South Africa is seeing a financial exodus
Despite a global surge in IPOs during 2021 on the world’s stock exchanges, Africa has seen companies systematically pulling away from the equity markets – with the Johannesburg Stock Exchange no exception, according to a new report by professional services firm PwC.
PwC said the reduction of IPOs and capital raising in 2021 indicates that Africa may be falling behind the international market’s ability to leverage the private sector in order to create investment and wealth.
“The Sub-Saharan market, specifically South Africa, reported a reduction of approximately 73% in equity capital raised, when compared to 2020. This is a trend that has been seen over the past five years, in which the number of delistings outweighs the number of listings on the JSE,” the firm said.
The same trend is being experienced throughout the rest of Sub-Saharan Africa. Investor relations experts speculate the reasons for the exodus to be low valuations and high cost related to corporate actions, PwC said.
“No IPO was recorded in South Africa in 2021 as the largest bourse in the continent – the Johannesburg Stock Exchange (JSE) – continued to record a large number of delistings; 24 companies delisted from the JSE in 2021 against 20 that delisted in 2020.”
Capital flight
In a written submission to parliament in 2021, the JSE said South Africa’s macro environment has deteriorated over the past five years.
All three global rating agencies lowered their ratings of South Africa’s sovereign credit standing in 2020. As a result, South Africa has either exited key global indices or become severely diluted, it said.
“The effect of this negative macro environment has been significant net outflows in trading by foreigners in South African bonds and equities.
“It is our view that limiting the re-use of collateral will lead to a significant decline in liquidity in the South African capital markets, the diminished attractiveness of South Africa as an investment destination and further capital outflows.”
Despite the high number of delistings and challenges to attract new listings, JSE chief executive Leila Fourie has also downplayed the situation.
Fourie said that while the number of listed entities declined, the market capitalisation of listed companies on the JSE grew by 15% during 2021.
“Most of the recent delistings have been in small-and mid-cap companies and largely off the back of corporate actions and schemes of arrangements,” she told BusinessDay TV.
She did, however, admit that the delistings harmed the JSE. They are now actively cutting red tape and attracting quality dual listings from foreign exchanges to address this problem.
Going private
It is becoming increasingly apparent that hidden value on the JSE is being recognised by private equity investors, industry players (particularly foreign companies) and even some locally listed companies, says Justin Floor, fund manager at PSG Asset Management.
“We have seen a surge in activity as increasing numbers of South African companies are being delisted and taken private.
“This zeal and optimism contrast with the prevailing negative sentiment we are still observing on the JSE: many smaller, domestic-oriented companies trade below their fundamental value and pessimism and disinterest continue to prevail.”
Floor said there are several reasons why these companies are tempting private buyers – including a favourable point in the cycle for taking companies private.
He added that private and industry buyers have a powerful competitive advantage of their own.
They are plugged into the true economy, with all its very real challenges, and have the confidence to buy businesses to delist them, thus removing the feedback from high-frequency price data and its corresponding volatility. This allows them to be opportunistic and to take a truly long-term approach, he said.
“The current trend of companies delisting from the JSE is not over, in our opinion, and we expect more delistings in the future if prevailing pricing continues.
“The risk of selling too early and at too low a price is something we worry about, and we strive to achieve a fair and an appropriate investment outcome when we sell. The smaller companies that we own on behalf of our clients are a valuable component of our current portfolios and the return profile they can generate is difficult to replicate in large asset management firms. We aim to continue to fully exploit this opportunity as best we can.
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