Nairobi Securities Exchange

Companies seeking to raise funds have found alternative avenues to the capital markets, starving the Nairobi Securities Exchange of opportunities provided by regular and quality IPOs to attract a new generation of investors.

| File | Nation Media Group

Listings drought at NSE: What ails Kenya’s capital markets?

The past two decades have played out like a roller-coaster for the Nairobi Securities Exchange (NSE), swinging from highs that created new millionaires by the fistful, to lows of despairing losses running into the billions of shillings.

The first of the decades, running roughly between 2004 and 2014, was a period of innovation and change for the market, and endless opportunities to make money for investors.

The years after that has provided leaner pickings for investors, even as the market continues to churn out new products and system improvements.

Companies seeking to raise funds have found alternative avenues to the capital markets, starving the NSE of opportunities provided by regular and quality IPOs to attract a new generation of investors.

The most visible alternative has been private equity (PE) capital, which from the early years of the last decade found a new home in Africa in both startups and established companies.

Rufus Mwanyasi, the managing director of investment advisory firm Canaan Capital Limited, argues that PE funds have become more efficient in providing funding for companies, both from a time and process perspective.

For instance, raising PE capital takes roughly three to six months, says Mr Mwanyasi, while public listings take 12 to 18 months to conclude. Add to that the fairly inflexible compliance regulations, a lacklustre performance of recent IPOs and you have the makings of a listing drought.

“Currently, potential IPO candidates can easily raise IPO level money from a single PE player. PE average ticket sizes have gone up to high teens within the region and most are ‘dry powder’ rich and under pressure to deploy. A good example is the Credit Bank deal done by Equator Capital,” says Mr Mwanyasi.

“Most stock markets across the globe are experiencing the same shift…of more delistings/less listings.”

This has not always been the case however for the NSE. 

In the period between 2006 and late 2008, the stock market was king in terms of capital raises by large companies.

A Bull Run helped, meaning that companies could get high valuations for their shares when listing. In January 2007 for instance, the NSE 20 Share Index hit its all-time peak of 6,161 points, having climbed from 2.753 points in January 2004.

There were also other favourable factors, such as an economy that was expanding quickly after years of stagnation, cheap and readily accessible bank credit, and a technological leap in the market that made it easy for the retail investor to trade in shares. 

After years of trading through an open outcry system, and use of paper certificates to show ownership of shares, the NSE had stepped into the modern age from November 2004, when the central depository system was commissioned, automating the clearing and settlement of shares in the market. 

Two years later, the bourse set up an automated trading system (ATS), and added an extra hour of trading to the normal two hours, pointing to an increase in transactions due to the ease of buying and selling. 

Then in December 2007, the introduction of a Wide Area Network (WAN) platform heralded the start of remote trading by investment banks and stockbrokers. In February 2008, the market extended trading hours once again to the 9am and 3pm slot that is still applicable today.

This great leap forward for the market was due to rising interest in equities trading, and a need to bring the NSE into the 21st century.

However, as good as the modernisation was, the market still needed a key ingredient to grow: a supply of quality stocks in which to invest.

Whether by design or coincidence, the period between 2006 and 2008 saw the market receive a steady flow of quality initial public offers (IPOs), bringing in hundreds of thousands of new investors into the bourse and setting off one what is arguably the most impressive Bull Run ever seen in the local market.

There had been IPOs before, most notably the 1996 listing of Kenya Airways that won its privatisation team an excellence award from the World Bank, and the 2001 listing of Mumias Sugar.

The KenGen IPO in April 2006, which was oversubscribed three times, was however the one that set off the NSE’s golden age, bringing the equities market to the masses at a time when technology had democratised access to the bourse.

It also helped that KenGen’s share price rose to Sh49 on the first day of trading on May 17, 2006 from a listing price of Sh11.50, generating huge interest in the stock market.

What followed was a quick succession of oversubscribed IPOs, comprising a mix of private firms and solid parastatals that had a track record of profitability.

ScanGroup (620 percent subscription rate), Eveready East Africa (830 percent) and Access Kenya (363 percent) held successful IPOs between June 2006 and March 2007.

The government then sold a stake in Kenya Re (July 2007) with a 334 percent subscription rate.

Then in March 2008, it rolled out the largest IPO in the NSE’s history with the sale of a 25 percent stake in Safaricom, which saw 896,213 new brokerage accounts opened and investors offer Sh236 billion, against the Sh50 billion that the State sought from the sale. 

