Private equity firms boycott IPOs over stock market liquidity


By JAMES ANYANZWA

African private equity firms have boycotted initial public offerings (IPOs) as a way to exit companies from the continent due to illiquidity in stock markets.

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

“IPOs represent the least popular exit route on the continent, mainly due to the illiquidity that characterizes 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 to several stock markets which are struggling to attract new listings, with just $900 million in fresh capital raised through eight IPOs on the continent in 2021 and $644 million raised in 2020. This compares to $8.1 billion raised through 71 IPOs between 2017 and 2021. Commercial buyers remain the most popular exit route for African private equity. Commercial buyers represent existing businesses wishing to synergize the private equity firm with their current operations.

Next is exit through other equity and financial buyers, with the third most popular exit being management buyouts (MBOs),” the report states.

Commercial vs Financial Buyers

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A commercial buyer is a company that buys another company, usually in the same industry, while financial buyers are long-term investors looking to buy well-run companies for long-term gains.

Management buyouts, on the other hand, are transactions in which business leaders buy the assets and operations of the companies they manage, while an IPO refers to the process by which private companies sell shares to the public through the stock market.

According to the report, African private equity firms had an average holding period of 6.4 years between 2010 and 2021, with the holding period peaking at eight years in 2020.

Liquidity on African exchanges took a hit in 2019, with average daily turnover dropping 30%, largely due to contagion from emerging markets in the second half of 2018, which led to an overall outflow of capital by investors in emerging and frontier markets.

Despite a global increase in IPOs on global stock exchanges in 2021, Africa has seen companies systematically withdraw from stock markets, signaling that the continent may be falling behind in the international market’s ability to leverage the private sector to create investments and wealth.

Last year, Sub-Saharan markets, particularly South Africa, reported a 73% reduction in equity raised compared to 2020.

The trend that has been observed 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 seen in the rest of sub-Saharan Africa,” says PwC.

The report by consultancy PricewaterhouseCoopers (PwC) “Africa Capital Markets Watch (2021)” shows that most companies prefer to issue debt securities rather than floating shares, largely due to low valuations in stock markets and the high cost of listing.

The number of African companies that issued debt securities in 2021 more than doubled to 27 in 2021 from 11 in 2019, with total proceeds representing a 10-year high of $15.2 billion, nearly doubling the highest annual value of the last ten years.

Market contraction in 2021

According to Riscura, private equity 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 fundraising year since 2010.

However, the pandemic-induced international shutdowns have disrupted trade and economic activity and, combined with downgrades, currency devaluations and revised investment sentiment towards Africa, all of these fundraising initiatives have been negatively affected.

Total private equity deals rebounded strongly in June 2021, leading to a 19% increase from June 2020, with the IT and consumer discretionary sectors attracting the most interest, followed by the financials sector. The energy sector recorded the highest expenditures.

But Riscura says that while the quantum of transactions has increased, the value per transaction has not increased. For example, the average deal value between 2016 and 2019 was $40.44 million, while between 2020 and 2021 it dropped to $11.1 million.

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

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

The largest IPO in 2021 by value was the listing on the Egyptian Electronic Finance Exchange for SAE Digital and Financial Investments, raising $371.6 million

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

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