The Road to Local IPOs
This month, we reflected on the state of Africa’s capital markets, the hurdles ahead, and the progress that's been made.
Capital markets play a vital role in facilitating real economic growth by bringing together suppliers and users of medium to long-term capital. They essentially allow deferred savings to finance entrepreneurial activity, catalyzing economic growth. In many developing markets like Africa, that role is largely played by banks, leaving entrepreneurs vulnerable to any shocks in the supply of bank credit. The development of business financing options beyond banks is critical to support innovation and entrepreneurship activity on the continent.
This month, we reflected on the state of Africa’s capital markets, the hurdles ahead, and the progress that's been made. To give us some perspective, we spoke to Gerald Gondo, a business development executive at the investment advisory firm, RisCura.
Listen below:
If you prefer Apple Podcasts - find the podcast here.
Join us for a live event that is a continuation of this conversation on April 29th - RSVP here.
So where are African capital markets today?
Well - that depends. Much like everything else, capital markets in Africa have developed at a varied pace. The continent is home to about 36 exchanges with different degrees of market activity. The Johannesburg Stock Exchange (JSE) is the largest exchange in Africa and the 16th largest in the world. It also supports more sophisticated products like ETFs and derivatives. On the other end of the spectrum, we have exchanges like the Eswatini Stock Exchange (ESE), which is fairly nascent and has no real trading activity. Somewhere in between, we have exchanges like the Nairobi Stock Exchange (NSE), where one company (Safaricom) constitutes more than half of the exchange’s market capitalization.
Overall, African exchanges are underperforming in their role as capital matchmakers. A lack of liquidity is one of the biggest reasons why. In developed markets, institutional investors like pension funds, typically invest in both public and private equity as part of a diversified portfolio strategy. In Africa, many institutional investors are only comfortable investing in government bonds. In Uganda for instance, long-term savings held by local institutional investors is worth about $4 Billion, but 60% of that is invested in government bonds. This makes it difficult for entrepreneurs to raise capital when going public on local exchanges, and for investors to exit their investment.
The gaps in market infrastructure are another hurdle to increased liquidity on local exchanges. A lack of digitization and outdated regulation in some markets has stifled capital market ecosystem development. In addition, the institutional investors that do invest in public equities tend to buy and hold for the long term, limiting market liquidity.
The last piece of this liquidity puzzle is excessive stock concentration. In exchanges where there are very few companies listed, it’s difficult for both institutional and retail investors to develop diversified equity strategies. Many exchanges have started to make progress on this by introducing junior exchanges that allow small and medium-sized enterprises to list.
What About Economies of Scale?
Market fragmentation is another issue that has restricted the development of many local exchanges, particularly in smaller markets. Scale is important for exchanges to work effectively and provide adequate access to capital for entrepreneurs. Regional exchanges that cover multiple countries have already made a debut: the BVMAC in Central Africa and the BRVM in West Africa. Uganda, Tanzania, and Rwanda have also announced plans to merge their exchanges to form a regional exchange.
There’s also work being undertaken to promote capital flows across borders within the continent. The African Exchanges Linkage Project (AELP) is a joint project led by the African Securities Exchanges Association (ASEA) and supported by the African Development Bank (AfDB), which seeks to facilitate the cross-border trading and settlement of securities in Africa. In its initial phase, the Project is looking to create linkages between seven African capital markets - that represent >85% of Africa’s market capitalization. (Learn more about it on this month’s podcast episode)
So progress has been made, but there’s still a long way to go on this road to local IPOs.
Join us for a live event on April 29th to continue this discussion on the state of local capital markets in Africa - how far we’ve come and how long we have to go. We’ll be joined by guests with extensive experience in various African exchanges - hope to see you there! - RSVP here.
Onwards, Africa!