Private exchanges can serve the next generation of entrepreneurs, says HGX’s Kelvin Lee

Kelvin Lee, co-founder and CEO, ​Fundnel, and advisory board member, ​Hg Exchange.

The private exchange Hg Exchange (HGX), which is run as an alliance of the financial intermediaries PhillipCapital, PrimePartners, and Fundnel, aims to provide a secure and efficient environment for cross-border listings and trade of digital and non-digital capital market products.

Public stock exchanges are not the best platforms to distribute capital efficiently from capital providers to companies (and investors), says Kelvin Lee, co-Founder and CEO of Fundnel who also serves as an advisory board member of HGX. ​They are also unable to meet the capital requirements of SMEs. “Closing the gap for this underserved segment is what we hope to do here with Hg Exchange,” he said in an interview that appeared in DealStreetAsia’s recent report, SE Asia Private Marketplaces 2020, where private marketplaces are examined in depth.

Edited excerpts of the interview with Lee, where he discusses the role of private exchanges and how they serve the next generation of entrepreneurs, and not just the Grabs and Gojeks of the world:-

What is Hg Exchange and how do you operate?

Hg Exchange (HGX) is a private exchange formed by an alliance of leading financial intermediaries: PhillipCapital, PrimePartners, and Fundnel. All members are individually licensed and regulated by the Monetary Authority of Singapore (MAS).

As a member-driven consortium, we rely on the network effect amplified by our financial intermediaries — each brings to the exchange their own set of issuers and investors. Hg Exchange enables a secure and efficient environment for the cross-border listing and trading of both digital and non-digital capital market products supported by our technology partner Zilliqa.

How much is being a member-driven exchange a hindrance to you and overall operations?

I don’t think it has been a hindrance at all actually. We hold meetings every week with the leadership and working teams because the member model is important to all of us. In fact, we are open to having more financial institutions join the exchange.

In January 2019, The Economist magazine ran an article explaining the problem with exchanges, highlighting that stock exchanges were utilities for more than a century; not-for-profit, self-regulated, and owned by their broker members.

Out here in Asia, similar conversations also surfaced, alleging that public stock exchanges are not the best platforms to serve SMEs. Fundamentally, exchanges must serve a greater purpose in society — to distribute capital more efficiently from providers of capital to companies (and investors) who can now use the capital to grow and reinvest and create new jobs for society.

What happens to these companies that depend on the exchange for their capital market objectives?

Closing the gap for this underserved segment is what we hope to do here with Hg Exchange.

If we dive into the history of exchanges, you would notice that many of them started by prioritising the needs of their member firms. In turn, the members, by securing a seat on the exchange, can better represent their clients. But with time, some of these exchanges became so profitable that they listed themselves on their own exchanges thereby inheriting a set of public shareholders who instead started pushing the exchanges for share-price optimisation.

Despite having more de-listings than listings on such exchanges, their business model evolved and revenues started streaming from other areas like trading derivative instruments. Hence, their stock prices continued to fare well even though these exchanges were no longer supporting SMEs in their capital market objectives.

So you’re saying that Hg Exchange/Fundnel is about going back to fundamentals by helping companies raise capital? Enabling the efficient distribution of capital, spurring entrepreneurship, and helping SMEs grow; which in turn, leads to jobs creation?

Today, where there is sufficient capital that can be raised from the private markets, companies do not necessarily go public to raise new capital. Rather, most would value price discovery to determine how much is the company worth, not just by investors within the boardroom, but by the larger market — this is a critical step. After the share price has been accepted by the wider market, the company is able to do a lot more, such as corporate actions, and get access to better banking credit facilities. It solidifies value for the employees as well. This brings me to the second objective: how can the company help its early investors and employees with subsequent liquidity and realise the value of their holdings? Increasingly, management teams of private companies understand this is a necessary step because it’s a structural problem.

Companies are staying private longer globally, not just in Singapore. PE/VC funds created in the past decades have a typical LP investment structure and fund life which may not work in this new “staying private is the new normal” environment; as the fund approaches the end of their fund life, managers need to start creating liquidity events for their portfolio companies in order to generate returns for the LPs (and raise their new fund). However, today, many portfolio companies are staying private both by choice or necessity. So how would a fund manager return money to their LPs? As you know, in this unfavourable economic climate brought upon by the pandemic, some LPs may roll over and grant extensions, but I think a lot of them may be anxious to get their money back to reinvest in new opportunities.

