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‘Gradual economic recovery good opportunity to explore IPO market’

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Uche Uwaleke

Professor of Capital Market and President, Capital Market Academics of Nigeria, Uche Uwaleke, in this interview with HELEN OJI, spoke on the imperative of privatised state-owned enterprises listing on the Nigerian Stock Exchange as obtainable in other emerging economies, and the benefits of doing so, including the opportunity to raise long-term and cheap capital, which banks and other financial institutions may not provide. With only nine out of over 40 million SMEs listed on the exchange, Uwaleke laments that a lot of firms in the country are unaware of the opportunities available in the capital market and how they can take advantage of it, hence the need for both the regulators and operators to step up awareness campaigns.

For sometimes now, companies have shunned capital raising strategy, and are embracing rights’ issues and bonds. Last year, activities were upswing in the Nigerian Stock Exchange (NSE), but the Initial Public Offer (IPO) segment was mute thereby taking us back to the pre-2007, 2008 era. What could be responsible for this?
I quite agree with your observation. The fact is that in recent times, the Nigerian stock market has not witnessed the type of tempo in primary market activities, which characterised the period prior to the global financial crisis. You would recall that the Initial Public Offer (IPO) market got a huge boost on the back of the banking consolidation exercise of 2005-2006. The IPO drought came in the wake of the near-crash of the stock market in 2008, following the financial crisis in which the market lost over 60 per cent of its value.

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Again, you and I know that the economic cycle in Nigeria has been quite volatile in recent times. The economy went through a recession in 2016- 2017 on the back of a sudden collapse in crude oil price, followed by tepid real GDP growth, and not long after, the economy is in another recession occasioned by the COVID-19 pandemic.
   
Also recall that in all the years since 2014, the Nigerian stock market has posted negative returns except in 2017, and last year. It is therefore understandable why IPOs have dried up.
 
So, the conclusion one can draw from the IPO trajectory in Nigeria, and indeed the world over, is that the success of an IPO is a function of the state of the market, and the economy. I do not expect any issuer, mindful of huge underwriting costs, to be doing an IPO in a bearish market, or an economy that is characterised by weak fundamentals.

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The market’s gradual recovery, experts insist, is an opportunity for the government to reposition it with favourable policies that attract new issues. In what areas does the market need government interventions to promote a re-launch of IPOs?
In a number of areas really. Indeed, there are compelling arguments on why government intervention could spur IPOs. Studies have indicated that enabling government policies significantly influence issuer demand for capital markets funding. Privatisation of government enterprises through the stock exchange is one area.
It may interest you to know that in emerging markets, in particular, privatisation or listing of state-owned enterprises has proven to be one of the strongest levers for influencing issuer demand.
 

In Nigeria, as you are aware, many privatised state-owned enterprises are not listed on the exchange. I think we can borrow a leaf from Saudi Arabia, which recently partially privatised its state-owned oil giant Aramco, via its listing on the Saudi Arabia domestic stock exchange known as the Tadawul. So, I recommend this route to the government with respect to the NNPC, especially now that the Petroleum Industry Bill (PIB) is about to be passed by the National Assembly. This is the time to insert a provision in the bill, which mandates the new company to be formed to have its shares listed on the stock exchange after some time. I bet you, this will open the floodgate of IPOs in the stock market.
 In a similar way, government policies can be used to lead more issuers into the country’s capital market. During the licensing of telecom companies, listing on the exchange within a specified period after commencement of business should have made part of the considerations. If that was done, by now other companies beside MTN and Airtel would have been in the market. As I mentioned earlier, the CBN banking consolidation requirements turbo-charged the IPO market in 2006.
 Talking about fiscal policies, I also think that favourable tax policies can have a strong positive influence on the IPO market. The government can grant tax incentives to companies that are willing to list on the stock exchange, as well as reward already listed firms through government patronage and preferential business access. Doing so promises to attract many more companies, indigenous and multinationals, to the exchange thereby reducing the concentration risk currently plaguing the market in which just five companies account for over 50 per cent of market capitalisation.

