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London Stock Exchange: London calling Africa
Africa is the final frontier for investors in search of yield. Cross-continental railway plans, state-of-the-art airports, eurobonds and power-generation projects across Africa all offer hefty potential returns for investors willing to take risks. And nowhere is better placed to take advantage of Africa’s opportunities than London, says Ibukun Adebayo, co-head of emerging markets strategy at the London Stock Exchange (LSE).
“London is firmly the financial capital for Africa,” Adebayo says. The City (London’s financial centre) is the gateway for international investors that hope to access African investment opportunities securely. Proof of this most recently came in the shape of Vivo Energy’s initial public offering (IPO). In May, the downstream petroleum company – the only distributor of Shell products in Africa – floated just under 30% of its shares on the LSE.
Appetite was high, and Vivo raised £548m ($742m). The offering was the largest UK-listed African IPO since 2005, when Telecom Egypt went to London to float 50% of its shareholdings. Next on the list, speculators say, is a dual listing by Nigerian heavyweight Dangote Cement and an IPO from South Africa-based telecom group Econet.
In 2017, there were 61 African IPOs and follow-on equity deals on the LSE, with many choosing to list on the Alternative Investment Market (AIM), which allows smaller companies to float shares in a much more flexible regulatory system. There are now 110 African companies and 34 bonds listed on the LSE. Since the beginning of the year, Nigeria, Kenya and Egypt have issued a combined $8.5bn in debt on the LSE. “It’s been 80 years since Africa’s first listing on the LSE, and our connection is stronger than ever,” says Adebayo.
A healthy dose of intra-African competition is part of London’s appeal. The Johannesburg Stock Exchange boasts the deepest and most liquid capital market in Africa, but companies from elsewhere on the continent may be reluctant to list there, says Charles Robertson, chief economist at investment bank Renaissance Capital. “I think they don’t want [Johannesburg] to be the financial centre for Africa any more than it already is. London doesn’t necessarily pose the same threat. So if companies can, they’ll go there,” he says.
There are few mega-deals worthy of international interest like that of Vivo Energy, Telecom Egypt and Seplat, a Nigerian petroleum producer, which raised $500m in dual listing in Lagos and London in 2014. But London boasts liquidity, and there are simply not enough projects to absorb all the cash. Aside from long-term infrastructure projects – where development finance institutions dominate the scene – funds jostle to get their teeth into some of the best deals.
“Say a frontier fund has $1bn set aside for Africa,” says Robertson. “How many African stocks do you want to own? If it’s 100, it means that there needs to be on average $10m for each company. There aren’t that many opportunities in Africa that big right now,” he says.
North African pretenders
Morocco has emerged as an alternative financial hub for Africa. Its proximity to African markets and the country’s deepening liquidity are a draw for companies. The Casablanca Stock Exchange has 81 listed securities and a capitalisation of more than $71bn. For now, most of the firms listed are financial services companies largely based in North Africa.
“There is a real drive from Morocco to become a leading finance hub for Africa,” says Zin Bekkali, chief executive of Silk Invest, a boutique investment manager. “In particular, francophone companies in the continent are linking up with Morocco, where the cost of listing is not as high as it is in London,” he says.
Egypt is also competing for African business, especially as markets there have had a huge turnaround: “In fact, around 20% of all Egypt’s foreign debt goes to international investors. Just two years ago this was zero,” says Renaissance Capital’s Robertson. And location is key: with the development of the Suez Canal Economic Zone, Egypt hopes to benefit from its situation and connect Africa to the rest of the world.
For more modest companies looking for capital market access, smaller bourses might make sense as well. “At the end of the day, London is expensive,” says one emerging-markets analyst based in London. “I’ve heard of some companies, from Zimbabwe actually, wanting to list on AIM but they have had to pull out because of the excessive fees associated with listing. It’s just not worth it for them.”
While London-based funds and investors search for business and investment opportunities in Africa, African countries increasingly look at how London can work for them. “There’s an element of the UK deploying ‘soft power’ to ensure a mutually beneficial financial relationship with Africa,” says Andrew Pilgrim, an associate partner at consultancy firm EY. “International knowledge-sharing, investment conferences and meetings between trade delegations that bring together experts in emerging-market finance, all help companies and markets on the African continent grow,” he says.
Initiatives abound. The LSE has partnerships with the stock exchanges in Lagos and Casablanca, and has launched its ELITE initiative, which provides business support and helps raise funds for fast-growing companies, in Kenya, Morocco and the countries of the Union Economique et Monétaire Ouest Africaine.
Naira gains status
Meanwhile, the Bank of England and Britain’s Department for International Development have set up a new partnership to provide training and technical assistance to the central banks in Ghana, South Africa and Sierra Leone. And in February, the UK’s credit finance agency, UK Export Finance, added the naira to the list of accepted trade currencies, allowing transactions with Nigerian businesses in local currency.
“This has elevated the naira’s status to be a viable international trading currency and has meant that UK companies are willing to take on Nigerian currency risk,” says Fadzayi Musanhu, an Africa analyst at EY. “Hopefully more African currencies will be added to the list soon.”
The UK’s investment minister, Graham Stuart, is championing London’s role in supporting development and growth in Africa’s economies and capital markets. “London is the world leader in international finance and we want to continue to be the partner of choice for African companies looking to raise finance.”
His statement ties in with the new ‘Global Britain’ idea, used by the government to put a more positive spin on its withdrawal from the European Union (EU). Stuart’s new department was set up just a couple of weeks after the referendum on Brexit in June 2016 to illustrate the country’s commitment to global trade and investment. His words are well-rehearsed: “In a post-Brexit world, it is important that we are globally focused and we look to expand and improve trading relationships across the world. That’s a top priority for us.”
But as Britain scrambles for investment and trading partners the world over, how much of a priority will the UK’s relationship with Africa be? More lucrative deals with economies such as India, the US and China could mean that Africa is low on the agenda.
And leaving the EU may have ramifications for Africa not yet considered. “The UK was a champion of African trade and investment and through the customs union pushed other European countries to remain open to African countries,” says Robertson. “But once the UK leaves Europe, Africa’s relationship with the rest of Europe could deteriorate.”
With Brexit negotiations far from over the reality is difficult to discern. Any new trade deals will not come to fruition until the UK leaves the EU. For now, the perception is that Africa’s ties to London will not fade away that easily.
“In financial services, in particular, there is a strong African presence within London-based emerging-market funds and research houses,” says EY’s Musanhu. “London is a hotbed of expertise in dealing with African financial markets, and this won’t disappear overnight,” she says.
And the attraction of London is not just professional. “What African is going to start doing all their shopping or looking at real estate in Frankfurt because of Brexit?” asks Danladi Verheijen, chief executive of Nigerian private-equity firm Verod Capital Management. “The relationship is too deep.”
This article first appeared in the September 2018 print edition of The Africa Report magazine