An initial public offering (IPO) offers numerous advantages for a company, such as raising money for expansion and allowing initial owners to sell some or all of their ownership stake. It also makes shares transferrable and allows the company to benefit from the success of other companies in the same industry while generating publicity. Despite these benefits, Kenya has not had an IPO for seven years as of 2022.
To reinvigorate activity at the Nairobi Securities Exchange (NSE), the Kenyan government has pledged to sell shares of state-owned companies through the stock market in the coming years. This marks the end of a prolonged period of inactivity in terms of listings on the bourse. When a government-owned or -controlled company sells shares to private investors through offering of shares on a stock exchange, it is known as a privatization IPO.
While privatization IPOs will certainly increase total market capitalization, this alone may not be enough to boost the market. The number of state-owned companies that can go public is limited. The privatization process should inspire privately held firms to pursue listing on the exchange as well. Listing large, state-owned companies can attract more liquidity to the market by providing investors with more options. An increase in overall trading activity can ultimately deepen the market. In theory, a broader and deeper market could encourage more private listings, breaking the drought cycle.
However, the current market conditions may make an equity issue less attractive for investors. With a 10-year bond yield of 14.25% and a central bank rate of 8.75%, debt investments may be more appealing than new equity offers. Additionally, the global risk sentiment is negative, causing investors to seek safer investments. This may lead to concerns about the ability to secure subscriptions for an IPO.
There is no shortage of private firms that are able to list on the market. In fact, the private equity space has been very active recently. According to data from the African Private Equity and Venture Capital Association, Kenya had 43 venture capital deals worth a total of $800 million in the first half of 2022. Alternative financing routes, such as private equity, offer several advantages for private firms, including reduced scrutiny, greater flexibility in terms of capital structure, and reduced stock price volatility.
There is also competition where investors may consider investing in US and European IPOs through Capital Market Authority (CMA) of Kenya regulated brokers like FXPesa and Hisa that offer access to trading IPO stocks listed in more liquid markets such as the New York stock exchange and the London stock exchange.
Furthermore, private companies prefer to list their IPOs on more liquid foreign exchanges. For example, Jumia, Africa’s leading e-commerce platform founded in Nigeria and with operations in Kenya, chose to list its initial public offering (IPO) on the New York Stock Exchange. The Nairobi Securities Exchange must create a competitive environment that outweighs the benefits of listing on other globally competitive exchanges in order to attract local listings.
To reverse the trend of declining initial public offerings (IPOs) on the Nairobi Securities Exchange (NSE), the benefits of being listed must significantly outweigh other financing options. While the Kenyan government’s plan to sell shares of state-owned companies through IPOs can help improve the NSE, it is also important to support and encourage privately held companies to go public. In addition, improving macroeconomic conditions to lower debt costs will be essential in attracting investors to new equity offerings. By taking a holistic approach to improving the capital markets, it may be possible to revitalize the NSE and increase the number of IPOs.
Samson Mzera is a financial markets consultant, FXPesa
