Delistings are some of the most disturbing events that stock exchanges grapple with because of several issues that companies face. A classic example is the troubled Johannesburg Stock Exchange (JSE).
According to South African business publication, Financial Mail, the number of listed companies on the JSE plunged from 800 in the 1990s to 314 today. With many more expected to follow the trend, its CEO Leila Fourie embarked on a mission to “attract new listings and retain existing counters”, reported Marc Hasenfuss, Editor of Investor Monthly.
Fortunate enough for the Botswana Stock Exchange (BSE), its CEO Thapelo Tsheole says “we have not had a lot of delistings like other markets”. For a handful that bowed out of the BSE, Tsheole cites several reasons. “(For the) majority of them it’s because there are other shareholders who came into the picture in a listed entity,” the CEO said during a Q&A session at the end of the launch of the 2022-2026 Strategy of the BSE. After a company has new shareholders, Tsheole said, some want to deal with the company out of the stock exchange.
He gave the example of BancABC, which had previously delisted when it was bought by Atlas Mara but later returned to list, saying this seems to be a common occurrence. But the BSE never really wants to lose listings, Tsheole noted, even fewer than those who left the JSE. This is because the pain of one delisting is not equivalent to the joy of gaining one listing. But some companies are generally not doing well, which like Afinitas Limited, Tsheole said “could not create more value” and were forced to delist, costing pensioners nearly P90 million.
Cost of regulation is another elephant in the room. But it is not so much the cost of listing on the BSE as it is the cost compliance with stakeholders. “Just imagine companies like Letshego, for example,” said Tsheole. “They pay listing fees, go to NBFIRA and also pay fees to BAOA because they are an entity of special interest public entity. You look at it as the composite cost of regulation generally affecting companies.”
Nonetheless, the CEO of the BSE finds solace in the fact that for Botswana, the “cost of regulation is one of the cheapest relative to other markets” and is perhaps the reason that only a few have backed out of the exchange. In the last five years, Tsheole estimates that the BSE has lost four companies which “is not normally a big issue”.
Private equity vs stock market
Some experts who spoke to this publication argue that the stock exchange does not offer investors returns any more. The BSE has acknowledged that asset managers just buy and hold stocks, hence it has embarked on international roadshows to attract foreign investors and introduced market-making and securities borrowing and lending, which the CEO said take time to materialize.
During the worst of COVID-19, all markets were in the red. But the BSE stood its ground, and analysts say this was a perfect display of its inefficiency. One portfolio manager says the alternative space, Private Equity (PE), is more exciting, given that the investable universe on the BSE is small and the wave of delistings seen over the last few years has made things worse. In other words, too much liquidity is chasing few assets, thus the move to PE because the limits are less. PE is more dynamic and offers more opportunities.
Private equity versus stock market is historically an unresolved debate that will go on for a long time yet. Using Botswana as a case in point, Tsheole says there is no composite measure of private equity. Therefore, in his observation, it will be some funds investing in some private companies that they somehow chose. He stresses that there are various stocks that even private equity will not match. To an investor, he says, “it is a question of when to buy and then when to sell,” noting that one needs to get some good stock in one’s portfolio for one to really make more money.
Tsheole’s main contention regarding PE is its complex model which can sometimes make it tedious to divest from. Citing the BancABC acquisition, he says for “such kind of deals under private equity, it is very difficult to exit because the information is not publicly out there”. Ultimately, he underscores that it leads to stock selection and the companies that one really buys. “You need to be either a clever manager or an individual that actually looks at the mood of the stock market,” he emphasised. “It’s a kind of 50/50 type of investment. You will agree with me that surely there are private people who invested in Bona Life. To your knowledge, how much return did those guys get? There is a number of guys who invested in CMB which invested some funds in a lot of private equity.”
There is a long list of private equity deals which have fallen through, he added. In Tsheole’s view, it is only that unlike the stock market, PE deals do not get much publicity. Against this background, he believes “people will tend to think private equity has more return than stock markets” but acknowledges that even in stock markets there are listed entities that have gone under.
Cost of going private versus public
The debate over the PE and stock market adds onto the trend of delistings, giving rise to arguments over the cost of being public versus private. A key issue that emerged at the height of the COVID-19 pandemic that Tsheole has also emphasised was the cost of capital. He believes that a listed entity enjoys benefits that overpower the costs in terms of raising capital using sale of shares.
“What is your cost of capital? Almost close to nothing compared to someone who is not listed. If you are private, the only place you have to go to is a bank and the interest rates you are going to pay are reflective of that. You don’t have any lee way to raise capital,” he said.
For the CEO of the BSE, it is actually more important during COVID-19 and what he realised is that a lot of companies that were never interested in listing have now come forward to express interest. “Remember when there was COVID-19 there was no one who knew how long it would last,” he pointed out. “If you are a company looking for capital, you go to a bank. They ordinarily would not give you a loan because they are worried about the fundamentals.”
On the other hand, when a company is listed it can plead with investors to inject more cash. This is why, says Tsheole, the amount of capital raised during COVID-19 was four times higher than in the previous period. Banks had adopted an extra caution about to whom they were lending.
Against the market dynamics at play, Tsheole is very optimistic of the listings that he says “we are sitting on”. “We are looking at some inquiries, so we think there will be more listings in the services sector,” he says, noting that the BSE is getting good attention from companies outside Botswana and hopes this will materialise. “There is one listing that is just about to happen by an AAA-rated institution,” he noted would not mention the name of the entity. “It will happen in the next month or sooner. We compete with the JSE for these things and these are very efficient markets and we need to really be on our toes.”
The BSE enjoyed big trades in 2017, 2018 and 2021. Tsheole’s prediction is that in the next two years, the market will be dominated by large trades. “This year, we will definitely have another large trade apart from the ones that have happened,” he said. “Next year we are also likely to have another big trade. That is the characteristic of the market for the past three years and next two years.” The BSE also disclosed that it is sitting on two applications for its Tshpidi Mentorship programme.
Incentives for listed companies
One of the deterrences that Tsheole has observed in the market is limited benefits. One thing that he says the BSE wants to do is drive for the government to be deliberate in offering listed companies incentives because these companies are actually sharing wealth with Batswana. “We believe they need to be given some form of preference. It happens in other countries. Listed entities are considered citizens when there is citizen economic empowerment.” he said, disclosing that they have made a submission for their inclusion. “We still have challenges with some of them excluded in terms of this because foreigners hold their shares.”
MOU with Zim Stock Exchange to drive secondary listing
The BSE entered into MOU with the Zimbabwe Stock Exchange after the listing of BancABC and SeedCo. According to discussions between the two, a lot of other Zimbabwean companies wanted to expand into the region and needed to raise capital. Because listing requirements between the two are generally the same, the idea was to let the Zimbabwe companies to do secondary listings in Botswana to raise capital.
However, due to what Tsheole says were structural problems in Zimbabwe, it was not easy to raise capital in Botswana and move it back to Zimbabwe because it cannot be remitted back to pay dividends. What most of companies have proposed to do, according to Tsheole, is that they will set up in Botswana through the FSC and thereafter list on the BSE to raise capital, and even deploy it. “You can pay suppliers from here and goods arrive in Zimbabwe,” he pointed out. “Then when you make money from outside, the money comes here and then you will be able to pay dividends.”
That is the model that the CEO of the BSE says they are currently looking at. “Our intention is that already we have a system,” Tsheole noted. “We have support of Seedco and BancABC to benchmark with, so it is going to be easier for us get a lot of Zimbabwe companies. We met one big company last week and they want to start the process.”