the drying up of liquidity in other African countries was mainly due to a global risk-off environment, with Turkey’s currency and debt crisis in the second half of 2018 contributing to the risk-off environment.