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What do capital market investors stand to gain from the resurgence of IPO? 
Essentially, when companies list on the exchange and do an IPO, it gives investors in the capital market the opportunity to invest their savings and earn returns by way of dividends and capital appreciation. 
So, it is an opportunity for investors to diversify their portfolios especially if the companies are in different sectors of the economy. As you know, more listings increase the breadth and depth of the market. So, investors benefit from improved market liquidity and a stable market. 


What are the factors that attract companies to list on the exchange, and are they currently present in the market?
 
First and foremost, the stock exchange provides a platform for raising long-term capital. So, I expect any company seeking quotation on the exchange to be looking for an opportunity to raise long- term and cheap capital, which banks and other financial institutions may not provide. For many companies, it helps them broaden and diversify their investor base given that listing provides an opportunity for valuation, and potentially enhances liquidity by accessing new investors. 


Another attraction of listing for companies is the enhanced visibility and profile that accompanies it. Also, highly geared companies that are interested in deleveraging their balance sheet in search of an optimal capital structure are most likely to embrace listing on the exchange. I must point out though that company that does not want to dilute the control of the owners may not approach the Exchange.

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Aside from government interventions, what should regulators and operators do to attract new issues to the market? 
I think both the regulators and operators should join hands in ramping up awareness campaigns. There is evidence to suggest that a lot of firms in Nigeria are not aware of the opportunities available in the capital market and how they can take advantage of it. How else does one explain the fact that in a country of over 40 million SMEs, only nine are listed on the exchange? Even the large companies are not well represented either on the premium board, or the mainboard. So, a lot of sensitisation effort is required on the part of regulators and operators through roadshows and effective engagement of print, electronic and social media. 
 

On the part of the Securities and Exchange Commission (SEC), which has done a lot in this regard, a continuous effort at speeding up the approval process and shortening the time required to market is crucial. I must note that the establishment of the Growth Board by the Nigerian Stock Exchange (NSE) is a step in the right direction.
 It will encourage companies, especially start-ups and SMEs to seize the opportunity of raising long-term capital and also promote liquidity. I am equally aware that the NSE has lowered listing fees and favourably reviewed the eligibility criteria for listing.

In the case of the Growth Board, for example, the NSE has provided an alternative entry route for new companies that may not meet the first set of criteria. This is in addition to the provision of value-added services designed to assist companies in complying with post-listing requirements and retaining their listing status. These efforts are commendable.
 

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If empirical studies are anything to go by, I also think that the ongoing demutualisation of the exchange promises to enhance exchange governance and improve investors’ confidence thereby attracting more listings and new order flows.

How do you think this gradual return of bulls can be sustained since no new issue will come to the market if the secondary market is not vibrant
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You are very correct. It goes without saying that the tempo of activities in the secondary market usually robs off on the primary market. As far as I could see, the biggest factor that boosted the secondary market in 2020 was the CBN policy, which fostered a low-interest-rate environment making investments in the fixed income market less attractive. Some other factors worth mentioning are the gradual recovery of crude oil prices; the COVID-19 vaccine roll out; the stimulus packages from the government, and the CBN which increased liquidity in the economy.
 It is expected that CBN’s policies will continue to be pro-growth in 2021 as long as the economy remains in recession. This will include sustaining the Loan-to-Deposit Ratio policy, as well as a low-interest regime environment. Chances are that a number of banks in 2021 will recapitalise to meet up with the challenge of upscaling technology in response to the new normal of doing business occasioned by COVID-19.

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Insurance companies in particular will most likely be seeking funds to meet recapitalisation requirements. So, unlike in 2020, the primary segment of the equities market may witness some tractions in 2021 on the back of a bullish stock market. 

   

I must point out, however, that the major risk to this outlook will be the intensity and spread of the second wave of the pandemic; the impact on crude oil prices, and how early the US Federal Reserve begins interest rates normalisation (following Biden’s presidency) due to its potential in redirecting capital flows.

On the domestic front, insecurity poses a key downside risk. All these will dictate the level of domestic and foreign investors’ participation in our stock market in 2021.
 The bullish trend will linger as long as the fixed income market continues to prove relatively unattractive to investors. But I see the market pulling back the moment the economy is out of recession, and the CBN begins to tighten policy once again through hawkish interest rate hikes aimed at stemming rising inflation. So, as the economy gradually recovers amidst a bullish stock market, this time presents a good opportunity for companies to explore the IPO market.

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