Published on April 13, 2008
Venture Capital and Developing African Capital Markets: Venture Capital and Developing African Capital Markets A PRESENTATION TO THE 5th AFRICAN VENTURE CAPITAL ASSOCIATION (AVCA) ANNUAL AFRICA VENTURE CAPITAL CONFERENCE By: Mr. Chris Mwebesa Chief Executive 9th November 2005 TABLE OF CONTENTS : TABLE OF CONTENTS Background of African Stock Exchanges Nairobi Stock Exchange(NSE) Opportunities for Bridging the gap between Private Enterprise and Capital Markets at the NSE (Capital Raising and Exits) African Stock Exchanges(Challenges and Achievements): African Stock Exchanges(Challenges and Achievements) Factors constraining the development of African Stock Markets:: Factors constraining the development of African Stock Markets: Quotes from the AVCA conference on the Capital Markets in Africa …Our Stock Exchanges are not well developed…listings are not happening …There is little or no opportunity to raise debt in Africa… …IPOs comprise only about 7% of all our exits… …IPO assumption is based on US model… Factors constraining the development of African Stock Markets:: Factors constraining the development of African Stock Markets: Political and macro-economic set-up. Political instability and internal strife- Cote d’Ivoire High volatility in GDP Growth Macro-economic uncertainties Lack of medium-term visibility on the macro-economic front. Stock Market Specific Factors Liquidity issues-Debatable Manual Trading and Settlement infrastructure Corporate Governance practices of Listed Companies Market depth and breadth Contribution of Stock Markets to African economies: Contribution of Stock Markets to African economies Facilitated the privatization process Diversified the financial services sector Provided listed companies with a platform to raise long-term capital Offered investors’ alternative investment opportunities Acted as a barometer of overall macro- economic performance Attracted foreign capital flows and increased the level of foreign exchange reserves Statistical Data on African Stock Markets (Ex South Africa): Statistical Data on African Stock Markets (Ex South Africa) WORLD RANKING ACCORDING TO LIQUIDITY: WORLD RANKING ACCORDING TO LIQUIDITY Slide9: African Stock Exchanges Vs Other Emerging Markets Listed Companies vs. Turnover Ratio – Selected Mkts: 2004 Background of the Nairobi Stock Exchange (NSE): Background of the Nairobi Stock Exchange (NSE) Background of the Nairobi Stock Exchange(NSE): Background of the Nairobi Stock Exchange(NSE) NSE is one of oldest Stock Exchanges in the Eastern and Central African region; founded in 1954. Developed a culture of stock investing and capital markets financing solutions. Strong stock-broking industry and now an emerging network of Investment Banks. Offered excellent privatization opportunities for the government of Kenya - Privatization of Kenya Airways still regarded as one of the best examples of government divestiture. NSE 2003-2005: NSE 2003-2005 Emerging from a decade of recession Currently enjoying excellent performance on all fronts confidence (relief over the peaceful transition?) low interest rate regime (portfolio adjustment) fixed supply of equities vis a vis expanding CIV sector (pension & mutual funds Taken steps to deal with bottlenecks and currently finalizing the second phase of automation-automated trading. 2005 vs 2004 Market Performance : 2005 vs 2004 Market Performance Trend: NSE 20 Share Index & Market capitalization: Trend: NSE 20 Share Index & Market capitalization Since Sept 30 2002 :- the NSE 20 Share Index has moved from 1043.73 to 3,832.69 on 30 September, 2005, a rise of 2,788.96 points, a 267.21% change; the market capitalization has moved from Ksh. 85.79 billion to Ksh. 449.79 billion on 30 September, 2005, posting an increase of Ksh. 364.00 billion, a 424.29% change. Market PE 15X Absorption Capacity of the Capital Markets (2004): Absorption Capacity of the Capital Markets (2004) Challenges and Opportunities for the Venture Capitalist in the Region: Challenges and Opportunities for the Venture Capitalist in the Region Challenges and Opportunities: Challenges and Opportunities How can the Venture Capital industry access the regular contributions of pension schemes, whose investment scenario is long term in nature, but who find Venture Capital Funds illiquid in nature? The Nairobi Stock Exchange 2006 – 2008 Corporate Plan includes the implementation of a Venture Capital Board; The Capital Markets Authority (K) is looking into developing comprehensive rules and regulations to facilitate the development of a venture capital industry. Opportunities for Bridging the Gap on the NSE: Opportunities for Bridging the Gap on the NSE The NSE is Currently demonstrating excellent liquidity and absorptive capacity. The market is currently experiencing very strong demand for listed securities. Our challenges are therefore supply based and not necessarily demand. (Therefore there is supply for VCs) NSE offers Capital Raising opportunities for VCs operating in the region-Debt Raising and Equity The Liquidity at the NSE also offers exit opportunities for VCs operating in the region Slide20: Capital Raising The Venture Capitalist can provide the seed capital for a separately incorporated collective investment scheme, whose mandate is defined in the business prospectus. Investors benefit from professional fund management, economies of scale, share risk and achieve a greater level of diversification than would otherwise be possible. Alternatively the privately held venture capital firm can go public and sell shares in itself by listing on the NSE. Enable institutional investors such as pension schemes and insurance companies to participate. Debt issues – might be more relevant to DFIs Slide21: Exits Case Studies Athi River Mining (ARM) In October 2003, the Acacia Fund disposed of its stake in ARM acquired in 1997. At the time Acacia bought its 12% stake, ARM had a market capitalisation of US$ 12 million. When Acacia sold its stake, ARM had a market capitalisation of US$ 25million. ARM is NSE listed with a strong growth track record (from 1994 to today, the company has achieved an average annual growth rate of 23% in US Dollar terms). A1 short term and A long term investment grade credit ratings affirm excellent credit status Just concluded issuing Kenya’s the first credit rated, unsecured MTN. Slide22: Exits Case Studies In April/May 2003, CDC disposed of its 15% stake in Mumias Sugar Company. Slide23: Exits Case Studies DFCU – Uganda's largest local financial group In May 2003, CDC Capital Partners purchased the German Development and Investment Company’s (DEG) 25% shareholding resulting in CDC having a 60% stake. The remaining shareholders were the IFC (21.5%) and the Government of Uganda (18.5%); DFCU listed on the Uganda Securities Exchange in October 2004, following the offer for sale of 79,509,743 ordinary DFCU's shares worth Ushs. 20 each; The shares were sold in minimum lots of 100 shares at a cost of Ushs. 23,000 (USD.13.00). The offer was opened on July 30. When DFCU listed, its market capitalisation was Ushs. 45.74 billion (USD. 25.85 million) On 26 October 2005 the market capitalisation of DFCU was Ushs. 84.52 billion (USD. 45.4 million). An increase of 43.06% increase in market capitalisation in US Dollar terms. Africa is open for Business and the Region’s Stock Exchanges are also open for Business: Africa is open for Business and the Region’s Stock Exchanges are also open for Business Slide25: Capital Markets Authority Collective Investment Schemes Regulations, 2001 Every collective investment scheme incorporated as an investment company shall list on the Nairobi Stock Exchange within six months of a period of expiry of two years after the date of registration of the collective investment scheme. The minimum amount to be raised for a collective investment scheme set up as an investment company shall be Kshs 25 million. The investment company will be registered as a collective investment scheme upon providing proof that it has raised the minimum amount of Kshs. 25 million. In the event that the minimum amount of Kshs 25 million is not raised then the investment company shall refund the monies received as subscriptions.