What the exit of African Alliance means for USE

Wednesday April 24 2019

The stock brokerage business, some obs

The stock brokerage business, some observers say has been slow due to long droughts of initial public offerings. FILE PHOTO  

By BERNARD BUSUULWA

Kampala- African Alliance will exit Uganda’s brokerage business next month. The company will close the curtains on its 15-year journey at the stock exchange due to low revenues.

The announcement has raised questions about the South African company’s future in African capital markets, as its major shareholder struggles with a slowdown in various financial markets.

The financial services firm announced on April 11 that it was exiting the stockbrokerage business and terminating its membership of the Uganda Securities Exchange.

At the time, Mr Kenneth Kitariko, the African Alliance chief executive officer, said: “When the business is not making money, you have to plan for the future and the shareholders were not happy subsidising the stock brokerage business anymore.”
The company, he added has in the 15 years of its existence not made much money in the brokerage space, thus it was prudent to take a drastic move to save other arms such as advisory services that it is engaged in.
A statement released by African Alliance at the time, indicated it will close its stockbrokerage services on April 25 and client accounts will be transferred to UAP Old Mutual Financial Services by May 6 following approvals by the Uganda Securities Exchange and Capital Markets Authority.

However, African Alliance will maintain its investment advisory operations in Uganda. No job losses are expected in the aftermath of the restructuring exercise.

The company has previously handled some of Uganda’s largest initial public offerings including Umeme, Satnbic and the crosslisting of Nation Media Group on the USE, among others.

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Prior to its exit from the stockbrokerage business, African Alliance had in 2010 suspended its unit trust services, citing a low asset base, fluctuating interest rates and poor returns on investment.

Total assets accumulated by the unit trust business amounted to less than Shs4b ($1.06m) after six years of operation, according to company records.

The firm also closed its asset management unit last year on similar grounds. The total value of pension funds managed by this unit stood at Shs140b ($37m) by the time of closure - in an industry whose asset management fees have averaged less than 3 per cent in the past.

Sold subsidiary in Rwanda
African Alliance Group sold its Rwandan subsidiary last year for an undisclosed sum, but the business retained its brand name, following years of low revenues posted by the Kigali-based operation.

A series of meetings held between the Group’s majority shareholder and heads of its African subsidiaries last year in South Africa discussed the idea of selling off some of its operations, with most of the executives endorsing the proposal.

Whereas potential buyers for some operations have been sought, there has been no further guidance from its head office on sale negotiations with interested parties since last year, according to sources familiar with the matter.

African Alliance Group has subsidiaries in Kenya, Uganda, Zimbabwe, Malawi, Zambia, Nigeria, Mauritius, Botswana and Ghana.
This exit is a stark contrast to events dating back to the period between 2004 and 2007, when many foreign institutional investors in the US and Europe were excited about investing in Africa’s financial markets amid rising liquidity levels.

This trend inspired African Alliance to expand its operations across Africa in an attempt to benefit from foreign investors, observers say.

But the massive foreign portfolio outflows experienced in 2008, 2009 and 2017 have destroyed “hot money” dreams in many African financial markets eager for short-term, offshore dollar flows.

Cost of sending money
The drought and the lack of consistence in issuing initial public offerings at the stock markets could be straining the operations of financial service firms involved in the brokerage business.

Although drug maker – Cipla – last year listed on the exchange through an initial public offering, it came after six years, creating a drought at the exchange.

The exchange had last had an Umeme IPO. Thus observers say, many companies involved in stock brokerage might be struggling to make sufficient returns.

bbusuulwa@ug.nationmedia.com

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