Venture Capital and Developing African Capital Markets

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Venture Capital and Developing African Capital
Markets

• A PRESENTATION TO THE 5th AFRICAN VENTURE CAPITAL
  ASSOCIATION (AVCA) ANNUAL AFRICA VENTURE CAPITAL
  CONFERENCE
• By
• Mr. Chris Mwebesa
• Chief Executive
• 9th November 2005

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TABLE OF CONTENTS

• Background of African Stock Exchanges
• Nairobi Stock Exchange(NSE)
• Opportunities for Bridging the gap between
  Private Enterprise and Capital Markets at the NSE
• (Capital Raising and Exits)

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African Stock Exchanges(Challenges and
Achievements)
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Factors constraining the development of African
Stock Markets

• Quotes from the AVCA conference on the Capital
  Markets in Africa
• Our Stock Exchanges are not well
  developedlistings are not happening
• There is little or no opportunity to raise debt
  in Africa
• IPOs comprise only about 7 of all our exits
• IPO assumption is based on US model

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Factors constraining the development of African
Stock Markets

• Political and macro-economic set-up.
• Political instability and internal strife- Cote
  dIvoire
• High volatility in GDP Growth
• Macro-economic uncertainties
• Lack of medium-term visibility on the
  macro-economic front.
• Stock Market Specific Factors
• Liquidity issues-Debatable
• Manual Trading and Settlement infrastructure
• Corporate Governance practices of Listed
  Companies
• Market depth and breadth

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Contribution of Stock Markets to African
economies

• Facilitated the privatization process
• Diversified the financial services sector
• Provided listed companies with a platform to
  raise long-term capital
• Offered investors alternative investment
  opportunities
• Acted as a barometer of overall macro- economic
  performance
• Attracted foreign capital flows and increased the
  level of foreign exchange reserves

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Statistical Data on African Stock Markets (Ex
South Africa)
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WORLD RANKING ACCORDING TO LIQUIDITY
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African Stock Exchanges Vs Other Emerging Markets
Listed Companies vs. Turnover Ratio Selected
Mkts 2004
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Background of the Nairobi Stock Exchange (NSE)
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Background of the Nairobi Stock Exchange(NSE)

• NSE is one of oldest Stock Exchanges in the
  Eastern and Central African region founded in
  1954.
• Developed a culture of stock investing and
  capital markets financing solutions.
• Strong stock-broking industry and now an emerging
  network of Investment Banks.
• Offered excellent privatization opportunities for
  the government of Kenya - Privatization of Kenya
  Airways still regarded as one of the best
  examples of government divestiture.

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NSE 2003-2005

• Emerging from a decade of recession
• Currently enjoying excellent performance on all
  fronts
• confidence (relief over the peaceful transition?)
• low interest rate regime (portfolio adjustment)
• fixed supply of equities vis a vis expanding CIV
  sector (pension mutual funds
• Taken steps to deal with bottlenecks and
  currently finalizing the second phase of
  automation-automated trading.

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2005 vs 2004 Market Performance

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Trend NSE 20 Share Index Market capitalization

• Since Sept 30 2002 -
• the NSE 20 Share Index has moved from 1043.73 to
  3,832.69 on 30 September, 2005, a rise of
  2,788.96 points, a 267.21 change
• the market capitalization has moved from Ksh.
  85.79 billion to Ksh. 449.79 billion on 30
  September, 2005, posting an increase of Ksh.
  364.00 billion, a 424.29 change.
• Market PE 15X

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Absorption Capacity of the Capital Markets (2004)
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Challenges and Opportunities for the Venture
Capitalist in the Region
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Challenges and Opportunities

• How can the Venture Capital industry access the
  regular contributions of pension schemes, whose
  investment scenario is long term in nature, but
  who find Venture Capital Funds illiquid in
  nature?
• The Nairobi Stock Exchange 2006 2008 Corporate
  Plan includes the implementation of a Venture
  Capital Board
• The Capital Markets Authority (K) is looking into
  developing comprehensive rules and regulations to
  facilitate the development of a venture capital
  industry.

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Opportunities for Bridging the Gap on the NSE

• The NSE is Currently demonstrating excellent
  liquidity and absorptive capacity.
• The market is currently experiencing very strong
  demand for listed securities. Our challenges are
  therefore supply based and not necessarily
  demand. (Therefore there is supply for VCs)
• NSE offers Capital Raising opportunities for VCs
  operating in the region-Debt Raising and Equity
• The Liquidity at the NSE also offers exit
  opportunities for VCs operating in the region

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• Capital Raising
• The Venture Capitalist can provide the seed
  capital for a separately incorporated collective
  investment scheme, whose mandate is defined in
  the business prospectus.
• Investors benefit from professional fund
  management, economies of scale, share risk and
  achieve a greater level of diversification than
  would otherwise be possible.
• Alternatively the privately held venture capital
  firm can go public and sell shares in itself by
  listing on the NSE.
• Enable institutional investors such as pension
  schemes and insurance companies to participate.
• Debt issues might be more relevant to DFIs

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• Exits
• Case Studies
• Athi River Mining (ARM)
• In October 2003, the Acacia Fund disposed of its
  stake in ARM acquired in 1997.
• At the time Acacia bought its 12 stake, ARM had
  a market capitalisation of US 12 million.
• When Acacia sold its stake, ARM had a market
  capitalisation of US 25million.
• ARM is NSE listed with a strong growth track
  record (from 1994 to today, the company has
  achieved an average annual growth rate of 23 in
  US Dollar terms).
• A1 short term and A long term investment grade
  credit ratings affirm excellent credit status
• Just concluded issuing Kenyas the first credit
  rated, unsecured MTN.

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• Exits
• Case Studies
• In April/May 2003, CDC disposed of its 15 stake
  in Mumias Sugar Company.

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• Exits
• Case Studies
• DFCU Uganda's largest local financial group
• In May 2003, CDC Capital Partners purchased the
  German Development and Investment Companys (DEG)
  25 shareholding resulting in CDC having a 60
  stake. The remaining shareholders were the IFC
  (21.5) and the Government of Uganda (18.5)
• DFCU listed on the Uganda Securities Exchange in
  October 2004, following the offer for sale of
  79,509,743 ordinary DFCU's shares worth Ushs. 20
  each
• The shares were sold in minimum lots of 100
  shares at a cost of Ushs. 23,000 (USD.13.00). The
  offer was opened on July 30.
• When DFCU listed, its market capitalisation was
  Ushs. 45.74 billion (USD. 25.85 million)
• On 26 October 2005 the market capitalisation of
  DFCU was Ushs. 84.52 billion (USD. 45.4 million).
  An increase of 43.06 increase in market
  capitalisation in US Dollar terms. 

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Africa is open for Business and the Regions
Stock Exchanges are also open for Business
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• Capital Markets Authority Collective Investment
  Schemes Regulations, 2001
• Every collective investment scheme incorporated
  as an investment company shall list on the
  Nairobi Stock Exchange within six months of a
  period of expiry of two years after the date of
  registration of the collective investment scheme.
•  The minimum amount to be raised for a collective
  investment scheme set up as an investment company
  shall be Kshs 25 million.
• The investment company will be registered as a
  collective investment scheme upon providing proof
  that it has raised the minimum amount of Kshs. 25
  million. In the event that the minimum amount of
  Kshs 25 million is not raised then the investment
  company shall refund the monies received as
  subscriptions.