Australia bourse counts single-board structure as key to attracting overseas listings

Max Cunningham, Executive General Manager Listings, Issuer Services & Investment Products at ASX. Credit: Twitter/Max Cunningham.

2018 is expected to see a strong surge in foreign listings on the Australian Stock Exchange with the market demonstrating a strong appetite for small-cap initial public offers (IPOs), a pattern set to be maintained for 2018, though investors will stay selective in their attitude to large-cap listings.

Max Cunningham, the Executive General Manager Listings, Issuer Services & Investment Products at the Australian Securities Exchange (ASX), is bullish on the performance of the exchange in 2018.

In an exclusive interaction with DEALSTREETASIA, Cunnigham discusses the market fundamentals of the ASX, public listings pipeline and its efforts to engage the venture ecosystem in Australia.

Edited excerpts:

The ASX has seen strong growth in its technology listings and emerged as a highly desirable tech listing platform.  What sustainable competitive advantage does the ASX have?

The main attraction of the ASX is that it is a very large capital market with its retail investors being self-managed. This is by nature of the compulsory savings scheme that we’ve had in place since 1991. That is at the moment about A$1.82 trillion and is expected to grow to about A$6 trillion over the next 10 to 15 years.

So there’s that side of the market, combined with the fact that we maintain a single board (Mainboard). We’re well-regulated, well-recognised and possess great connectivity to retail investors, self-managed superannuation funds, and family offices. So it’s a large, well understood, well-researched marketplace that has all the major investment banks present.

We’ve also got an index that is well-recognized for accommodating large, mid-cap, and small-cap companies, coupled with great connectivity to investors from New Zealand, Singapore and Hong Kong, Europe and North America. So I think it’s a market that’s very, very attractive for companies of all sizes.

What are some of the fundamentals of the Australian investment landscape that have driven the technology listings growth?

First, ASX has invested a lot of time in the local ecosystem, speaking to incubators and partnering with co-working spaces such as Stone & Chalk.

Even our board members have spent time in some of these startups. We took our board down to Fishburners – a major incubator in Australia with offices in Shanghai, Sydney and Brisbane.

We spend a lot of time advocating startups to not list too early but help them to find a pathway to private funding. We’ve had big growth in pre-IPO funding in Australia, a big growth in micro-caps, and a lot of these guys have been very, very keen to fund these companies.

It’s almost like a bridge between early-stage funding, growth funding and going public. The pre-IPO market has been very, very open and active in the last couple of years. And I think it’s helped set up some of these companies for success when they eventually go public. And we’ve been a central partner to that.

In terms of liquidity, a large part of the securities market in Australia is very underwritten by the involvement of different pension funds, which are long-term investors. So who are some of the medium-term to shorter-term players that are driving liquidity in the Australian stock market?

Broadly there are three distinct categories of investors; these are the superannuations funds, family offices and small-cap index funds.

First, there’s been large growth in the family offices. So you have these high net worth individuals (HNIs) that have businesses operating and they set up a family office to manage their investment portfolios.

And that’s grown exponentially. Nearly 10 years ago, there was about a dozen but it may be 100+ and more today. And, those family offices can be managing assets ranging from A$20 million all the way up to A$1 billion.

Second, there’s been a major surge in micro-cap index funds. That category didn’t exist until probably about five years ago. The largest investors have shifted towards a passive approach and some of those smaller cap investors have been growing and benefiting.

That’s where they can generate greater output by going straight to the right small-cap fund managers. So those three asset classes are growing strongly.

As foreign enterprises, what are the dynamics of risk and complexity that Asian firms encounter when listing on the ASX?

At the ASX, its a fairly straightforward process. Like any IPO, the biggest part is in the planning and who you pick as your advisor, as well as who your partners are.

Compared to Europe and North America, our regulatory environment and the cost of doing business are seen as materially lower. On a regional basis, in markets like Southeast Asia and New Zealand, the attraction is that we don’t have the second board, which means you can get that access to the full investor suite on day one.

In terms of the process, for us, the timetable from pressing the button is about 12 weeks or so, while for some markets its 10 weeks or 16 weeks. I don’t know if that’s a big issue but most people are thinking about this process six to 12 months out. You’ll find in some markets that regulations might be more difficult and simpler in others.

The feedback that we get from the US – when we deal with the Silicon Valley issuers – is that people look at it from a cost and regulatory perspective.

But from the Southeast Asian region, the feedback we get is that there’s better understanding of these smaller enterprises and a more willing investor group. There’s a single board that connects those issuers with those investors, and I think that’s the major selling point for places like Southeast Asia and New Zealand rather than time or cost.

For Australian institutional capital and retail investors, what sort of risks do they face when investing in Asian technology enterprise and some of the Silicon Valley startups that are choosing to list on the ASX?

