African frontier markets: extent of illiquidity and inherent private equity investment opportunities
Date
2013-08-27
Authors
Du Toit, Willem Johannes
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Abstract
This study investigates the current private equity market in African frontier markets as well as
inherent investment opportunities in these African frontier markets. The research includes an analysis
of, inter-alia, the following: the development of capital markets in Africa, the classification of African
frontier markets, the measurement of liquidity, the relationship between liquidity and asset prices and
the history of private equity. This study will highlight to policymakers both in African and in donor
capitals the need to implement strategies that will support investment (especially private equity
investment) into the continent. The research carried out in this study should contribute to a better
understanding of illiquidity risks of African frontier markets and show how these can be mitigated.
This study will also provide key information on African frontier markets to investors and fund
managers in order for them to understand that a typical investment strategy for investing in developed
markets cannot be applied to frontier markets. The study analyses data of listed stocks on selected
African stock exchanges and compares this to data for similar stocks listed on developed world stock
markets to examine the relationship between liquidity, earnings multiples and market capitalisations
for these stocks. Interestingly, results show that, while there is no relationship between the liquidity of
stocks and the Price Earnings (PE) multiples of stocks, there is strong evidence to suggest that a
relationship exists between the liquidity of stocks and the Enterprise Value to EBITDA
(EV/EBITDA) multiples of stocks. Furthermore, we find strong evidence that African frontier market
stocks are significantly less liquid and have lower earnings multiples than stocks with similar market
capitalisations listed on stock exchanges in the developed world.
Description
Thesis (M.M. (Finance & Investment))--University of the Witwatersrand, Faculty of Commerce, Law and Management, Graduate School of Business Administration, 2013.
Keywords
Liquidity, Finance, Capital markets, Africa, Investment strategy