Why Listing on a Public Exchange adds value for Business and Investors

LAGOS, Nigeria, Capital Markets in Africa: Africa has long been regarded as the ‘last frontier’ in terms of economic growth and investors have pinned their hopes on the latent potential of the continent. However, the tapering off of commodities prices following lower demand from China provides evidence that many countries have still been too dependent on oil and other commodities for export.

The reliance on commodity-related growth and lack of restructuring in many economies have resulted in many investors being disappointed. Indeed, the International Monetary Fund (IMF) has lowered its growth forecast for sub-Saharan Africa to 3% for 2016, from 3.5% in 2015.

Now many are left wondering whether these emerging market economies will ever recover, and where the value is to be found. Similarly to several other frontier markets, the relatively underdeveloped state of the continent’s capital markets has made it difficult to extract value – even for those investors with a very long-term view. A frustration over the years for institutional investors is that the formal capital markets are just not deep, liquid and regulated enough in order for them to consider allocating money to these markets.

Furthermore, many of the exchanges on the continent are not truly representative of their economic make-ups, with the handful of companies that are listed coming from smaller sectors of the economy. The challenge in many African countries is that their economies lend themselves to private equity (PE) investment rather than to public entities. Many of the biggest businesses on the continent are family-owned and therefore not within reach of public investors.

This is not necessarily a problem, though, and at the JSE we believe the PE sector plays a valuable role in unlocking value for businesses, and subsequently, economies. PE investment on the continent has grown significantly over the past 15 years, as many economies opened up more to foreign investors. PE investors have shown that healthy returns can be found in sectors that are underrepresented in the public sphere. For example, consumer, technology, and infrastructure- related sectors have grown significantly thanks to PE investment. These investors have shown the ability to add value to businesses and allow these firms to mature.

While the PE sector is doing well to add value to businesses, the continent still needs to see more development regarding exit strategies at the end of the investment period of typically five to seven years. We believe there exists more potential than we are seeing at the moment, for unlocking value that would benefit the business, exiting company, as well as investors seeking yield.

For reasons mentioned above, most notably the lack of liquidity on many exchanges, PE investors have tended to exit their investments through strategic private sales rather than via initial public offerings (IPO) listings. According to research by EY, approximately 53% of PE exits in Africa in 2014/2015 were done through selling to corporate buyers, while 18% were sold to other PE investors. Only 1% of exits were done through listings on stock exchanges. While PE investment gives businesses the ability to mature and optimise their structures, public offerings give these improved businesses a regulated environment for raising capital with which to grow their firms and economies.

A concern from some businesses prior to listing is the fear of losing control of the operations. However, the listing does not necessarily mean a company should offer up its complete share capital. For example, viable companies can look into the dual-track exit process, whereby a company files for a listing but also pursues an outright sale. This process may provide the selling company with more options. It could potentially obtain a better price as public markets remain volatile, and as regulations continue improving, making it easier for companies to consider listings.

There has also been a great deal of innovation and development globally in this regard, to address the challenges of PE exits, so that greater public participation in a business does not necessarily mean ‘giving up control’ to strangers. This includes the use of crowdfunding. Recently, the London Stock Exchange has turned to a crowdfunding platform to give small-time investors in the UK access to IPOs – a market which is largely the preserve of institutional investors and affluent individuals.

There is, of course, tremendous value accretion potential for businesses that do make the leap to listing. One of these companies is Botswana retailer Choppies, which now has a secondary listing on the JSE and successfully raised R575 million on its listing here.

The listing also provides investors with much sought-after exposure to greater parts of the underlying growth fundamentals of the continent. Most investors know that Africa is about more than oil, gold, and copper, and have often found it frustrating not to have access to other growth areas such as sectors relating to consumption and telecommunications.

Furthermore, by listing a business, the capital markets of the continent become deeper and broader, and can so attract more investors, bringing about more liquidity. This is beneficial to the development of the overall financial services sector in Africa.

Even though the continent has a challenging short-term outlook, there are sectors that are still advancing. If more firms allow access to public shareholders, growth can be encouraged for the greater good of the continent.

Contributor Profile
Donna joined the JSE in August 2014 as Director of Capital Markets. In this capacity, she is responsible for all primary and secondary market activity across all asset classes. This includes the sourcing of new debt and equity primary issues, the development and on-going management of all secondary market trading in cash and derivative markets (Equities, Bonds, Interest Rates, Commodities, and Currencies). She also oversees the JSE wide Group Strategy, Group Economics, and Group Regulatory Policy functions, as well as New Product and Market Development.

This article was featured in the INTO AFRICA August edition, with focuses on Infrastructure Finance in Africa.