How special purpose acquisition vehicles can drive NSE growth

Nairobi Securities Exchange (NSE) on the trading floor of the Exchange building. FILE PHOTO | NMG

Ever heard of the seven-year itch – that happiness in a marriage or long-term romantic relationship declines after about seven years?

Well, the Nairobi Securities Exchange (NSE) is coming on seven years since we last had an initial public offer (IPO) or at least some consoling bull run.

We hoped for a different outcome but our reality is nothing close to ideal. After briefly raising our expectations last year, the talk about 10 listings by this time is sure to be another fanciful illusion.

But my pastor reminds me: If you ever get the itch and on the eve of your seventh wedding anniversary you’re wondering, will there be another seven? Here’s what you do, just scratch it.

So here’s my little scratch to keep the spark alive. Let’s revisit the reverse listing option – NSE has at least four listing options; an IPO (Safaricom), listing by introduction (Equity Bank), Cross-listing (Umeme, Atlas, now delisted) and reverse listings (I&M bank reverse acquisition of City Trust).

Do you also recall the listing frenzy through special purpose acquisition companies or SPACs in the US market?

Well, the two are actually similar. Two sides of the same coin. Essentially, a SPAC is a reverse acquisition of a blank cheque company.

So, just thinking, if our private companies are uncomfortable with the protracted traditional IPO process, what stops us from exploring this route?

You may ask, why this route? Let’s see it from three perspectives: the investor, the SPAC sponsor and the private company.

Starting with the former, SPACs are attractive because they allow them to co-invest with sponsors that have the requisite industry knowledge, expertise and access to potential acquisition targets that may not otherwise be available to investors through the public markets.

The SPAC structure is also appealing because of its “money-back” features. If a deal is not closed within a specified timeframe then, absent agreeing to an extension, investors are entitled to the return of their investment.

Furthermore, in distressed markets, SPACs can be well-positioned to take advantage of favourable acquisition targets that may arise.

For private companies, the potential to sell themselves for a higher price than in a traditional IPO is workable through reverse listing.

Unbeknownst to many, traditional IPOs are normally priced to encourage a jump in the share price on the first day of trading.

This often makes newly listed companies feel that they have “left money on the table”. In contrast, a merger with a SPAC can be negotiated at a fair value.

Besides, they get to close quicker – a SPAC merger can take place within five or six months compared to 12-24 months for an IPO.

Lastly, for the SPAC sponsor, they only need a good name and some minimal investment now for a huge stake in the SPAC.

They also get time, usually two or three years, to complete an acquisition. So what’s not to like?

I believe, to address our “IPO itch” problem, blank-cheque companies could possibly be the solution to deliver more listings.

But here’s the downside: SPAC IPOs don’t automatically lead to an increase in listings. They only offer the possibility of that happening.

It’s only when a merger is done that a listing is counted.

The writer is the MD of Canaan Capital.