Have you seen an increase in the number of funds approaching you because of this problem?

I think companies, investors, and even governments have always been looking for good partners to work on this problem but there’s never been a structured platform and exchange that they could approach. By serving the capital recycling objectives of these funds, the entire ecosystem benefits.

When the LPs — comprising family offices, corporate investors, etc. — of these funds receive money back from their original fund commitment, some may choose to recycle money into a new fund which can be deployed again into new opportunities.

But how attractive are these employee stakes in these companies? Based on your observations, do they usually trade at a discount to the last traded price?

As one of the members of Hg Exchange, we have worked on a variety of sizes with sellers expecting premiums or discounts (to last round) depending on the company.

Do you think that people have become savvier and acquainted with private markets in the last few years? How has the overall landscape evolved?

Going back to the genesis of HGX’s, the same idea remains: to serve the next generation of entrepreneurs and investors. So when people talk about acceptance of the idea, does it mean to serve the Grabs and Gojeks of the world? Not to me because we’re really building something for the next generation.

The decacorns maybe a little too late for us but we will support them; getting them involved is great, but true buy-in must happen from the next generation.

This problem of creating liquidity events and returning money to LPs accelerated in the past few years as more funds that invested into the region before 2013-14, are required to demonstrate returns on these investments to enable them to raise new funds. Therefore, there is a more urgent need now (than ever) to continue to invest in and build the private capital markets.

Do you see yourselves as being a complementary or a competitive player to the wider ecosystem here in Southeast Asia? In China, we’re seeing the likes of the STAR Board allowing unprofitable tech companies to list publicly. In the US, we see companies like Tesla tap on the high-risk appetite in that market for such visionary companies. What does this mean for a platform like yours?

First of all, it is crucial to remember the people we serve — the next generation of entrepreneurs and investors. Hg Exchange counts established institutions like PhillipCapital and PrimePartners as members alongside newer firms like Fundnel. Collectively, we are a mix of old and new world issuers and investors. Tech companies may get a lot of media attention but we need to remember that there are also other companies (which play a pivotal role in supporting our essential services and employ over 80% of the population). Very little thought is given about building an efficient capital market to serve those guys, right?

Hopefully, with the technology pieces that we’ve built, we will provide cost and time-efficient access to growth capital for private companies around us, and an IPO or trade sale (M&A) will no longer be the only two “exit” options available to entrepreneurs.

Our technology infrastructure, when plugged into emerging countries around the world, will replace or augment existing capital markets or funding ecosystems. We will break the monopoly of the rich by providing access to professionally managed private equity to the average person. We will facilitate investments in the local businesses we love so that our children will get to experience these traditions in time to come; or roll the dice by backing founders solving hard problems critical for our longer-term growth.

What is your vision for the next one to two years?

I think the litmus test for us is the support we are able to garner from entrepreneurs; how we can help the next generation of entrepreneurs find an alternative so they do not feel compelled to list on a less relevant exchange just to recycle money for the VC or PE firms. It is unfortunate that some entrepreneurs go through all the trouble that started with an idea to make a difference, set up a company, find product-market fit, raise capital, build their team, and scale, only to wind up at an unnatural process to “exit” and crystalise value. Entrepreneurs already experience a very high rate of failure and they shouldn’t be directed towards a suboptimal route at their expense.

Currently, you can either be a private company and illiquid or you can be a public company with some liquidity. Our goal is to help companies stay private and liquid. In the future, the journey of an entrepreneur will be blurred between going public and staying private — I don’t think a clear distinction is relevant anymore. Why should there be a split between running a private or public company? Entrepreneurs should be able to do the same things. In fact, one might even be able to do better.

Running a private company means the entrepreneur is also managing early investors, helping them with an exit, and focusing on building a company. On the other hand, operating as a publicly listed company requires managing market noises which could distract the management team from reinvesting your profits for longer-term objectives, and much time is also spent on quarterly reporting. So that’s my vision: getting their buy-in, being the alternative option for entrepreneurs.


This interview originally appeared in DealStreetAsia – Research & Analytics’s SE Asia Private Marketplaces 2020 report.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.