Business Daily (Nairobi)
Washington Gikunju And Albert Muriuki
15 May 2008
In many ways the initial public offering of the Kenya Electricity Generating Company (KenGen) in 2006 was a watershed in the history of the country's capital markets. It was the first big flotation in a decade in a market thirsting for new offers by the government since the Kenya Airways share issue in 1996.
To Mr Patrick Gakiavih, the managing director of Nyaga stockbrokers (currently under statutory management), it was an eye opener. When the tallying of applications was done, Nyaga Stockbrokers emerged third among the brokers who had placed the highest number of applications.
It was a satisfying level of market presence for the man known as just Gakiavih to his relatives and friends and the crowning moment in an 18-year struggle, that started on a small farm in Embu, breaking into the height of high finance in Kenya. The journey started in 1988 soon after joining Kenyatta, one of Kenya's prestigious public universities.
In those days, university students used to be paid a stipend, commonly known as boom, in the range of Sh5, 000 in a semester of four months.
Though the boom was actually a government loan now managed through the Higher Education Loans Board, many "freshers" were wont to spending it on broadening their social horizons, acquiring music systems and tasting the forbidden life hitherto forced on them mostly by the humble backgrounds of their parents.
Not so for Mr Gakiavih, 40, the son of a peasant family in Embu, on the foothills of Mount Kenya.
He invested the first boom in the pursuit of additional professional certificates to supplement the undergraduate course in Economics and Business that he was taking at Kenyatta University.
A first degree in 1991 was no guarantee for employment as it had been a few years earlier, and the papers ensured the workaholic Gakiavih did not have to look for a job after graduation.
He joined Nyaga Stockbrokers as a trading floor clerk, the first step in a career that would, at the time Nyagah Stockbrokers fell into administration in March this year, take him to being one of the longest serving directors at the Nairobi Stock Exchange and a founder director in the Central Depository and Settlement Corporation.
On joining Nyaga Stockbrokers, Mr Gakiavih, impressed the proprietors by putting in long hours, sacrificing time and resources on company needs, providing leadership and solutions to matters that even his seniors in the firm found daunting.
With time he became the most trusted lieutenant rising to be managing director and allowing the owner time off for other businesses.
As economic growth slowed to a virtual halt towards the sunset years of President Daniel arap Moi's reign in 1992, so did the fortunes of the stock market tumble with the NSE 20 share index resting at 1,000 at some point.
Stock prices of even blue chip firms were dirt cheap. Combined with uncertainties surrounding the Moi succession, many business owners contemplated quitting the more volatile interests like stockbroking in favour of stable lines like professional and advisory services.
The proprietors of Nyaga Stockbrokers were among those who preferred to leave the stock market for the predictable auditing and company registry businesses they had set up a couple of years soon after independence.
In the intended exit, Mr Gakiavih saw an opportunity to own the firm. Despite being constrained for resources, his offer to the owners of Nyaga Stockbrokers was a mark of both genius and sacrifice.
He would forego a salary and other benefits attached to his position, like the Biblical Jacob, until the assessed value of the business was offset. In place for this sacrifice, he gained an entry into the most protected businesses in Kenya's capital market by buying a seat on the Nairobi Stock Exchange. A seat at the NSE is currently valued between Sh350 million to Sh500 million.
"It was a difficult time for stockbrokers and most were almost closing. But the labour exchange was at the market price," he told The Business Daily yesterday. Asked of the determination, he said: "I have always been a go getter, "waking up early, sleeping late and making the most of the time and opportunities."
That self appraisal fits with descriptions of Mr Gakiavih by his high school colleagues. One of them recalls him as a student who was focused with studies, interspersing with field activities where his love was Volleyball. "He would have made the school team. But he viewed this as a distraction from his studies," said a corporate lawyer practising in Nairobi.
The deal was sealed in 1999 and the transfers effected, giving him the sole authority to direct the firm, one of the six founding stockbrokers at the Nairobi Stock Exchange. The gamble to buy out Nyaga when stockbrokers were almost closing shop following years of economic mismanagement in the Moi era was a big one, but Mr Gakiavih had tasted the pudding having entered into the stock broking fray in the early nineties.
Despite his new position as owner and managing director, Mr Gakiavih continued to accompany his dealers for trading sessions at the NSE floor, first at IPS building and later at Nation Centre. The NSE has since advanced electronically so that brokers handle business from the comfort of their offices.
Nyaga Stockbrokers after the firm was placed under receivership
This hands-on approach had its bright side. It gave him visibility in the market, drawing many small traders to Nyaga Stockbrokers for his accessibility. It also won him respect among fellow stockbrokers who entrusted many tasks to him. Besides the directorships, the most notable moment was when he took President Kibaki through the operations of the NSE during the president's visit to the bourse in 2006.
The Capital Markets Authority (CMA) describes Mr Gakiavih as an overbearing manager who likes to run the show single-handedly.
