Record number of firms in Africa are lining up for a potential initial public offering (IPO) in 2015. Baker & McKenzie, a leading law firm, said 30 firms were preparing to list this year. Last year, the 24 IPOS by African domiciled companies were a 33 percent rise in volume and, at just over $2 billion, nearly 225 percent increase in value from 2013.

In sub-Saharan Africa, South Africa, Nigeria and Kenya offer the highest projected IPO values and the best markets for accessing local and foreign investors, particularly spurred by the exit strategy and investment activity of private equity investors focused on the continent. With the boom in private equity fundraising for Africa, the outlook is very bright.

But risks remain with specific African markets disproportionately exposed to the global volatility. Some economists and investors fret that the low oil price, low gas price, and strong US dollar could burden specific African markets in the near term and possibly long term depending on how prices shift by mid-2015 and through 2016.

What if a Country went for an IPO?

All things considered, what would it be like to IPO a country in the current market? Walk with me for moment…The factors used for evaluating an IPO are very transferable to evaluating a target country for an IPO or investment:

  • Why go public? (Translated: Why open the market at this moment?)
  • What will the company do with the money from the IPO? (Translated: What will the country do with the new foreign direct investment (FDI)?)
  • What is the competitive landscape for the company and its relative position? (Translated: How does Country A in sub-Saharan Africa match up against Country B-Z?)
  • What are the growth prospects? (Translated: What is the upside growth potential of the country?)
  • What is the current profitability? (Translated: Is the country actually turning foreign direct investment into greater returns (i.e., GDP per capita, income growth, etc)?
  • What is management like? Does the management team have prior experience running a publicly-traded company and/or a history of success in business ventures? (Translated: Do the leaders of the country have sufficient experience and qualifications to run the country?)
  • What are the past operating results? (Translated: What has been the country’s past performance?)

With all the IPO factors translated to be applied to a country, we can formulate a list of the best countries to IPO (or translated: the countries that would garner the greatest value in the public market based on a cross section of factors). This week’s article highlights the top 3 countries on that list:

Rwanda

Rwanda – often called the “Singapore of Africa” – is an investor favorite for all the reasons that would make it an ideal IPO candidate. The country still requires significant investment, particularly in infrastructure. Fully (as lot has been done to date) bridging the infrastructure gap in the county is an instance gateway to unlocking further value in the country’s manufacturing and financial sectors among others.

Rwanda is definitely the little giant in the competitive landscape…its population of more than 11 million is bigger than NYC (~8.4 million) but not by much. Yet it is booming from an economic productivity perspective, best indicated by 7-plus projected growth in 2014 and 2015. On a per capita (PPP) basis, the GDP has grown north of 165 percent in the last 20 years from $575 in 1995 to approximately $1530 in 2015.  The smart investor will ask what the distribution on that investment dividend is and statistics show that a significant portion, hovering around 40 percent, still goes to the top 10 percent of the country.

But management, aka Paul Kagama and crew, are making great strides to change that number and lift more people out of poverty. Economic management may be the country’s strongest IPO characteristic. Kagame & Co.  have built Rwanda’s brand as a tourism location, an emerging financial and technology hub, and an up and coming bilingual (French and English) services hub. The country is one of Africa’s most technologically advanced countries with a consistently easing environment for doing business. All these factors considered point to an amazing upside for potential investors. Leadership is dedicated to and capable of driving the country towards achieving significant growth in target sectors and has a demonstrated track record, as the numbers indicate.

The caution is to not overpay for the small giant. But this article did not promise a pricing range for the IPO.

Nigeria

Nigeria is an IPO candidate taken from a different view than Rwanda. The country requires significant amount of investment, particularly in infrastructure, similar to Rwanda.

