In the past three years, international equity issuance from African companies has outpaced listings on the continent. This trend looks set to continue for the time being, thanks to the small size of most African exchanges and global investors’ increasing appetite for exposure to the continent.

Africa’s equity markets have developed rapidly in the past decade. The continent’s economic boom in that period, during which its growth rate has averaged about 5.5% annually, has led to high demand for publicly traded shares, while reforms of capital markets have encouraged an increasing number of companies to list. The result has been a steep rise in the market capitalisation of African stock exchanges, from less than $200bn in 2002 to more than $900bn at the end of 2012, according to South Africa’s Standard Bank.

But African companies have not just been growing on their domestic bourses. Plenty of them have opted to issue stock abroad. Since 2011, of the $27bn of public equity raised by African firms or those with their main activities on the continent, 60% has been sold outside Africa. Recent international issuers have included Nigeria’s Zenith Bank, which listed $850m of its shares through global depository receipts in London in March, and Eland Oil and Gas, an oil explorer focused on Nigeria, which raised £118m ($183m) in an initial public offering in London in September 2012.

Such deals exemplify how global portfolio investors have become far more comfortable with sub-Saharan African assets, largely thanks to the region’s economic buoyancy relative to other parts of the world, and improving governance standards among its companies.

“A lot of global emerging market fund managers are asking: ‘Where is the future growth going to come from?’. The answer is Africa,” says Simon Matthews, head of equity capital markets (ECM) at Standard Bank. “As a result, many of them are now looking at the continent more closely and understand it well, whereas five years ago they wouldn’t have bothered.”

Geographic diversification

As investors have become more familiar with the continent, they have expanded their focus beyond the largest economies such as Nigeria and South Africa. Since October 2012, the Australian Securities Exchange alone has seen equity raisings from miners operating in Burkina Faso (Orbis Gold), Mozambique and Tanzania (Syrah Resources), and even Mali (Papillon Resources), a country that was effectively split in two until a French-led military intervention earlier this year reunified it.

“A few years ago, international investors were looking at just a few countries in sub-Saharan Africa. Those were mainly Kenya, Nigeria and South Africa. Now, they have a much broader focus,” says Ibukun Adebayo, head of international primary markets for south Asia, the Middle East, Africa and the Americas at the London Stock Exchange (LSE), and whose job it is to persuade companies from those places to list in the UK.

For many emerging market equity investors, gaining exposure to African companies on a developed world exchange is still preferable to doing so via the issuer’s local bourse. Not only does it mitigate currency risk, it allows them to avoid the problems associated with low levels of liquidity, including higher trading costs and an inability to exit or build positions quickly. Africa’s exchanges are notoriously illiquid. While the Johannesburg Stock Exchange (JSE) has more than $1bn of securities traded on it each day, Nigeria’s stock market, the second biggest in sub-Saharan Africa, has a daily turnover of less than $30m.

International advantages

For the issuers themselves, one of the main benefits of an international listing is the ability to tap long-term institutional investors, of which there are few in sub-Saharan Africa outside of South Africa, owing to the lack of mature pension and insurance industries. Bankers say it is these types of investors, as opposed to more fickle retail ones, that companies will have to tap should they need repeat access to equity markets to fund their future expansion. “As African corporates grow, they will need to have diverse sources of capital available to them,” says Nishit Ruparelia, an ECM banker at Citi in London. “It will help if they’ve made themselves visible to long-term international investors right from the start.”

Others add that a listing in places such as London or New York is a big draw for African companies due to the status it confers on them. “It’s not just about finding capital,” says Oliver Bell, who leads an Africa and Middle East fund for US asset manager T Rowe Price. “They also see being able to come to London as a rubber stamp that they’re following the best practices in terms of accounting and transparency.”

Mr Adebayo at the LSE says that there is an element of prestige involved, too. “We probably underestimate that,” he says. “You only realise it when you see people on the balcony on the first day of dealing. There’s certainly a sense of pride for these companies, most of which wouldn’t have had a look in [on an international exchange] 10 or 15 years ago.”

