Recently, the Dar es Salaam Stock Exchange (DSE) introduced the DSE Business Acceleration Program, and its extension introduced a platform, “Endeleza”, for listing private entities that need patient capital. long term and seek the corresponding type of capital. and investor.
The targeted donors are development banks; Investment banks; venture capitalist; private equity funds; angel investors; pension, provident and insurance fund managers; crowdfunding platforms, etc. In a way, these institutions complement the stock market – in the sense that they feed into the listing function of the stock exchanges. Normally, if the capital markets ecosystem lacks development banks, investment banks, venture capitalists, private equity funds, or fund managers, the stock market lacks the necessary pipeline of available companies. for IPOs and listings, but also the necessary liquidity necessary when raising capital and trading in the market. Which is currently the case for us – although it is also fair to appreciate the fact that we are still a young and developing stock market.
Why? because, under normal circumstances, companies would consider short to medium term borrowing from commercial banks, then companies will switch to development banks and private equity for long term debt and equity financing before engage the public in the context of an initial public offering (IPO) and subsequent listing of the shares on the stock exchange. During the IPO process, investment banks take on the underwriting role for the public offering and when listed investment banks (and sometimes commercial banks if the regulatory framework allows) would again play the role of underwriting. role of market maker and liquidity providers.
And this is how the capital market ecosystem could function effectively and efficiently for the growth and development of the capital market, and its role in mobilizing financial resources (domestic and other) for productive economic activities. . In our case, we lack some of these crucial institutions in our capital market ecosystem and therefore are part of the struggle we face to develop the capital market. By the way, private equity funds, venture capital funds and development finance institutions, once invested, often leave (in other economies) their investment positions in private companies through IPOs and a listing of shares on the stock exchange.
So to speak, most of the aforementioned financial institutions (especially private equity and venture capital funds) operate on the model of investing in companies and then engaging in their governance and operational management – this is to ensure the protection of their investment interests and also to ensure sustainability. But then most would have an investment plan that included targeted returns on investment in terms of income, capital gain, etc. in the event of their decision to withdraw from the investment they are making.
Thus, in whatever form, these financial institutions invest in companies for a specific purpose and for specific periods. At the end of this period, they can choose to take various exit routes. Periodically, new investors enter companies and others leave. In our case, the consideration of the exit route was the commercial sale / commercial purchase. It was also the most preferred route during the privatization of public entities. However, the other most effective and efficient exit mechanism, currently less opted for, is through the exchange through initial public offerings (IPOs). I’ll explain the top three reasons why companies should consider the local stock market as an exit option.
Before that, let’s first try to understand how the exit occurs. Traditionally, investors – private and public have relied on two types of buyers: secondary buyers and commercial buyers – these are buyers looking to gain market share or enter new markets. These approaches have long served the investment industry. Why? Because it is easy and efficient to sell a business to those who are interested, that is to say an interest in increasing market share or making a new entry into a new market by buying a business that has experience, customer base, distribution systems, relationships with various stakeholders, etc.
This is the case, except for – one; it is not easy in a private market to quickly access a commercial buyer due to inefficiencies, especially those involving a lack of information. Of them; it takes a relatively long time and consumes effort to negotiate a fair trade based on the fair price and fair value of the business. In fact, the 2018 Deloitte Survey report – Africa Private Equity Confidence Survey – indicates that investors are struggling to exit companies due to difficulties in finding the right buyers in the private market.
This is why the IPO review makes perfect sense. First, the IPO exit provides investors with an exit route with the fastest exit time.
The introduction of the Enterprise Growth Market (EGM) segment, a segment that allows start-ups as well as small and medium-sized enterprises to raise capital and list on the stock exchange, has made introductions in stock market as an exit route an even more viable option than before, due to its lower barriers to entry.
Experience shows that for the 5-7 year investment cycle of investors in private equity and venture capital funds, during which most venture capital and private equity funds would prefer to invest. withdraw from their investment, it can be difficult to ensure that a business is indeed an operationally successful business. and profitable entity with a secure future.
However, platforms like the DSE EGM are becoming useful as a way out.