Why UK bourse is wooing Kenyan firms to cross-list

Fast-growing Kenyan companies are looking beyond the national borders for opportunities to list in developed markets for access to new sources of capital.

Oil sector services provider Atlas Development last year showed the way with the dual listing on the Nairobi Securities Exchange (NSE) and the London Stock Exchange (LSE).

The listing has emboldened LSE’s search for more cross-listing candidates in Kenya. The Business Daily spoke to the LSE co-head of emerging markets—primary markets Ibukun Adebayo on the opportunities and challenges of dual listing in Nairobi and London, and the prospects for emerging markets this year.

Why is the LSE seeking partnerships with African exchanges such as the NSE, and how does the Kenyan market stand to gain?

The LSE has a deep commitment to Africa, especially Kenya because of her position as the regional champion for East Africa Community that will soon have a population of 200 million people.

There is need for more efficient, patient capital from overseas markets such as London in the region. Our main reason for seeking to tie up with local exchanges is to bring that capital here, in form of dual listings.

There are about 120 African companies listed on LSE, worth about $260 billion. Many of them are sole listed in London, but aspire to do business in this region. Besides, the many private equity firms that are investing here will ultimately need an exit strategy.

If there is a dual list construct for them, we can then see a huge number of IPOs coming into the African markets instead of the secondary trade sales that they now use to exit.

I must stress though that there is nothing formal that is in place yet between us and the NSE. We however do provide the software that runs the trading platform here in Kenya through our company Millennium IT.

We also collaborate with the NSE through FTSE, another LSE company which provides an index for the NSE. Opportunities to widen the relationship are welcome from our perspective.

Which sectors in Kenya do you see as prime for dual listings?

Financial services definitely. Kenyan banks are of huge interest in London where there is a community of about 130 emerging market banks among who they would fit in very well.

The key thing for us is that Kenyan banks are profitable, have good books, and a good potential to expand loan books by offering more equity in the public markets.

There has been a lot of capital raising recently by local banks, and they are putting in place new solid structures such as holding companies.

Mining is another sector of interest. Although commodity prices are at the lower end of the cycle right now, we should expect that at some point there will be some requirement for capital expenditure, which is usually high.

Access to that capital abroad, in compliment to what is available here in Kenya will be an essential feature for these businesses moving forward. At the moment we have Kakuzi, Base Resources and the recently dual listed Atlas Development at the LSE.

What challenges are local companies seeking to list at LSE likely to face, and what opportunities are there?

Kenyan companies coming to an international market mostly have challenges in corporate governance. This is mainly because of their set ups — to what extent the businesses are run as independent units, provide total shareholder return on value at all times and whether they have boards that challenge the management.

These, I must add, are challenges facing companies globally and are being tackled actively. More recently, for instance, we have had Kenyan companies make disclosures four times a year, establish independent management and boards with different kinds of committees.

Any Kenyan company wishing to list in London can do it on different platforms such as the small growing companies, established companies segments or as ones looking to purely make investments.

Equally, for companies coming from London, the Kenyan market has segments such as GEMS, the alternative market and the main market to choose from.

Kenya is taking steps to remove foreign ownership limits for listed firms. How important is this from an international investor point of view?

When there are no foreign control limitations, you will see a lot of interest in doing business in Kenya. The prospects arising out of regional integration is the driver for that, since many investors see as Kenya a gateway into the region. Many countries globally are still restrained by limitations to foreign ownership.

Removal of restrictions is very important. In the UK for instance, we have no restrictions in any sector.  The best retail store—Harrods—is owned by overseas institutions, and the LSE itself is owned by Qataris and US banks.

All of these are drivers of efficiency, creation of more competition which can only be beneficial to an economy like Kenya’s which is ready for a turbo-charged phase of growth.

Kenya is set to start derivatives trading. Is this the right move at the right time?

Derivatives are an essential part of a healthy financial system, as investors are able to spread their risks through these products. It is very important that Kenya has now got these products.

However it is equally important that Kenya has enough of the underlying asset itself already listed. This means more corporate bonds, more equities and more Reits.

That will create a much more efficient environment rather than just having a handful of derivatives that won’t necessarily gain a huge amount of traction.

Our experience has been across the equity, agriculture and commodity derivatives traded in London and energy derivatives which we trade on the Borsa Italia which is part of the LSE. I think Kenya is going about it in the right way.

Kenya is looking to finance the development of its infrastructure through partnerships with foreign investors. How can foreign capital markets get into this?

These projects are long term and have returns that are not necessarily large but are consistent. Investors matching that kind of profile are pensions and insurance funds from Europe and North America.

There could be a very good conduit between these investors and Kenyan infrastructure projects, even smaller projects. The way to do that is through tools such as infrastructure debt funds, which are locally listed bonds with partial government guarantees that pay the coupons.

On top of this, you have master feeder funds in developed markets like London which offer pension funds an investment into a London listed fund.

Such a fund could in turn invest into Kenyan infrastructure projects through a debt fund mechanism of the local bond.

These are ideas we are considering at the moment, and we believe that there will be a significant push towards this as we bring capital markets to the development of these projects.

Should emerging markets be concerned about the stronger dollar and a recovering US economy in terms of inflows?

It is true that markets have previously benefited from cheap money, and that the US taper has constrained capital. However, the EU has started its QE programme at $60 billion a month, so there is more capital available from European institutions.

Developed economies still have huge systemic issues such as deflation in Europe and a growth ceiling in US, and there is still a requirement for investments that will meet high return requirements for such sectors as pension funds, debt funds.

Counties like Kenya growing at the rate they are will remain interesting for this kind of money.

What is your outlook on foreign capital inflows into Kenya going forward, and is the new capital gains tax likely to worry foreign investors?

At five per cent, my personal view is that this CGT is very reasonable, given the scope of opportunity and valuations in Kenyan market for both local and foreign investors.

The NSE 20 is trading at multiples where the potential for growth is significantly high. To pay a five per cent CGT tax on that basis still makes sense for a lot of investors.

That we have had investor inflows slowing down is purely from a rebalancing of capital post various African events such as the Nigerian elections which had brought a lot of anxiety.

In this rebalancing, we should eventually see allocations rising to Kenya and Nigeria, probably away from centres like South Africa.