Compelling companies to list on the capital market
Two weeks ago, a bill to compel companies with N40 billion ($246m) in capital and N60 billion ($369m) in turnover to list on the Nigeria Stock Exchange (NSE) passed second reading at the House of Representatives.
While we welcome the intention of the bill it’s doubtful if coercing companies to list on the capital market is the best way to deepen the market.
Akintunde Oyebode, head of SME lending at Stanbic IBTC reckons that companies that meet these criteria are typically multinationals or privately-owned local companies and their listing will reduce concentration of known names on the stock exchange and attract more capital from foreign and local investors.
Getting such companies to list on the NSE will also help improve corporate governance. Listing on the stock exchange will also strengthen these companies and ensure they remain going concerns beyond the lifetime of the founders.
In Nigeria, developing a vibrant capital market is a chicken and egg problem – venture capital (VC) and private equity (PE) firms are increasingly investing in start-ups and small to medium enterprises (SMEs). PE investments in Africa over a five to ten year period have outperformed public stocks and developed markets. The superior value generated is due to strategic and operational improvements made by PE firms.
But a poor developed financial market is a barrier to entry for PE firms. After a period PE firms need to exit the business they invested and typically do this either via the stock exchange or strategic sale. A weak exit environment i.e. an illiquid capital market discourages the sale of shares or an Initial Public Offering (IPO). These problems are best overcome through reform that incentivise rather than compel. Oyebode says “increased activity on the bourse will only enhance the Alternative Securities Market (ASEM) which is where SMEs go to list.”
Companies start life as small to medium enterprises funded by family, friends and fools. In a more structured and formal environment growing companies get financing from venture capital or private equity firms, depending on life stage of the business. Once they are up and running and ready for growth banks provide debt. Incentives to make listing easy and not so expensive are thus preferable to legislation.
However, the number of high-growth SMEs that can drive GDP, wealth, taxes and jobs are few and far between. Laws that ease the business environment and encourage SMEs are an alternative to forcing existing SMEs to list on the NSE – every $1 invested in an SME generates an additional $10 in the local community.
Still, once the high-growth SME becomes the so-called graduating SME it has outgrown $5m that SME lenders can provide. Its funding need is below $20m, more than SME lenders can provide and lower than what banks are willing to risk (investing in treasury bills and government bonds is surer and safer bet). This is where Africa-focused PE firms step in.
More than 75 PE firms have dedicated funds for Africa, from the established e.g. Ethos, Actis, Kingdom Zephyr to new ones e.g. Carlyle, BTG Pactual, Helios. Lately, Compagnie Benjamin de Rothschild Conseil in partnership with two other PE firms, Abraaj and Carlyle Group, says it plans to invest the $530m in SMEs in Africa.
The good news is that a model for investing in Africa is emerging. PE firms bring expertise in operations, finance and accounting, corporate governance and combine with local knowledge and patience (a 10 year patient capital) to make significant returns. These investors realise that in Africa time counts. Therefore, enabling laws that will attract more patient capital are needed. Then, as the number of high-growth SMEs increases, and with right incentives, they will seek to list their shares on the stock market.