Why capital raisings and IPOs have fallen off a cliff in Africa

Baker McKenzie's Wildu du Plessis says political and economic uncertainty is the main cause.

Capital raised by issuers in South Africa and Africa as a whole has fallen off a cliff in the first half of 2019 on the back of a muted growth rate in new initial public offerings (IPO).

Heightened political and economic uncertainty across the continent is the main cause, mergers and acquisitions (M&A) experts argue.

Capital raisings and IPOs are a critical part of M&A activity as they both involve companies accessing public equity markets and raising money through the issuing of shares. The capital raised is normally used to fuel a company’s growth and sustainability – either through funding deals or paying down debt.

According to Baker McKenzie’s latest Cross-Border IPO Index, capital raised by African issuers declined by 28 percent year-on-year to US$341 million in the first half of 2019, compared with US$472 million pencilled in during the first half of 2018.

The index uses data sourced from financial markets data provider Refinitiv to track the value of capital raisings and the number of IPOs across the African continent.

The decline of capital raised is attributed to an 80 percent drop in domestic capital raising in Africa – standing at only US$85 million from four IPOs, compared with US$419 million from the same number of IPOs during the first half of 2018.

Wildu du Plessis (pictured), the head of capital markets at law firm Baker McKenzie in Johannesburg, says the decline was due to political and economic uncertainty on the continent that has put off investors wanting to raise capital.

“Also eroding investor confidence in Africa are the escalating global trade tensions, which have culminated in, for example,  the so-called United States (US) China trade wars and the possibility of a  “no deal Brexit” – both have the potential to impact African economies significantly,” says Wildu.

Investors are sitting on the sidelines waiting for political and economic stability to return before proceeding with capital raisings. This is more evident in South Africa, Africa’s most industrialised economy, where political uncertainty has been heightened by the run-up to the country’s elections and a weak economy, which is expected to grow by less than one percent in 2019.

“Political stability will hopefully begin to return now that country’s elections are over, but there is still a lot of work to do to stabilise the economy. The World Bank recently downgraded South Africa’s growth rates and I think there is at least another year of hard work before the economy starts to recuperate and capital markets in South Africa recover,” Wildu adds.

But there are some green shoots in other jurisdictions in Africa.

Egypt is generating buzz around its pipeline of IPOs with M&A experts speculating that 2019 could be the busiest year for listings in Cairo since the political uprising in 2011, which ended the three-decade-long presidency of Hosni Mubarak.

The largest IPO to have come out of the African region so far in 2019 is Carbon Holdings, a petrochemicals productions company, which is expected to raise as much as US$250 million in London and Egypt sometime in June.

Growing confidence in economic policies introduced since the currency float has boosted the Egyptian Exchange and is prompting companies to consider share sales. One large pipeline IPO is expected from Banque du Caire SAE, a bank, in the third quarter of 2019.

There are also signs of life returning to Nigeria’s capital markets, says Wildu.

“Political instability was also to blame for a big collapse in capital raising in Nigeria in recent years, but the country looks to be recovering.”

According to Baker McKenzie’s recent Global Transactions Forecast, there is a predicted return of IPOs in Nigeria in the next three years. Read more about Nigeria here  “A case in point, Airtel Africa announced recently that it is seeking to raise as much as US$750 million in London and Nigeria, but the company has yet to release more information about when it plans to go public this year.

“Hopefully this is the start of a long upswing in capital raising activity in the country.”

The top cross-border IPOs by African issuers were South African company Renergen Limited’s listing in Australia, which raised US$7 million; and Egyptian company Carbon Holding’s pipeline dual listing in London and Egypt, which is expected to raise US$250 million.

Both of these cross-border IPOs are in the energy and power sector. In terms of domestic IPOs, technology company BMIT Technologies PLC raised US$55 million when it listed in Malta, real estate company ICON Properties PLC’s listing in Malawi raised US$20 million, industrial company Skyway Aviation Handling Co raised US$6 million when it listed in Nigeria and healthcare company Speed Medical SAE raised US$3 million in a domestic IPO in Egypt.

A major deal that is excluded from African figures is Jumia Technologies' debut on the NYSE, which raised US$225 million in April. Jumia is a pan-African e-commerce start-up but its parent company, Jumia Group, is incorporated in Germany, so it is not included in the Africa report.