Why drought in local IPOs should keep Kenya awake

Former Nairobi securities exchange (NSE) Chairman Eddy Njoroge (second left) watch as Flame Tree Group Chairman George Theobald (left) rings a bell to celebrate the Group’s listing on Nairobi bourse, Nairobi. With them is the group’s CEO Heril Bangera (Second from right) and Director Frank Ireri. [David Njaaga, Standard]

There were lots of initial public offerings (IPOs) at the heart of Kibakinomics. Most start-ups dreamed that one day, they would go for an IPO and sell off to the public or list to achieve two main objectives.

One is to get the true value of the firm. The market is often efficient; it quickly uses all the available information to put a value to the firm.

That includes information on its assets from physical to intellectual such as patents. The value of the firm also factors in the future streams of income. 

The second objective is to raise money for further expansion of the firm. IPOs are a cheap source of capital, no worry about high interest rates, debts or outright purchase.

Could the high number of IPOs during Kibaki era explain the low interest rates then? With funds from IPOs, firms had no incentive to borrow money, which could have lowered the interest rates because of lower demand.

The other incentive to initiate IPOs in Kenya was that once-secretive firms would now be run professionally and grow.

Listed firms have more prestige and attract better talents, leading to growth. But public scrutiny, providing information to competitors, making it easier to be taken over, cost of compliance, agency problem and loss of control discourage firms from listing. The previous three paragraphs are good for finance and economics neophytes.

Let us try and answer the previous question. Why were there so many IPOs during Kibaki’s presidency and not now? It may be that with his economics background, Kibaki fully appreciated the importance of IPOs.

It seems the Kibaki regime got an alternative source of capital to fund projects such as roads.

The government owned some of the firms floated at NSE. It is also possible that the effects of economic liberalisation were finally felt with a lag. IPOs indicate the status of the economy.

It is thus not accidental that the Kibaki regime had more IPOs in the first five years, when the economy boomed and confidence was high after KANU era.

The post-election violence (PEV) reduced the appetite for IPO. Beyond PEV, lots of citizens were unhappy with the Safaricom IPO. The price never rose as expected even after some Kenyans predicted it would hit Sh100.

It was evident that they were not buying Safaricom shares for investment but for speculation purposes. No wonder betting has done so well.

The endless politicking does not give us time to focus on economic issues. We are more concerned about sharing resources, not generating wealth.

Who are our economic heroes in Kenya, equivalent to our politicians, musicians and actors including Githeriman?

IPOs are a good proxy measure of the state of the economy and the confidence citizens have in it.

Apart from Access Kenya, other firms that listed were partly owned by the government.  We still have a shortage of startups that grow to IPO like Google and Facebook. 

Building a firm from scratch to IPO is the stuff every entrepreneur dreams of. One could ask loudly where our Zuckerbergs and Sergey Brins are.

When we ask our graduates to start businesses, do we encourage them to go full hog, from start-ups to IPO? Does Uwezo or Women’s Fund demand that?

There is no shortage of small and medium enterprises in this country. What we are lacking are big firms that will take on multinationals.

Local financial institutions have successfully run big banks from the West out of town. Why can’t firms from other sectors do the same?

The biggest banks in Kenya are now locally owned. Why can’t this spirit of entrepreneurship in finance permeate to other sectors like agriculture?

Though it is the mainstay of the Kenyan economy, when did we last have a firm anchored in agriculture in an IPO? What of manufacturing? What of health? What of higher education or sports? 

Looking at the London or New York Stock exchanges, there is no shortage of unusual listed firms including the famous Manchester United football team.

Why can’t Gor Mahia list; we buy shares and force the management to achieve certain targets? With devolution now part of our political mosaic, counties should be competing on the number of IPOs for firms domiciled in their areas. Does Equity Bank not boast of its Murang’a roots?

IPOs have another advantage; it’s the logical route to globalisation. Once listed and capitalised, firms can now expand their markets beyond the borders.

We can also list in foreign bourses to get more money like Alibaba on the New York Stock Exchange. Taking our National Oil to London is a great idea.

The drought of IPOs is a real concern not just to economists but to all citizens.

It is a sign that our start-ups are not growing big enough and that the informal sector still dominates our economy. An IPO is the best indicator that a firm has come of age. It is an economic rite of passage.

We need to go beyond privatising State-owned enterprises such as National Oil into nurturing startups into IPOs. That will mark Kenya 3.0. Kenya 2.0 was liberalisation of the economy while Kenya 1.0 was the command economy with controlled prices that held our progress hostage before liberalisation in early 1990s.

-The writer teaches at the University of Nairobi

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