Assessing primary market’s readiness for IPOs in 2020

A typical stock market has two distinctive categories- the primary market and the secondary market.

The primary market is where new securities such as companies’ shares are first introduced. The secondary market is for the trading of existing securities.

During the period of the global economic crisis, which brought about a liquidity squeeze in the financial system, there was slow economic growth, weakened financial system and job losses. This also led to an unprecedented lull in activities in the stock market all over the world.

The lull in activities implied that companies had difficulties in accessing funds from the markets to grow their businesses. More so, it became unattractive for businesses to raise additional capital for expansion through the sale of shares in a public market. This is because it would most likely be undersubscribed.

According to statistics, 34 per cent of companies in the United States (U.S.) dropped plans to list on stock exchange, while in Europe, the Middle East and Africa, about 45 per cent of planned Initial Public Offerings (IPOs) were abandoned.

The Nigerian stock market was also affected by the recession, as it experienced unprecedented decline in activities during the period.

The market capitalisation fell from its all-time high of N13.5 trillion in March 2008, to less than N4.6 trillion by the second week if January 2009.

Similarly, the All-Share Index plummeted from about 66,000 points to less than 22,000 points in the same period. Many investors had their investments depleted while intending investors were scared of investing in the market.

Activities in the primary market mirrored the secondary market, as there was a lack of activities.

Prior to the crash of the stock market in 2008, the primary market was relatively attractive with some companies approaching it for IPO.

With the imposed compulsory recapitalisation for the banking sector by the Central Bank of Nigeria (CBN) within the period, the primary market witnessed an astronomical increase in activities, banks approached it in a bid to meet the new capital requirement, while companies jostle for IPOs.

Between 2006 and 2010, the market recorded about 180 different offers. The number of IPOs in the market within then was 88, and private placements 54, while Rights Issues were 38.

In 2006, the number of securities brought to the market within the period was 79. Surprisingly, the figure decreased drastically to eight in 2010. This clearly indicated a loss of confidence in the market as a capital raising channel for businesses.

In 2015, only Seplat Petroleum Development Company Plc and Transcorp Hotels Plc had IPOs. While Seplat’s, a global IPO, was 100 per cent successful, Transcorp Hotels recorded only 50 per cent subscription.

Between 2016 till date, about 10 companies or less have accessed the market for IPO. This is despite efforts put in place by the capital market regulators to restore investors’ confidence, especially the retail investors.

Analysts said that the overall weak macroeconomic scenario, sustained negative market sentiments in the past few years, coupled with tensed socio-political space, has not encouraged successful primary market activities.

It is also on record that some planned IPOs have remained on hold due to the prevailing negative market sentiments, driven by growing uncertainties on the back of falling oil prices and other macro-economic challenges.

Investors, in an interview with The Guardian, have maintained that there is a need to shore up the market’s liquidity if it must attract the desired IPO in 2020.

An investment analyst, Johnson Chukwu, argued that several reasons entice companies to list on the stock market, including the expectations that the market will appropriately buy them and place a premium to the intrinsic worth as lure for investors to trade on the equities.

“Again, there should be liquidity in the equities market so that people can actually buy and trade their shares. Lastly, the listing will give them better access to credit.

“Unfortunately, in a bearish and dampened equities market, these factors are not present. Until there is a significant recovery in the secondary market, one should not expect a re-launch in IPO.

“The economy is weak and the market pricing reflects earnings’ capacity of companies, which now has been weakened by inflationary period the economy had witnessed,” he said.

He attributed the weak economy to hostile and inconsistent macro-economic policy and regulatory environments and a lack of transparency in economic management.

The President of Constance Shareholders Association, Mallam Shehu Makail, said uncertainties in the local economy have continued to dampen investors’ confidence in the market.

According to him, domestic investors are still apprehensive of these factors, preferring to offload their shares and seek succour in fixed income instruments.

He added that foreign investors have offloaded and repatriated their funds back home as a result of uncertainties and a weak economy.

He stressed the need for the Ministry of Finance, CBN, Securities, and Exchange Commission (SEC) and the NIgerian Stock Exchange (NSE) to strengthen regulatory collaboration and become more proactive in their operations.

“The CBN should be more cautious and do more consultations with stakeholders in policy formulation in the banking sector, as lethargy in banking stocks automatically transcends into the overall market.

“Any upsurge and sustainability in secondary market activities may trigger life in the primary market. Confidence building in the market should also be taken more seriously by the regulators,” he said.

A Partner, White & Case, London, Jonathan Parry, at Deloitte Nigeria IPO Master Class workshop in Lagos, stated that investors are worried about Nigeria’s macro economic concerns.

He pointed out that the market would record IPO revival if the government would to come up with an appropriate policy framework that would explain its economic direction as well as align fiscal and monetary policies, especially, where there are disconnects.

“Investors are worried about Nigeria macroeconomic concerns. We need more clarity, more direction because if we move in the right direction, with disclosure and guidance, more foreign investors would become more active in the market.

“Liquidity is the first reason, many wonderful companies want to invest but because of the illiquidity in the market, they are holding back their money.

“Foreign investors are not comings not now but coming in and if we can fix some of these issues, I would hope we should see more activity on the exchange.

“The problem with Nigeria is not investors base, it is not a matter of quality of companies because the companies are great but it is actually about volatile economy, another biggest problem that we have is the gap in valuation, are investors willing to buy, that is what is stopping companies from coming to invest.

“Nigeria has many opportunities in terms of potentials in the countries, the demographic and potentials of businesses but have other market concerns and as a result investors have a price to pay.

“If the regulators could become more market-friendly in terms of capital coming in and going out, to encourage foreign direct investment to come in and free-flowing expatriation of dividend and other wise, things can make a difference.

“But the major thing is if we can get investment actively in growing companies,” he said.