Influence of Private Equity Penetration on Capital Market Development in Sub-Sahara Countries

Mongwa Nkam Fonkam,Akume Daniel Akume,Molem Christopher Sama

doi:10.11648/j.jim.20190804.11

Abstract

Any country that recognises the importance of private equity investments may be forced to have a developed capital market as private equity investors use capital markets for Merger and Acquisition transactions and exit routes from portfolio companies after the holding period. Therefore, this paper seeks to assess the extent to which private equity penetration influences capital market development in Cameroon, Nigeria, Ghana, Kenya and South Africa. Secondary data was collected from private equity and venture capital data bases, World Bank development indicators, regional private equity venture capital associations and on country specific stock market websites. The Two-Stage Least Squares Instrumental Variables, Panel Corrected Standard Errors and Feasible Generalised Least Squares estimation techniques were used due to the potential problems of endogeneity and spherical errors of serial correlation, heteroskedasticity, cross sectional dependence and multicollinearity. The results show that the signs of the variables from the Panel Corrected Standard Errors and Feasible Generalised Least Squares estimation techniques are consistent with those of the Two-Stage Least Squares Instrumental Variables, though the magnitudes of the coefficients are different. In terms of the variables that are significant, the same set of variables (stock market liquidity, banking sector development and GDP per capita) is significant in all the specifications while foreign direct investment and private equity penetration (variable of interest) are insignificant in all the specifications. Based on the findings, we recommend the governments of these countries to set listing requirements based on businesses sizes, continue to improve macroeconomic environments and improve on the regulations on microcredit banks.

Highlights

In this modern era, there is no country that does not wish to have a developed capital market
The analyses began with the Panel Instrumental Variable (IV) based on the fact that endogeneity may exist between stock market capitalisation and private equity penetration
The null hypothesis of this test is that stock market capitalisation is endogenous and the alternative is that private equity penetration is exogenous as the P-value is insignificant, we accept the alternative that private equity penetration is exogenous and conclude that there is no endogeneity issue in this study

Summary

Introduction

There is no country that does not wish to have a developed capital market. Capital market development is a multi-dimensional process of improvement in the quantity, quality and efficiency of stock market services. Developed capital markets are known to attract investors in to a country. Private equity (PE) and venture capital investors use capital market information to value their investments and as exit routes from their portfolio companies after the holding periods. By private equity will include venture capital since they are investments in unquoted companies in all stages in a company’s lifecycle [1]. Private equity penetration is the amount of deal flow to a particular country based on some attractive or attractive actors [2]

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Conclusion