Nigeria may have one of the highest return upsides for capital.The country, due to its size, has facebook potential:

(1) it has a population north of 175 million,

(2) it is Africa’s biggest oil exporter and (usually forgotten) has the biggest gas reserve in Africa; and

(3) it has one of the most technologically advanced and entrepreneurial populaces in Africa. And from a financial standpoint, the naira is significantly undervalued with a low oil and gas price environment hanging above its head…in other words, any investor is buying in at a cheap foreign exchange rate with all expectations of a higher naira value in the future.

On a per capita (PPP) basis, GDP has grown north of 330 but has a long way to go on a dollar value, especially considering the wealth of resources in the country. As an oil and gas behemoth, the country has not captured the full value in the resource exploration and production value chain. Why is that? That question leads us to the underlying risks (or more so challenges) in Nigeria.

The country has strong leaders. But a consensus has yet to be found among leadership on addressing terrorism in the country, managing oil production in a low price environment, and realizing value in the gas sector. Local entrepreneurs have strived in the euphemistically described “burgeoning wild west” of Nigeria but greater internal financial structure and security from management could push this country’s stock to the front of the pack as an investment opportunity. Its financial, energy and industrial sectors combined could and should be unrivaled by the competition.

Nigeria is a major buy in any market, but especially with a low naira valuation. Expect a low valuation in the current environment with great stock appreciation over time.

Ethiopia

Ethiopia is the equivalent of an early stage IPO – probably before it could get an ideal offer price but still with an immense upside. The country requires significant investment, specifically in its numerous business sectors…although infrastructure is a big need for the country, the country’s leadership is already making great strides in investing in that space.

If Nigeria has facebook potential, then Ethiopia has whatsapp potential: (1) it has a population approaching a 100 million and (2) it is one of the world’s fastest  growth countries but it lacks (1) the natural resources of other booming African countries (ala Nigeria) and (2) the technological infrastructure of other emerging economies (ala Rwanda). It is euphemistically the emerging app with great upside but many investors are still wondering how success (monetizing in technical terms) will look like in the long run. The country is generally unaffected by changes in oil and gas prices, except for the pseudo tax break it receives on its oil import bill in a low price environment.

Ethiopia banks its growth on a multitude of consumer-driven industries, including manufacturing, financial services and consumer products. The growth is steady but may not have the consistent opportunity to have a 15 percent boom year (i.e., oil rising above a $100 in next six months will not add 33 percent to 66 percent to the revenue line like it could in a Nigeria and Angola). Still, on a per capita (PPP) basis, the country has grown north of 125 percent in the last twenty years.

The country’s management consistently provides strong (not always favored) leadership with the economic management of the country. Criticism is expected on the iron-fist nature of the ruling party. But a lot of credit should be equally handed out for the leadership’s ability to combat terrorism, manage security, and drive growth. There is ample room for improvement with currency management, financial (including debt) management, and guiding the development of the technology and (overall telecom) sector.

All things considered, Ethiopia may not get the ‘Nigeria’ price at this stage…but you may be very surprised how close it will get. It has an upside that is immense albeit not fully spelled out.

Ghana and Angola

Ghana and Angola are tricky countries. One (Ghana) has a significant mining sector with some oil and gas potential. One (Angola) is an oil behemoth that could use growth in non-oil sectors. Both countries are gradually boosting their financial services sectors and have great upside in that sector. Yet one (Ghana) has a currency suffering in the current environment (largely due to some economic miscues) and one (Angola) could soon feel pain if the oil price does not recover. In a dream world, investors probably like to merge the two countries and IPO them together.

But, unable to M&A two countries (or just because it sounds ridiculous to discuss countries in this sense), Ghana and Angola stand as the tricky two countries tied for fourth place on this list (or the honourable mention countries as the first three countries were not ranked).  Per capita and GDP growth numbers remain strong and the upside is simply massive because of a growing financial sector supplemented by a strong mining (including oil & gas) sector, major infrastructure improvements, quickly improving energy sectors, and committed leadership. Leadership, for reasons not to be overly indulged, can also be the catch-22 as the International Monetary Fund (IMF) has been critical at differing stage of both countries’ leadership from a financial and economic management perspective and an openness in the market perspective.

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