Introduction to Africa’s Stock Markets

Investing in Africa’s stock markets starts by first understanding the landscape, the opportunity set, and the risk-return profile of African stocks. Mainstream finance media underreport most investment activity in Africa because it’s deemed too small relative to other financial markets where investments occur at much larger scales.

First, we tackle the most important question….

Why invest in Africa?

With the lowest market cap-to-GDP ratio globally, African capital markets have room for growth.

The African middle class is projected to reach 1.1 billion people by 2060, increasing disposable incomes and demand for goods and services. A growing middle class tends to push for better governance, economic reforms, and political stability, creating a more favorable investment climate (As seen in Botswana’s peaceful government transition). A wealthier population leads to greater participation in capital markets, increasing stock market liquidity and demand for investment products such as ETFs, mutual funds, and insurance.

Governments are responding by improving regulatory frameworks, fostering entrepreneurship, and investing in infrastructure. Better monetary and fiscal policies have stabilized inflation, interest rates, and debt levels, making the investment climate more attractive.

Rising GDP per capita, a young workforce, and a low economic base provide room for strong growth, similar to Asia’s historical trajectory. Africa’s population is rapidly growing, projected to double by 2050 and again by 2100, increasing its share of the global population to 40%.

Africa’s Biggest Advantage - Technological Leapfrogging

Technological leapfrogging is the ability to bypass traditional stages of development by adopting cutting-edge technology and positions Africa as one of the most advantaged regions globally.

Unlike developed economies burdened by legacy infrastructure, Africa can embrace modern, cost-effective solutions in sectors such as finance, energy, education, and healthcare.

Examples:

The UK had to develop most of its infrastructure around what had been developed in the Victorian era. Roads are narrow because they were originally only built with horse & cart as the main transport mode. Most of Africa’s new infrastructure is planned from scratch without the constraint of working around older technologies and infrastructures.

Africa mostly skipped the landline era and moved straight to mobile technology, with mobile penetration exceeding 80% in many countries. Mobile money services like M-Pesa in Kenya and EcoCash in Zimbabwe revolutionized financial inclusion, enabling digital payments, microloans, and remittances without the need for traditional banks. The fintech sector continues to expand, with startups attracting billions in investment and introducing blockchain, peer-to-peer lending, and decentralized finance (DeFi) solutions

The lack of extensive brick-and-mortar retail chains has led to the rapid adoption of e-commerce, with platforms like Jumia, Takealot, and Wasoko serving a growing digital consumer base. The majority of small businesses in Africa opt for Facebook and Instagram as their storefronts, lowering the overall barrier to entry of business. Online learning platforms (e.g., Eneza Education, uLesson) are bridging gaps in traditional education systems, providing affordable and scalable solutions.

What do our Stock Markets have to offer?

There are currently 29 stock exchanges operating across the continent, with a combined market capitalization of approximately $1.6 trillion. These exchanges vary in size and trading activity, with the largest ones located in South Africa, Nigeria, Morocco, and Egypt

Based on the most recent data available, there are approximately 1,000 companies listed across African stock exchanges. The exact number varies by country, with Egypt leading at 239 listed companies, followed closely by South Africa with 237 companies as of 2022.

The Returns of Africa’s largest companies over the past year.

South Africa

Nigeria

Egypt

Morocco

IPO (Initial Public Offering) Activity in Africa

Most of Africa's business activity takes place in the private sector, with a significant portion of enterprises being family-owned, closely held, or informally structured. Many businesses prefer private ownership due to limited access to public capital markets, regulatory complexities, and the desire to maintain control. This has resulted in relatively underdeveloped stock exchanges across the continent, with fewer companies opting for Initial Public Offerings (IPOs). However, IPOs are crucial for Africa’s economic growth as they enhance transparency, improve corporate governance, and provide businesses with access to long-term capital for expansion. A more active IPO market would also deepen financial markets, create more investment opportunities, and attract both domestic and foreign investors, ultimately fostering economic development and job creation.

IPO activity in Africa has been notable over the past year:

• Boxer Retail Ltd launched Africa's largest IPO of 2024, raising ZAR 8.5 billion ($471 million) by selling a 34.4% stake in the company.

• Ethio Telecom initiated an IPO for 10% of its shares, starting on October 17, 2024, and set to close on January 3, 2025.

• MTN Uganda conducted a significant IPO, which was expected to increase the number of shareholders registered in Uganda from 40,000 to 200,000.

In 2023, African exchanges recorded 28 initial public offerings (IPOs) that raised $2.9 billion, along with 98 further offerings that raised an additional $10.6 billion.

Why do we see low IPO activity on African Stock Exchanges

The low volume of IPO (Initial Public Offering) activity on African stock exchanges is a multifaceted issue influenced by various interrelated factors. These challenges are caused or faced by mainly three stakeholders:

• Regulators

• Intermediaries - Investment Banks, Brokers, Exchanges, etc.

