De-equitisation is the latest buzzword in financial markets.
Its origin comes as a result of the global substantial fall off in the number of listed companies on exchanges and fewer entities going public.
The recent move by the Nairobi Securities Exchange (NSE) launching the Unquoted Securities Platform (USP)—a trading platform for private companies— is either a great countermove or a doomed-to-fail move.
De-equitisation is the latest buzzword in financial markets.
Its origin comes as a result of the global substantial fall off in the number of listed companies on exchanges and fewer entities going public.
The bigger markets such as London (shrinkage of 707 companies over the past decade) and New York (over 4,000 public listings have delisted since 1997) have all suffered huge delistings over the years.
Moreover, the Initial Public Offer (IPO) pipeline has dried up. In fact, there's now a running joke that the acronym stands for Its Probably Overpriced.
That's why the recent move by the Nairobi Securities Exchange (NSE) launching the Unquoted Securities Platform (USP)—a trading platform for private companies— is either a great countermove or a doomed-to-fail move.
But I am a diehard optimist. I actually see several benefits the new platform can potentially bring.
Besides the given benefits; price discovery, liquidity, access to funding through private placement, flexibility in listing requirements and obligations, USP presents some unique market opportunities.
First, as an exit market, the platform stands to open up the private equity market. The reality is that there is a desperate need for a mature in-depth secondary market in order to unlock the unlisted and provide exit solutions when the need arises.
All this time exits have only focused on trade sales, buybacks or public offerings. Recognising this huge untapped market potential presents a huge opportunity for the market.
Second, the platform could deal in suspended stocks during suspension periods. Thousands of holders in suspended stocks such as Kenya Airways (KQ), Mumias Sugar and Nairobi Business Ventures (NBV) are locked into their investments and can only sit back and watch their value erode until the suspension is lifted and dealings reopen at lower levels.
The ‘gating’ thereof should reinforce and stimulate the need for a private platform service that allows dealing in shares. Vulture and contrarian investors will demand substantial discounts if they decide to be buyers during the ‘gating period’.
Third, such well-developed venues for buying and selling unquoted shares like the NSE USP are needed to the point where the average private investor can put their capital and savings to work in multiple ways including the use of marketplaces for private stock.
It adds to the variety of investment options available to the average investor. With many new companies now preferring to stay private, it is easy to see why a de-facto private stock exchange could help reinvigorate equity trading markets.
In the end, what we are likely to see over the next several years is private markets coming out of the shadows, becoming not only more active. but also more transparent and liquid.
The captive market is huge.
Equally important, the platform holds the potential to diversify NSEs revenue stream. In 2019, transaction levies (from quoted securities) accounted for a majority share - over 70 percent of total sales.
What will be interesting to see is whether the platform will contrast the generally poor rating of the Growth and Enterprise Market (GemsS) segment which has struggled since inception. In all, a good initiative with a huge upside.
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Note: The results are not exact but very close to the actual.