Safaricom’s listing nearly doubled the number of investors at the NSE to 1.5 million, while also providing a stock that had the necessary liquidity and supply of shares to attract a new class of high net worth foreign investors into the bourse.

In between these IPOs, Equity Group, currently the NSE’s second largest company by market capitalisation, entered the market via introduction.

By the end of 2008, however, the appetite for IPOS had started to wear off, perhaps dulled by the failure of the Safaricom stock to match the share price rallies that had been seen on the likes of KenGen before it. 

Co-operative Bank, a tier one lender that is currently the fifth largest listed firm by market cap, could only muster an 81 percent subscription rate in its October 2008 IPO, while Britam’s offering in September 2011 attracted takers for just 60 percent of the stock on sale.

From there, the market entered its IPO drought phase, save for the NSE’s self-listing in 2014–oversubscribed six times—and the ILAM Fahari I-Reit, which raised a 29 percent subscription when floated in 2015.

The listing drought has unsurprisingly coincided with a long period of bear market at the NSE, which has seen the NSE 20 Share Index slide to 1,577 points.

There has also been a number of voluntary delistings after takeovers of firms by foreign investors, including Access Kenya, Rea Vipingo, CMC Motors and KenolKobil. 

This prolonged slump has sent market players back to the drawing board in search of ways to help the market regain its past glory as the go-to asset class for investors.

These efforts have included the creation of the Growth and Enterprise Markets Segment (GEMS) and the launch of an incubation and acceleration programme by the NSE known as Ibuka, which seeks to prepare companies for potential listing.

The market has additionally brought in a raft of new products such as Reits, exchange traded funds and derivatives, but these have yet to move the needle much in terms of drawing in new investors.

The Capital Markets Authority (CMA) has also updated listing laws in order to align the NSE with emerging market needs and trends, all in an effort to drive new listings.

At the same time, there has been a promise by the government to resume the privatisation of state owned enterprises (SOEs) that can kick start a new run of IPOs.

According to the CMA, work has gone into reviewing the Privatisation Act to make it more facilitative towards offloading shares in government firms to the public.

The regulator has in the meantime carried out public exposure for proposed changes in its Public Offers law, for which it has now submitted draft changes to lawmakers for consideration through its parent ministry (National Treasury) and the Attorney General’s office. 

These law changes, alongside proposals to offer tax incentives to potential listees, are part of a package of reforms that the sector hopes will actualise the promise by President William Ruto to bring new listings and restore market confidence for the NSE. 

“We have also seen interest from the private sector, because raising funds is driven by the real economy and we believe that having come out of Covid-19, there are a lot of asks about listings. But when we receive these asks, they are accompanied with requests for incentives, which we think are central to bring more people in the exchange,” CMA chief executive officer Wyckliffe Shamiah says.

He also insists that the stock market can co-exist with PE funds in the capital provision space, saying that in the process of capital formation, entities that require funding support can either come to the market directly, or through other vehicles, such as PE funds and venture capital. 

PE funds, he adds, can also work positively for the market by providing a pipeline of listing opportunities when exiting companies.

“In most markets, it is expected that PEs will exit via the stock exchange. For us, the discussion with PEs is about what can be done so that they can take up our exchange as an exit option,” says Mr Shamiah.

In order to replicate the excitement of the 2000s, the State will most likely need to take the lead by offering up quality firms for privatisation, just like it did with KenGen in 2005. 

According to Mr Mwanyasi, the candidates being floated so far under the Privatisation Programme are underwhelming ‘zombies’ which have failed to attract private capital for many years.

Should the programme end up being seen as a dumping exercise of unwanted SOEs, he adds, it will not achieve its intended result of reviving the stock market while freeing the government from running businesses that can be better handled by the private sector. 

“The NSE needs an exciting name(s), in the style and size of Safaricom, to generate the buzz and bring back interest. They can scout for these opportunities inside P. portfolios and create seamless pathways for IPO exits,” says Mr Mwanyasi.

Such candidates among the existing stable of parastatals are not many, while there is no shortage of underperformers among the SOEs.

While the government is under pressure from funding partners such as the IMF to let go of cash guzzling parastatals, it may also be forced to cede stakes via IPOs in some plum ones for the sale of reviving the NSE.