23 April 2019

Uganda: African Alliance Group's Withdrawal From USE Signals Hard Times Ahead

African Alliance has announced its intended exit in May from Uganda's stock market after 15 years.

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, but did not give detailed reasons for the drastic move. A statement released by the firm indicates it will close its stockbrokerage services on April 25 and client accounts will be transferred to UAP Old Mutual Financial Services Ltd by May 6 following approvals by the USE and the capital markets regulator. However, African Alliance Uganda will maintain its investment advisory operations. No job losses are expected in the aftermath of the restructuring exercise.

Prior to its exit from the stockbrokerage business, African Alliance Uganda 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 Ush4 billion ($1.06 million) 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 Ush140 billion ($37 million) by the time of closure -- in an industry whose asset management fees have averaged less than three per cent in the past.

SUBSIDIARIES

African Alliance Group sold its Rwandan subsidiary to a Rwandan national last year for an undisclosed sum, but the business retained its brand name, following years of low revenues posted by the Kigali based operation, The EastAfrican has learnt.

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 the South African firm 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.

"If you have a cattle herd and you are stuck with a dry spell, you may be forced to slaughter some cows in order to fatten the herd and ensure the livestock survives with the little water available until the next rain season.

"As a result, we have decided to slaughter one cow which happens to be stockbrokerage and maintain the remaining one which is investment advisory. We have mobilised investment advisory transactions that we need to move the business forward," said Kenneth Kitariko, CEO of African Alliance Uganda.

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