The Kenya’s capital market made news this year as the worst performing bourse across the world tipping to record lows in January before tapering the fall and making modest efforts to recover past the 3000 psychological point.
The story behind it is a two year descent since 2015 that has wiped off investor cash, eroded company equity and made it difficult to attract new players into the market.
Deepak Dave of Riverside Capital, an Africa Focused debt advisory firm takes at through what options Kenyan businesses have in the new economic environment.
Kenya has relatively seen low listing with Deacons and K-Shoe last year and Fahari iReit in 2015 why has it been difficult to get more firms interested in the Nairobi Securities Exchange?
Equity is not a cheap form of capital, in terms of price or compliance burdens. Firms list when their growth is sufficiently high that even expensive equity is worth it. It says a lot that our local tycoons no longer see opportunities to deploy that capital.
At the current valuations almost all companies are valued lower than their introductory prices, has these dampened appetite for investor so much so that if a firm wants to list it may not get enough interest?
Very much so. Retail investors are driven by positive experiences. Sadly, we have few examples of true wealth builders in the last few years. So investors balk. Secondly, some of the IPOs a few years back were hyped up and overpriced at issuance. Inflation adjusted, returns are broadly unattractive, so little new money. Finally, some of the loans for shares programs by banks were guaranteed to create a short term bump and long term falls in value.
When you talk to local firms what are their main concerns in terms of raising funds?
Lack of patient private commercial capital outside of funds with short term timelines and unrealistic expectations; almost no access to cash flow based debt rather than real estate backed debt; allocation of capital to sectors that glow bright and burn out; and in the era of interest rate caps, a mispricing of risk that is shutting down credit.
When you talk to private equity firms and foreign firms, what are their main concerns about Kenyan businesses?
Few opportunities in the mid-market space outside of some form of real estate linked deals; mispricing of risk due to an excess of development agency funding particularly in specific sectors; judicial and regulatory systems not conducive to innovative capital structures; and a local culture not used to sharing management control or expertise.
With foreign participations at 80-90 per cent, why are Kenyans abandoning the bourse?
Let’s first strip out the effects of currency depreciation, repatriated Kenyan monies etc. That still suggests the market is dominated by foreign interest, and I would say sticky transaction costs as well as unattractive returns have discouraged retail investors. Institutional and retail money has chased the speculative, and frankly unsustainable, gains in the real estate market.
Are Kenyans investments, mainly driven by pension funds and fund managers, unreliable since they are too short sighted to take a long view?
They are short sighted for both good and bad reasons. Good ones include a focus on maximising returns in real terms, which necessitates not sticking with losing propositions. Unfortunately the investors with a truly long term view are in private or quasi private firms. Thus the culture of long term wealth creation through capital markets has not taken hold.
Are retail investors too few and what can be done about this?
Unless we become a more broadly wealthy society, pulling retail investors into the market is actually not a good thing. For our levels of per capita GDP, we may be better off allowing institutional investment mechanisms to build and protecting retail investors.
The GEMS market is also far behind CMA targets, what added motivations can stir it to life?
Unless our SME sector scales up, we will not get local, recognised firms being listed. People feel a sense of ownership when local brands prosper. This sector remains constrained in its growth due to lack of financing mechanisms.
I thought that the NIFC (Nairobi Financial Centre) idea of a couple of years back was a fantastic way to tie in growing GEMS with our foreign profile, sadly I no longer hear of that initiative.
Kenya like any other market is also riddled with fraud, has the regulator done enough to give confidence to the market?
It is to CMA and Mr Muthauras’ credit that the blatant fraud and misbehavior by brokers has so sharply reduced. Indeed I don’t believe a major broker has defaulted for some time?
But the CMA, CBK and NSE still often seem to be uncoordinated particularly in their approach to innovative products. Regulation is not only policing, it is also coaching, and some attitude adjustments by agencies and brokers are needed!
With a roaring US market and possible rising rates there, where do we go next?
Kenya has benefited from the theme in the last few years of investments being driven by a chase of yields rather than a compelling story of our own. Operational risks, mispriced capital, and constricted financial firms impede our attractiveness. What we need is to showcase the potential for returns and growth, not be content with relatively pricing ourselves as better. Post 2007 this has been holding us back.