Why PE funds are squeezing out initial public offerings

Private equity funds are continuing to elbow out initial public offering as means of raising money for companies looking for growth capital. PHOTO | FOTOSEARCH 

By RUFUS MWANYASI
More by this Author

Summary

• Most firms see no reason of taking public route given tough terms.

Are companies staying private to avoid price discovery? Are they put off by the myopic nature of public markets? Or have they become spoilt for choice? Six million dollar questions. No easy
answers.

Even more questions: Is it that privates don’t need much capital these days? Why are some public companies repenting of their choices and returning to private ownership? And has selling to larger firms become more preferable than doing an Initial Public Offer (IPO)?

From my point of view, all these trends are growing legs by the day and pose the biggest threat to public markets. You know something big is happening when such high profile public companies such as Kenol

are going private.

Related Content

• ENDOWMENT: Endowment funds can help finance varsities
• MWANYASI: Corporates should share their benefits through public offers
• MWANYASI: Why fund management fees must tally with performance

Something is not right when a ripe-for-IPO candidate such as Seven Seas, which has already joined Kenya’s corporate elite and is clearly among the most important private companies, still chooses to remain private. What to do? Perhaps let’s try looking inward (public markets) and see what we find.

One; public companies, which are given a higher multiple at the time of IPO, often falter in the aftermarket. Looking at the cohort of companies that have gone public in the last five years and their current trading multiples, one can see a very demonstrable story.

Clearly, the Nairobi Securities Exchange (NSE) has not been a receptive market for IPOs in the aftermarket. On the contrary, private equity (PE) funds, sitting on mountains of capital, continue driving up private market valuations.

More PE capital is now seeking a home than ever before. In their report, “Turning Tides (Africa Attractiveness) October 2018,” Ernst & Young ranked Kenya third as most attractive African market for private equity funding. This means more PE funds are going to be holding money than they know what to do with it.

Two, focus on short-term gains is another big challenge. Increasingly, compensation plans in listed firms are being tied to stock.

Also Read

Ideas & DebateWACHIRA: How to revive the Nyanza economy

Ideas & DebateMURIMI: How private equity cash can finance Uhuru's Big 4 Agenda

Consequently, more decision making and planning is being affected by more short-term oriented goals.

Compounding matters is the never-dying investor demand for short-term gains. This is a reason why most privates don’t need or want your money.

On the contrary, strategic investors/PE funds are giving privates their new-found ability to invest for the long haul and focus on the business rather than on chasing short-term milestones.

Why take on the hassles of being publicly traded when private sources of capital can supply all of your needs.

Three, cost of compliance is another headache. Half-to-quarterly earnings, annual gatherings, listings costs and all that jazz is killing IPO interest.

The result, many companies are choosing to stay private longer than ever rather than look to monetise their equity through an IPO.

In conclusion, why are founders, often with the vast majority of their net worth tied up in illiquid stock, choosing to stay private again? Well, the answer is not simple.

But perhaps we may need to tweak a few things internally. Maybe we’ll become attractive again or maybe not. But it does not hurt to try.