London in the lead

London is the leading destination for African companies listing abroad. According to Mr Adebayo, by the middle of this year, 103 sub-Saharan-focused entities were represented on the LSE. “Their market capitalisation is just less than $70bn. That’s the largest concentration of African businesses outside of Africa,” he says.

As well as being more active than other exchanges in courting firms from Africa, the LSE is helped by the UK having a wide base of investors and funds dedicated to emerging markets. “London has been the listing venue of choice for CEEMEA [central and eastern Europe, the Middle East and Africa] companies for a long time,” says Mr Ruparelia. “It’s where a large number of the frontier market and Africa-focused funds are based.”

Asian markets such as Singapore and Hong Kong have yet to make much headway attracting African companies, largely because investors there tend not to focus on issuers lacking substantial operations in Asia.

Sydney and Toronto have proved popular with some mining companies, while Paris and New York have had a few high-profile deals. Johannesburg, by far the biggest and most sophisticated exchange on the continent, launched a pan-African board in 2009, hoping to entice companies from the rest of Africa. Few have been tempted thus far, partly due to regulations that until recently placed restrictions on South African institutional investors investing in foreign firms, even if they were listed on the JSE. Those rules were eased in late 2011, which could lure more African companies there in the long term.

But few expect London’s dominant position to be challenged any time soon. “Companies in the smaller African economies will use London as a key listing market over the next few years,” says Adrian Lewis, head of EMEA ECM at HSBC. “It’s very much an international market. It’s in the right time zone for Africa and it doesn’t have all the Sarbanes-Oxley [accounting reform] issues that come with a New York listing. It ticks all the natural boxes. Moreover, there’s a broader cultural affinity that African companies have with London.”

Bankers say there will be no rush of international ECM deals from Africa in the near future, but that over the longer term volumes will be fairly substantial. “There’s limited visibility for the next six to nine months,” says Richard Cormack, managing director, ECM, at Goldman Sachs. “But over the next two or three years, there will be more supply.

“There are some huge economies in Africa and sectors in need of capital. So, you’d expect that companies from those sectors will use the equity markets. And a lot of them will look at London.”

Banks and miners

For the next few years, financial institutions and natural resources companies are expected to provide the bulk of whatever supply there is from the continent. Both sectors are experiencing rapid expansion, the latter thanks to heavy investment in mining and oil and gas assets, while banks are among the firms best able to ride the wave of high economic growth in Africa.

Mr Cormack says that laws in some African countries requiring more local participation in mining and oil production could result in greater equity issuance from the continent, as companies that are often starting from scratch require funding to expand and buy assets from foreign firms. “Indigenisation is driving the need for capital in some markets, including Nigeria,” he says.

Others point to the Nigerian banking sector. “Although a lot of Nigerian banks have high capital adequacy ratios, their pace of growth and lending activities means a number of them will have to raise equity in the next 12 to 24 months,” says Mr Matthews of Standard Bank.

So far, there have been few listings from the consumer sector. Many bankers say this will likely change, given that businesses exposed to the African consumer and middle class are among the continent’s most buoyant. Dangote Cement, Nigeria’s largest listed firm, is expected to sell up to 20% of its shares in London next year. Although strictly considered an industrial rather than a consumer group, analysts say the high-profile nature of the deal – the company is majority-owned by Aliko Dangote, Africa’s richest man and one of its best-known businessmen – could mean it paves the way for other consumer-related companies to list abroad. “There will be a lot of hype about Dangote Cement as and when it comes to the market,” says one businessman. “If the deal’s successful, it could be transformative.”

International equity investors seemingly have plenty more appetite for African assets. Given the continent’s high rates of growth, young population and increasing urbanisation, little is likely to change that in the next few years. Beyond then, Africa's own stock exchanges might have developed to the point where its companies no longer consider seeking capital overseas. For now, however, the world’s major exchanges look set to continue benefitting from Africa’s rise.

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