"It appears that all decisions in Nyaga Stockbrokers are made solely by Mr Gakiavih especially with regard to the organization restructuring," says an investigative CMA report on Nyaga written by the Authority's technical committee after an inspection audit last year.
But visibility also had its dark side. He was regularly caught up in the power politics-with many of his rivals viewing him as the sidekick of Mr Jimnah Mbaru, NSE's powerful chairman and owner of Dyer & Blair Investment Bank. The boardroom politics took a predictable path with some directors openly declaring support for their preferred parties during the last general elections.
It is these politics that have shaped the sequence of events since late last year that saw the Capital Markets Authority send investigators to Nyaga Stockbrokers in December, the NSE inject in it Sh100 million in February and the firm placed under statutory management in March. He is now facing civil prosecution from his own company with accusations of embezzling Sh523 million.
The case will be heard on June 9 but the Capital Markets Authority CMA has already obtained orders from Lady Justice Jessie Lessit freezing the bank accounts and assets of Mr Gakiavih in Embu, Sagana and Runyenjes.
It is understood, however, that he was just about to sign an equity deal with a strategic partner before the CMA moved in to close the firm. Under the deal, the capital would have been enhanced to Sh200 million from Sh80 million held then and the firm upgrade to an investment bank.
Mr Gakiavih said the injection was necessary to increase liquidity in the firm after it had spent money on expansion to position itself to reap from the broad interest in the stock market generated by KenGen.
Statistics of total equity turnover in 2006 show that Nyaga traded shares valued at Sh8.4 billion, accounting for 4.11 per cent of the Sh205 billion total equity turnover that year.
"We opened new branches in Thika, Limuru, Nakuru, Karatina, Nyeri and Kangari, to minimize congestion at the Nairobi office," he said. The branches were networked to allow a centralized operation and are still intact.
The broker, like his rivals, had sensed that the public was holding embarrassingly large amounts of money under their mattresses after the KenGen IPO valued at Sh7 billion netted about Sh26 billion. Other offers were lined up to 'mop up' this excess liquidity.
The offers included the ScanGroup, and Eveready IPOs, and the Mumias Sugar Company second offering. Many of Gakiavih's friends' talk of his special charm which attracted clients to his business during these issues, especially the old, moneyed investors who wanted to invest but who did not want to be treated with the aloofness associated with a majority of the stockbrokers then.
"The new employees and overheads on computer accessories and other items had raised expenses substantially," he said. But he blames the delay in launching the Safaricom IPO from May last year to last month for worsening the strain on the firm. "Safaricom was to be our big break. Unfortunately, we were closed just two weeks before the offer was announced," he said.
Mr Gakiavih cuts the image of a simple family man who drives a simple Toyota and works late into the evening for six days in a week. His friends describe him as reserved, hardworking, intelligent and reliable and have never imagined he could fall into the kind of troubles facing him following the placement of Nyaga Stockbrokers into statutory management.
Predictably, none of his erstwhile stock broking buddies wanted to go on record, especially after news emerged that Mr Gakiavih was to appear in court to face charges of suspected diversion of investor funds.
To the investing fraternity and especially the estimated 130,000 clients of Nyaga Stockbrokers whose investments in the firm are now in jeopardy, Mr Gakiavih could represent the larger than life figure of every investor's nightmare of losing a lifetime of investments.
In real life, Mr Gakiavih is an every day story of a young man driven by ambition, hard work and being at the right place at the right time beating the odds, only for the world to collapse around him. In December 2006, the Government sought to float the Mumias second offer smack in the middle of the festive season.
A surprisingly low investor interest in the 91 million shares equivalent to 19 per cent of Government's shareholding in the giant sugar company meant that the issue almost resulted in an embarrassing under-subscription, with the Government even extending the offer's application period. Brokers reportedly stepped in to save the day by buying huge stakes in the sugar company, believing that the discounted offer price of Sh49.50 would rise once the extra shares were listed at the stock exchange.
Much to their surprise, the Mumias shares slumped to a low of Sh33 and stagnated for a long time, putting many brokers who had bought millions of shares in the company in severe financial distress.
The fall was not unique to Mumias as it coincided with a biting market correction in the first quarter of 2007 which caught most brokers by surprise especially those who trade on their own behalf in what is called market making roles.
"The Mumias saga almost brought down the whole market but particularly weighed down on Nyaga due to its low capitalization base," says an NSE board member and a close confidant of Mr Gakiavih.
It is understood that 7 brokers put in between Sh100 and Sh150 million in underwriting the second share offer. Nyaga is believed to have put in about Sh110 million in the Mumias issue.
Later, Mumias gave a bonus issue of two shares for one, splitting its market price by three to the current level of about Sh12, equivalent to Sh44 which is still Sh5.50 short of the second offer price.
Underwriting Mumias share offer and expansion in anticipation of Safaricom would prove to be a disastrous decision that led to the current situation that Nyaga Stockbrokers is facing.
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