Well, I think the notion of risk is a good one to ask. I think people are often saying, “Well, a lot of these companies are risky. How can you be letting them on the exchange?” And it’s interesting, because in many respects the ASX and this notion of smaller companies have been around for the best part of a hundred years, and this is because we’ve been funding mining startups.

These are companies that find some iron ore, gas or gold. It’s a very, very well understood process. These companies often start life as small businesses. The biggest mining company in the world, BHP Billiton, started on the ASX effectively as an exploration startup.

What we tend to find is that some companies do list too early, and some companies do struggle with the public market environment. That’s why we ask them to come and talk to us. We make an assessment as to whether they should come and issue their stocks. Some persist and make it, but what we tend to find is that if you’re at a very early stage and the business is only a few years old, it’s probably not a good thing to IPO.

The most important asset they have is their own time, and once they’re public they have the regulatory and compliance obligations, as well as commitments to their shareholders, and they’ve still got to run the business.

There are many different definitions of startup. What we find is that companies that have been around for five years might only just be starting to generate revenue. That have invested capital and a team of staff. They’re the startups you’ll find that tend to be doing much better on ASX from the US, Southeast Asia, Israel and New Zealand.

The NZX has a dual listing agreement with the ASX that’s seen a number of NZX firms list across both bourses.  Are there similar dual listing arrangements in the future planned with Asian bourses?

We’ve got a category at the moment called “foreign exempt,” which means that if you’re a large-cap in any of the major exchanges – which includes Singapore, Hong Kong, Japan, and most of the Northern Hemisphere exchanges – then a company could list today under the same arrangement.

We extended that category to New Zealand foreign exempt a few years ago which has been very successful. In both instances all this means is you’re listed on an exchange that we recognise and it removes a lot of the red tape. We defer to the rules of that home exchange and your filings with that home exchange are acceptable to us.

I think the questions is what would we do with Singapore or some other Asian bourse? The answer is that we don’t have it on the near-term agenda. It is something that interests us, but for us, all of these things require regulatory approval and we’re always going through a process for different changes. Obviously, we have a range of discussions we’re having with the regulator on different things. We would look at it but it’s not something that we’re actively pursuing.

What’s the outlook for 2018 in terms of the listings pipeline, and specifically in the technology sector?

The first half 2017 was a more challenging market for larger deals, which saw some get shelved or go for trade sales. Our sense now is the market has opened again in Australia and that there is a growing demand for large-cap transactions, but there’s always a lag in the time before these deals can come to market.

Probably the biggest tech listing we will have this half, and probably one of the bigger ones in the region is the spinoff from Fairfax of their real estate online business domain, Domain Australia Holdings Limited, which was valued at A$2.2 billion. We think there’ll be some larger IPOs of varying nature in the first half of next year.

We will see some mixed tech listings from a range of different markets that’ll be on the smaller side. And if market conditions continue the way they are, then there’ll be some scope for some larger tech listings in H1 2018.

Any view on the emergence of startup stock exchanges and their potential to grow the listings pipeline of stock exchanges?

It requires patience. You need a very strong foundation in terms of your capital market, asset pool, a strong brand and a good regulatory environment, which we have. You also need a long-term vision.

You need to invest in marketing and building partnerships, as well as to recognise, as our board does, that for most of the investments that you make in building the listings pipeline, the payoff is two to four years before you actually get to see the companies coming through.

If you want fast returns in listings, you will get poorer quality companies and correspondingly poorer quality outcomes for the market. For us, if we wanted, we could get 20 or 30 companies from Israel, and another 30 companies from Asia. We could probably get a lot more companies coming out of North America as well, but they’re all too early, and that’s not our approach.

Our approach is to partner with and help these companies as part of our job to build out the ecosystem. Our CEO, Dominic Stevens, took a bunch of bankers and lawyers on their first trip to Israel in October, and that’s what you have to do. We’re educating them on these markets and partnering with global firms in the United States.

You’ve had cases of pre-profit tech firms – or even pre-revenue & pre-profit firms – listing on the ASX Mainboard. Isn’t a growth board more applicable for such firms and would having a secondary board, such as the London Alternative Investment Market, make sense?

Well, I think we should be clear: we’ll never go down that path. We do look at it once every five, ten years. We’ve looked at it very recently. We think these boards inevitably have lower corporate governance, and all of the boards you’ve mentioned don’t have universal connectivity with the investor universe that I talked about.

We think it’s one of the most important, compelling strengths of our market. We’re finding more people wanting to come from markets like Europe and North America to ASX because of the single board. And there’s no request for it from issuers, there’s no request for it from investors, there’s no request for it from the regulator. I think because the notion of risk in early-stage companies is well understood I can’t see why we would do it.

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