JSE delisting spate does not necessarily reflect the state of SA Inc

First published in Daily Maverick 168

The Afrox announcement follows the delisting of Intu Properties and Grit Real Estate in the second half of 2020 (the woes of the property sector) and could presage the delisting of Metrofile, which is still being circled by US private equity firm Housatonic despite that it is not trading under a cautionary at the moment. 

Heavy-equipment company Barloworld is being stalked by Saudi Arabian group Zahid Tractor & Heavy Machinery, which is now a significant minority. And MultiChoice could be in the crosshairs of French media group Canal+, which has acquired a sizeable stake in the pay-TV firm.

While delistings are painful, the reality is that none of this is new. The number of companies listed on the JSE has almost halved from 600 in 2001 to fewer than 350. The same is happening in the US and UK, which have experienced a similar quantum of delistings since the mid-1990s.

While this is not good for investors, particularly in South Africa where the investable universe is really narrowing, it is a feature of mature capital markets.

What is interesting is that while the number of listed firms is declining in mature markets, it is growing in markets where access to capital is limited. So, in Poland, the number of listed stocks has grown from 22 in 1998 to more than 800, while China has seen a jump from 100 to more than 3,000 over a similar period.

Kondi Nkosi, local country head for asset manager Schroders, tells me the decline in listings has less to do with dwindling levels of entrepreneurship and more to do with cheaper ways of raising capital. It’s a simple cost-benefit analysis, he says, and listing and remaining listed is expensive.

In the US, from 9% to 11% of what is raised in an initial public offering is used to cover listing costs, while the regulatory burden of remaining listed firms has increased exponentially since the Enron crisis.

Another factor is that since the 2008 financial crisis, liquidity has flooded markets, causing interest rates to plummet. So the costs of raising debt are significantly cheaper than raising equity, and the cost of servicing that debt is also cheaper.

Of course, this cycle may reverse.

But in the meantime, the delisting trend will continue, driven by a third factor, the rise of private equity. Nkosi estimates that global private equity investments are worth roughly $4-trillion, while public markets are 10 times that figure. But $4-trillion is a chunky number and likely to grow.

Two years ago, Ant Financial Services Group, operator of China’s biggest online payment platform, raised about $14-billion in what market watchers called the biggest single fundraising globally by a private company. And Didi, the Chinese ride-hailing company, has raised tens of billions of dollars from private investors in its life.

These companies may yet come to market, when private equity exits, but it means that investors in listed equities do not have an opportunity to invest early in fast-growing companies. That isn’t necessarily a problem when equity markets are delivering returns in the teens, but many analysts are concerned that the next decade will not see the returns of the past decade.

So what should investors, asset managers and the more entrepreneurial among us do? This is the time for innovation, creativity and more focus on using South African assets constructively. We have already seen the listing of private equity-type vehicles on the JSE — African Rainbow Capital is one, and Gaia, soon to be renamed Mahube Infrastructure, is another — though these have yet to deliver meaningful returns to shareholders.

We’ve been talking a lot in the past two years about investing in infrastructure as a means to drive economic growth, and President Cyril Ramaphosa’s economic reconstruction and recovery plan is centred on this. Pension funds have made it clear that they are hungry to invest in infrastructure, provided the plan is bankable and well managed.

Last week I wrote about the Kisby fund, which will invest in fast-growing SMEs. The founders hope to turn SMEs into an attractive asset class, backed by South Africa’s biggest capital providers. If it can prove itself, there is no reason pension funds could not invest in funds like this.

And despite all the calls to amend Regulation 28, which governs investment by pension funds, this is not necessary; there is plenty of scope within the present regulations for alternative investments. Investors just need to take the plunge. BM/DM168