Citigroup Sees African IPO Resurgence as Early as Next Year

  • Rising cost of debt will encourage equity sales, Azevedo says
  • African countries still seen offering opportunities for growth

Africa is set for a resurgence in initial public offers as early as next year, as market demand improves and companies growing on the continent seek alternatives to expensive debt markets, according to Citigroup Inc.

“I will say with conviction that next year we will see this market resuming,” Miguel Azevedo, Citigroup’s head of investment banking for Africa, said Thursday in an interview in Kigali, Rwanda at the World Economic Forum on Africa. “I would love to say that I can see a big IPO happening this year, but I cannot say that with conviction.”

In the first quarter, total equity issuance declined more than 65 percent to $960 million in Africa when compared with the same period in 2015, according to data compiled by Bloomberg. Bond sales, hurt by the rising yields and declining emerging-market currencies, dropped almost 54 percent to $4 billion in the first quarter, the data show.

“Sometimes entrepreneurs, all they want is debt, no equity, just debt,” he said. “This crisis showed them that this can be very expensive. It makes sense to bring in some more equity.”

Yields Rise

Average yields on dollar bonds issued by at least 18 sub-Saharan African nations have climbed by 159 basis points over the past year to 7.44 percent, according to data compiled by Bloomberg. The International Monetary Fund last month cut its 2016 growth forecast for sub-Saharan Africa by 1 percentage point to 3 percent, and reduced the estimate for 2017 to 4 percent from 4.7 percent.

Investors are demanding higher compensation to mitigate risks of investing in African debt as falling commodity prices knock government revenue. Countries such as Ghana, Kenya and Zambia are struggling to finance widening budget deficits, turning to the IMF for support.

For African countries still thinking of braving foreign debt markets only “sensible governments that do sensible things will get access,” Azevedo said. “Then there are some other governments that will not get access. It’s not an issue of price, people will say sorry, no,” he said, without detailing which countries will struggle to sell bonds.

Opportunities Exist

Africa’s most enticing industries this year include consumer goods, banking, power and infrastructure, he said. “I see the growth profile of the continent, and in the blocs, is still there. The opportunity in Africa is still there.”

Multinational companies seeking to expand on the continent are looking to take “significant positions” in companies, rather than outright purchases, Azevedo said. “The base case is buying around 50 percent with an agreement to buy the remainder,” he said.

Private equity firms will remain very active and there may be some consolidation among African businesses, he said.

Before it's here, it's on the Bloomberg Terminal.