Justin Hall, the principal of venture capital (VC) firm Golden Gate Ventures, believes that for the Singapore Exchange (SGX) to remain relevant and competitive as a listing venue, sustained investor education and enhanced liquidity are critical to its continued success as a bourse.
Earlier this year, Hall highlighted the need for meaningful exits in the region, particularly as startup ventures gravitate to stock exchanges with growth boards, such as the Nasdaq First North, the growth board of the Nasdaq OMX Nordic; the Growth Enterprise Market of the Hong Kong Stock Exchange (HKSE); and the Mothers Board of the Tokyo Stock Exchange (TSE).
Hall highlights: “Meaningful exits require, in large part, a critical mass liquidity and volume to make it a viable outcome for entrepreneurs.”
Agglomeration IPOs & early listings
Hall is sceptical of achieving exits through the use of an agglomeration IPO – an initial public offer (IPO) method where multiple companies consolidate their share capital into a single listing vehicle while retaining autonomy as units of the listed vehicle – and its benefits for either entrepreneurs or investors.
Theoretically, companies that consolidate their share capital in such a manner should be able to generate synergies and consolidate things such as administrative resources; the various units operate autonomously while benefiting from reduced financial risk, increased liquidity and scale, as well as enhances brand strength and marketing that come with being publicly listed.
Additionally, it permits businesses to present themselves as being part of a large, publicly listed enterprise with a global footprint, enhancing their legitimacy and public profile. Moreover, it aids in attracting experienced senior staff who may otherwise decline to join a small business with a higher risk of enterprise failure.
Hall argues: “Personally, this wouldn’t pass the sniff test. As an investor, I can appreciate the concept of combining multiple entities into one for the purpose of listing, especially if there is synergy between the businesses. It follows the adage that one plus one equals three, and for businesses with a lot of commercial and cultural overlap, an agglomeration IPO might be a solid alternative to listing separately.”
“But the concept sort of strikes me as two unrelated parties getting married so they can enjoy the wedding reception. There’s no guarantee that these parties will work well with one another, reasonably reinforce their respective businesses, or grow as one combined entity. Granted, both parties would (presumably) “get to know one another” prior, but when the companies are private, the bonds can be dissolved relatively easily if it isn’t working well.”
“But when I say relatively, that doesn’t imply that the separation is painless; far from it. Hence, I imagine a public entity breaking up into its disparate parts would be infinitely more painful and costly,” he adds.
Meanwhile, recent years have seen a trend of Silicon Valley and Singapore startup ventures pursuing an early listing on exchanges like the Australian Securities Exchange (ASX), which has been referred to as the “Nasdaq of Asia“, rather than pursuing private capital market investments.
Hall expects this trend to continue, saying, “Years ago, if a company opts to publicly list on some of the smaller bourses, the thinking might be that they were unable to raise from private investment. This is especially true in the United States. For Southeast Asian startups, the common refrain that “there isn’t enough growth stage investors to fund Series B” may have been true three or four years ago, but that is no longer the case today. Indeed, there are more than enough growth-stage investors for Southeast Asian startups.”
He adds, “There are nevertheless meaningful benefits for an early listing for a venture-backed startup: immediate capital/shares to use for acquisitions; if the vertical is “traditional” enough, the infusion of capital can actually be genuinely meaningful for Southeast Asian companies; and it provides a quicker exit for both investors and entrepreneurs alike.”
SGX, liquidity events & third board
Recent quarters have seen the SGX rebound from its moribund performance of 2015/2016, as well as introduce changes aimed at enhancing its appeal as a listing destination for technology enterprises.
But are these efforts working? There is a long list of structural challenges facing Singapore as a listing venue: a lack of significant listing candidates and a deficit of comparable companies; the allure of Nasdaq and other regional exchanges with superior liquidity; as well as the easy availability of private debt and capital.
Hall is sceptical of these changes, noting that they do not help “fix the underlying, structural changes required to have a strong tech bourse: retail investors that understand technology, and enough liquidity and volume to make public listings meaningful, from both a financial return and strategic angle.”
Meanwhile, the coming three years can expect to see a number of liquidity events as fund life spans come to an end across Southeast Asia and investors look to exit their commitments and realise the value of their investments, particularly as VC investments in the region are forecast to reach a historic high in 2017.
Looking at liquidity, the SIX Swiss Exchange of Switzerland, which is looking to build its market liquidity, has been seeking to engage investment from international funds with a presence in Switzerland in its equities markets.
Despite Switzerland’s population of 8.45 million, it is among the Trillion Dollar Club of stock exchanges and reports a market capitalisation of $1.51 billion as at April 2017. The Oslo Exchange – the only independent Nordic exchange – reports a market cap of $583.7 billion as at June 2017 with a population of 5.23 million.
Liquidity – the amount of volume bought and sold relative to the supply of stock available or turnover velocity of shares being traded – is crucial for realising the value of a company for investors; a company with 100 shares on issue and 300 trades of 1 share a time over twelve months has a liquidity factor of 3, while a company with 100 shares on issue and 1 trade a year of 1 share has a liquidity factor of .01.
With the growth of Singapore as an offshore financial centre and wealth management hub, what can the SGX do to engage these players and boost liquidity on the bourse? This is often cited, alongside conservative valuations, as common factors for enterprises listings elsewhere.
The most cited factors for companies choosing to list elsewhere are a lack of liquidity, alongside conservative valuations, for those choosing to list elsewhere.
To address this, Hall’s opines: “Start conservatively, start slow, but really begin educating the market on new technologies, market norms for fast growing technology companies, and streamlining/improving the requirements to list. At the end of the day, startups will not list in Singapore if they do not believe the exit outcome will result in a meaningful injection of capital, i.e on the order of a large Series B/C raise, or around S$10 million.”
As for a proposed third board on the SGX targeting high-beta, new economy enterprises, particularly given how enterprises like Tesla highlight how traditional business metrics can be outdated?
Hall doesn’t believe this to be necessary. “Presumably Catalist would serve this purpose. Again, at the end of the day: getting smart, technically-savvy, high-liquidity investors on the exchange is where SGX needs to go. In my opinion, diluting that amongst two or three different exchanges is not the best option.”