African exchanges urged to expand routes to public capital beyond IPOs

African capital markets need to diversify their financing options to accommodate businesses at different stages of growth, with alternative structures such as special purpose acquisition companies (SPACs) offering potential routes to public capital, according to a new industry commentary.

The commentary argues that traditional initial public offerings (IPOs), while remaining an important avenue for raising capital, may not suit every business, particularly medium-sized enterprises seeking expansion funding or existing investors looking for an exit.

It notes that the conventional financing journey, which typically moves from founders' capital to bank loans, private equity and eventually a public listing, can be costly and time-consuming for businesses seeking access to public markets.

Instead, it calls for African exchanges to develop a broader range of financial instruments and listing structures to help businesses raise capital while maintaining transparency and investor protection.

Among the alternatives highlighted are real estate investment trusts (REITs), which enable investors to gain exposure to property portfolios, and corporate bonds, which allow companies to raise funds directly from capital-market investors rather than relying solely on bank loans.

The commentary also identifies SPACs as a potential alternative for companies seeking to enter public markets.

A SPAC is a company formed to raise money from investors through a public offering before acquiring or merging with an existing operating business. The arrangement can allow the target business to access public markets through a merger transaction rather than undertaking a conventional IPO.

Kenya's Capital Markets (Public Offers, Listings and Disclosures) Regulations, 2023 already provide a framework for SPACs, including considerations around sponsors' track records, management expertise, business strategy and alignment of interests with shareholders.

However, the commentary cautions that the structure should not be viewed as a shortcut around regulatory scrutiny or as a guaranteed improvement on the traditional IPO process.

It points to international experiences in which SPAC transactions have faced criticism over optimistic valuations, complex incentive structures, shareholder dilution and disappointing post-merger performance.

Investors, it argues, must be able to establish who benefits from a transaction, how a business is valued and what happens when a proposed acquisition fails.

The commentary further links the need for more diverse financing options to the expansion of African businesses across national borders.

Companies operating in multiple countries may require capital and ownership arrangements that conventional bank financing cannot readily provide, creating an opportunity for capital markets to play a greater role in supporting regional growth.

However, it observes that fragmented African capital markets continue to limit the ease with which savings in one country can finance businesses in another.

While alternative listing structures alone will not resolve these challenges, the commentary argues that they could make stock exchanges more accessible to businesses at different stages of development.

It concludes that African markets should complement traditional IPOs with credible alternatives that give businesses access to funding while providing investors with sufficient information and safeguards to make informed decisions.