According to the classic studies by Thornton and Bagehot, the lender of last resort should provide emergency assistance directly to troubled banks, with the qualification that lending should be done at high rates, against good collateral, and only to solvent institutions. Some twenty years ago, an alternative to this “banking” view has emerged in particular through contributions by Goodfriend and King, Bordo, Kaufman, and Schwartz.
These contributions are sometimes usefully aggregated into the so-called “monetary” view, which says that once the financial system has obtained sufficient liquidity through an equitable open market operation, interbank markets for short-term credit should be sufficiently efficient to warrant the availability of liquidity for any bank that deserves it. The two opposing views on the management of financial distress have provoked a fruitful theoretical debate about the role and identity of the lender of last resort in contemporary banking regulation.
Equity markets are increasingly seen as important sources of investment funds in many emerging economies. Furthermore, many countries see the development of such markets as a means to facilitate both foreign equity portfolio investment and foreign direct investment (FDI). This may occur through acquisition of shareholdings in domestic companies, which supplements the low levels of funding from domestic savings. But many emerging stock markets exhibit substantial risk premia that increases the cost of equity for listed domestic firms and deters potential foreign investors.
This paper estimates the cost of equity in four major African markets that represent the largest and most developed equity markets in Africa and which act as regional hub markets. Johannesburg dominates the Southern African Development Community (SADC), Kenya is at the centre of the East African Union, and Egypt (the Cairo and Alexandria Stock Exchanges) leads the North Africa and Maghreb region. Morocco (the Bourse de Casablanca) is included as this is the only other major equity market in North Africa. Other markets have been omitted because of their very small size and severe illiquidity. All four markets have attracted interest from international investors and multinational enterprises.
It is a well known fact that convertibles are the most commonly used securities in venture capital contracting especially in the US. The security of choice in most venture financed deals is convertible preferred stock. Kaplan and Strromberg (2003) in their empirical analysis of venture contracts find that nearly 80% of all venture financing use convertible preferred stock. Further, they also find that in nearly 50% of the cases the convertible preferred was participating. $Participating$ preferred means securities which participate in excess earnings with the common shareholder over and above their preferred dividend. One of the most important features of these securities is that they allocate different cash flow rights depending on whether exit occurs through a Trade Sale (TS) or an Initial Public Offering (IPO). We give below simple examples which illustrate this feature.
Assume that a venture capitalists( (VC) investment entitles him to $5 million in a given venture in the form of a Convertible Preferred (CP), which is convertible into 50 percent of the common equity. Further assume that the company is finally liquidated for $12 million. The VC then has two choices he can either convert his stake to common equity and be entitled to 50% of the proceeds i.e. $6 million or he need not convert and can be paid his preferred proceeds i.e. $5 million.
