A small piece of the capital raising puzzle for African tech companies fell into place earlier this year with the launch of the Africa Tech Index (AT50) on the London Stock Exchange – a quiet but significant step.
Over the past decade, African unicorns have proven that the continent lacks neither entrepreneurial ingenuity nor the ability to scale. They have also shown that there are viable markets in Africa. Companies such as Nigeria’s Interswitch, Flutterwave, Opay, Moniepoint and Andela, South Africa’s TymeBank and Senegal’s Wave have disrupted traditional markets, scaled revenues, expanded reach and attracted venture capital from across the globe.
Comparability
Despite these achievements, long-term capital from public markets remains wary of African unicorns. This is because, in the view of public markets, many of those businesses are yet to attain the right levels of maturity for the all-important benchmarks of governance, risk management and stability.
The sector has hitherto been assessed on the basis of opaque metrics
Institutional investors allocate capital against benchmarks, using them to measure risk and return. So while these companies are attractive, they are simply not structured enough to be added to these investors’ portfolios. The launch of AT50 aims to close this gap between the African unicorns’ stellar performance and the comparability data required for institutional capital to flow to them.
AT50’s architects have structured the index as a rules-based benchmark that rebalances quarterly. It is expected to introduce discipline, comparability and independent oversight into a market segment that had hitherto been assessed on the basis of opaque valuation metrics often driven by excitement at the pace of growth and the extent of disruption caused.
The index will set transparent thresholds around revenues, governance practices, risk management and disclosure requirements, providing these companies with a consistent reference framework that will let public markets evaluate their performance and stability. This will hopefully lead to deeper liquidity for the AT50 companies.
Public capital is a very different animal to venture capital
Indices are benchmarks that can form an acceptable basis for institutional investors to make asset allocation decisions. Mutual funds, pension funds, sovereign wealth funds and insurance pools construct their portfolios relative to indices, measure performance against them, and manage risk by tracking deviations from these benchmarks. In the absence of a recognised benchmark, a sector struggles to attract institutional capital. Indices such as the S&P 500, the Euro Stoxx 50, Nigeria’s ASI, South Africa’s Jalsh and the like matter, as they standardise comparison and reduce information asymmetry.
Public capital
The African tech unicorns scaled using venture capital but, to continue on their growth journey, would have to access public capital. They would therefore have to tame a different animal. While venture capital tolerates opacity as it looks towards growth velocity and rich returns, public capital looks at comparability, stability and good governance. Public capital prices in board independence, good internal controls and quality of disclosures. AT50 will therefore help nudge these tech businesses towards behaviour that is desirable to public capital even before they begin to look toward formal listing. In markets where the perception of risk often exceeds actual risk, the structured comparability promised by AT50 can be as valuable as capital itself.
The intended result of this effort at benchmark creation is capital formation. Africa’s pension and insurance sectors now manage sizeable pools of funds, and it is necessary to provide them with credible benchmarks on which they can anchor allocations to African tech. If AT50 matures into an investable benchmark, it could begin to institutionalise capital flows that have hitherto been episodic and venture-driven. This will help deepen African markets and enable long-term domestic capital to find a structured pathway into productive enterprise.
Location and innovation
When I read the news of AT50, the launch destination jumped out at me. My first question was, why outside Africa? Thinking about it a bit more, the fact that capital is conditioned by venue credibility, regulatory familiarity and optics came to me. By aligning the index with a market long associated with regulatory rigour, international investor participation and a big name, AT50’s creators seek to leverage established infrastructure to hasten credibility. But one can’t help but ask, must African innovation seek external validation? Could African securities exchanges step up to become go-to markets for big capital? Answers to these questions will shape the geography of capital influence on the continent.
Credibility derives from transparency, consistency and independence
It goes without saying that the ability of AT50 to succeed and grow as an index will depend less on launch geography and optics than on its integrity. Indices like this derive credibility from transparency, consistency and independence. The index must stick to its calculation methodology and maintain rigorous standards even if it means excluding high-profile names. To keep its credibility and attract the trust of users, it must be managed properly. In institutional finance, as in much of life, credibility is built slowly but lost rapidly. The way AT50 is managed will determine where it ends up.
Ultimately, AT50 has to be seen as a beginning. Creating benchmarks indicates readiness to raise finance differently, but it cannot substitute for broader structural reform. For African tech capital-raising to move from episodic venture capital-driven funding cycles to the durability of public market funding, listing frameworks must improve, disclosure regimes harmonise and currency convertibility risks minimise.
If Africa’s first technology decade was about proving scalability in private markets, the next must be about proving standardisation in public markets. AT50 is a great step, but the architecture of deep, liquid capital markets will require sustained policy, regulatory and institutional commitment. And that calls for the contribution of everyone involved.