• Investors (suppliers of capital) - Institutional or Retail and Domestic or Foreign

• Businesses (users of capital) - Companies that could go public, Multinational Subsidiaries

The key drivers of this ‘market failure’ can be categorized into three broad areas:

• Regulation

• Market Structure & Infrastructure

• Maturity & Development of the Overall Ecosystem

Regulation

For Investors i.e. Suppliers of Capital:

Investors face a lack of confidence due to weak corporate governance and regulatory oversight, leading to concerns over the transparency and credibility of IPO candidates. There is limited availability of high-quality, independent research and advisory services, making it difficult to assess the true value and risks of IPOs. Companies seeking to list often have a history of inconsistent financial performance, creating uncertainty in the market (the ‘lemons problem’ of information asymmetry).

For Intermediaries and Businesses i.e. Users of Capital:

The high cost of compliance, governance, and reporting requirements discourages companies from going public. Ongoing regulatory burdens, such as frequent reporting obligations, create additional costs and administrative challenges.

Market Structure & Infrastructure

For Investors i.e. Suppliers of Capital:

Many African stock exchanges suffer from low liquidity, which deters institutional investors from participating in IPOs. Market concentration is a major issue—on some exchanges, a single company dominates trading activity (e.g., Safaricom accounted for over 50% of market capitalization on the Nairobi Securities Exchange in 2019). High trading costs, including brokerage commissions, clearing, and settlement fees, reduce the attractiveness of public equity markets.

For Intermediaries and Businesses i.e. Users of Capital:

Brokers and investment firms highlight the lack of market depth and breadth, making it difficult to efficiently trade shares post-IPO. The absence of a strong ecosystem for IPO advisory services results in poor preparation of listing candidates, reducing investor confidence.

Maturity & Development of the Overall Ecosystem

For Suppliers of Capital:

There is a general lack of investor education and appreciation of long-term capital markets. Reporting standards and financial disclosures are often seen as inadequate, making it difficult for investors to properly evaluate companies.

For Intermediaries and Users of Capital:

The ecosystem around IPOs is underdeveloped, with insufficient sell-side research and limited independent analysis on new listings. Investor appetite remains weak due to concerns over the reliability of financial reporting and corporate governance.

Solutions to Address Low IPO Activity on African Stock Exchanges

While the challenges surrounding IPO activity on African stock exchanges are significant, there is optimism about the potential for transformation. Interviewees in the study proposed a variety of solutions that, if implemented together, could significantly improve IPO performance across the continent. These solutions are broadly categorized into regulatory, market structure, and ecosystem development areas.

Market Structure

Attracting Domestic Retail Investors:

Currently, retail investors are under-represented, which contributes to low liquidity. A key recommendation is to provide incentives for low-cost digital and mobile savings products that offer exposure to equity markets. An example is the launch of the mobile share trading app by the Nairobi Securities Exchange in 2020, which facilitates easier access to the market for retail investors.

Improving Liquidity through Scaled Costs and Derivatives:

To deepen market liquidity, respondents recommended introducing scaled transaction costs based on thresholds like time, volume, or value. Additionally, the introduction of derivative instruments could further enhance liquidity, provided that the regulatory framework is suitable. Integration of stock exchanges and creating twinning agreements with international exchanges could also help increase scale and liquidity.

Regulation

Amortizing IPO Compliance Costs:

To address the high upfront costs of IPOs, it is suggested that the costs of regulatory compliance be spread over a longer period. This would make it easier for companies to manage the financial burden of listing.

Allowing Greater Allocation to Risk Assets:

Regulations must be amended to allow African financial institutions (such as banks and pension funds) to allocate more of their portfolios to riskier assets like equities. This requires setting clear, long-term horizons for performance measurement, which could encourage greater investment in IPOs.

Ecosystem Development

Improving Data Coverage/Flow and Reporting Standards:

There is a need for better information flow about listed companies. This includes promoting quarterly reporting requirements and ensuring that African stock exchanges' statistics are shared live with international data vendors like Bloomberg and Reuters. Improved transparency will foster investor confidence.

Private Capital Placement Pools:

The creation of private capital placement pools under the auspices of stock exchanges could help provide alternative routes for raising capital. This would complement the IPO route and potentially ease the pressure on companies seeking to list.

Tailored Public Ownership Models:

Given that many African businesses are family-owned and often prefer debt over equity, a flexible approach to public ownership is needed. Dual-class or multi-class share structures, which allow families to retain control while improving transparency and investor protection, could be a viable solution. Additionally, a tiered compliance system (light, medium, and full) could make listing requirements more sensitive to different business models.

Publicizing IPO Success Stories:

Conducting well-publicized studies that demonstrate the tangible benefits of IPOs could help shift perceptions. These studies could highlight the positive effects on employment, tax revenue, and turnover at companies that have recently gone public, serving as examples to encourage other firms to consider listing.

Notable Resources and Other Articles

Conclusion

The potential for improving IPO activity on African stock exchanges is significant, especially if the recommended solutions are put into practice. By addressing regulatory hurdles, improving market structure and liquidity, and fostering a more dynamic ecosystem, African markets can become more attractive for both domestic and international investors.

Additionally, leveraging technology to enhance accessibility and awareness could help overcome historical barriers, leading to stronger market performance and increased scale. As with mobile money, African stock exchanges have the opportunity to leapfrog traditional challenges and create an innovative, high-growth capital market.

At Regal Capital, we are looking to diversify our investment portfolios into Africa and eventually overweight our investment into Africa.

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