Going Private & Debt Insights

Welcome to this week’s edition of Frank Digest!

Your Weekly Brief on all things Finance and Investing. Quick, Enjoyable Reads for Busy Professionals in 5 minutes or Less.

Topics this week:

• 🏢 Dynamics of Private Finance: Impacts on Investors and Business Strategy

• 💰 Ethiopia’s Debt Story: Growth, Setbacks and Solutions

Thanks for reading!

What’s The Deal With Going Private?

In our previous publication, we saw that to get a company off the ground or leap to the next level, you need some ጥሬ ገንዘብ. The company can take loans from a bank, offer shares on the stock exchange (public offering) or tap into private credit (equity or loan by institutional investors).

Let’s look at a publicly listed company going private.

So imagine, you've invested your hard-earned cash in a company, feeling like a financial wizard managing your stock portfolio. But then, out of the blue, the company decides to go private. What gives? 

When a company goes private, it essentially means that the company's shares are no longer available for trading on the stock market. It becomes privately owned by a smaller group of investors, often including the company's management or a private equity firm. Think of Elon Musk’s $44 Billion buyout of Twitter, for instance.

What does this mean for you, the individual investor? 

• In the event of a full buyout- You will receive a cash payment for your shares, often at a premium to stock market prices.

• If partially taken over- Your share in the company may be diluted, but you will remain a shareholder. You are no longer able to publicly trade them and so lose the liquidity of a stock market

Going private can have the following perks:

• ማኔጅመንት will be able to make strategic decisions without the pressure of meeting short-term (quarterly) earnings expectations from public shareholders

• More attention can be given to long-term benefits and bold transitions, such as investing in research & development (R&D)

• More importantly, the desired scenario for going private is that the company found a great Private Equity partner that can help not only with financing, but also offer strategic direction and effective management 

Global trends indicate that small and medium enterprises (SME) are increasingly seeking private finance (equity and loans) rather than attempting to be publicly listed in the first place.

Currently, in Ethiopia we don’t have a notable domestic private finance market where large equity investors or lenders play a role in funding businesses. In fact, the National Bank of Ethiopia sent out a circular barring any non-banks from offering interest bearing loans. This move widens the funding deficit and encourages black market lending markets. By contrast, if the legal framework was put in place to promote private credit, it would be a catalyst in getting startups off the ground and boosting SMEs.

The enthusiasm and government support in launching the public stock market is commendable, however it will only make sense for large corporations to list in such markets. Equal attention to private credit is needed to foster a vibrant startup and SME ecosystem.

What is national debt and how bad is Ethiopia’s?

National debt is the total amount of money that a country owes to creditors.

It is a common practice for governments to borrow money to bridge budget deficits and fund various projects such as infrastructure, social programs and defence spending.

Ethiopia’s growth story evolved from agri-led to services to now construction as the government invests heavily on public infrastructure to expand manufacturing for export and import substitution. While the private sector is nudged to play a greater role in the economy.

According to a research paper from Harvard, authored by Hausmann et al, the rate of GDP growth dampened after 2015 due to reduced import capacity which is critical for industries:

• Slowdown of export growth- GTP 2 ending 2019/20 planned to reach USD 10 bln but actual was less than USD 3 bln

• Decline in official remittance- the black-market premium has widened significantly over recent years to reach approximately 100% 

• Decline in external borrowing- concerns of debt sustainability in part due to above points and IMF debt analysis alarm. External borrowing may have been restrained but the government and state owned enterprises (SOEs) resorted to more domestic financing

Debt health is typically expressed as a percentage of a Gross Domestic Product (GDP). As a standalone figure it doesn’t say much, a country’s economic fundamentals- its ability to service the debt and attract creditors- are important. Excessive national debt can have serious consequences for an economy, including የዋጋ ግሽበት, budget cuts on essential services (education, healthcare) and a decrease in investor confidence.

Ethiopia’s debt to GDP according to IMF has been declining for the past 30 years from its peak of 155.2% in 1994 to 30.5% in 2024. This is a relatively low ratio compared to countries like Japan 200%, USA 123.3% or similar economies Kenya 73% and Egypt 96.4%.

Despite the low national debt, Ethiopia hasn’t managed to transform its economy in a meaningful way due to unrealized projects in the past (sugar factories, mining and fertilizer, railway, etc to name a few).

So far, export performance has fallen far short of targets (ቡና ለምሳሌ), even before COVID-19, and the internal conflicts have undermined the economy and its people. International credit agency Fitch Ratings downgraded Ethiopia’s creditworthiness to Restricted Default (RD) following its missed coupon payment of USD 33 mln in December 2023.

Moving forward, it should secure long-term loans on favorable terms to direct towards projects with:

• High impact- in terms of food security, transfer of technology, forex earner, etc.

• Broad based solutions- benefiting the majority of the population by up-skilling, creating employment and encouraging entrepreneurship

For debt to be sustainable, the country needs to focus on the success of current and future projects. There needs to be inclusive public institutions, country-wide stability and market based incentives.

Stay tuned for our next week’s piece about personal expenses and how you can manage them!