Despite the current down cycle, Mohamed Nasser Ismail, who heads capital market development at the Singapore Exchange (SGX), believes that the IPO pipeline remains on track and aligned with the context of Singapore as a financial centre.
The troubled bourse, which has seen a number of delistings and privatisation deals in recent years, has been impacted by the slump faced by oil & gas as well as shipping sectors.
However, the city-state’s bourse is forecast to prop up initial public offers (IPOs) in the region this year following deals elsewhere in the region being curbed by currency volatility and weak investor sentiment.
In an interview with DEALSTREETASIA, Nasser Ismail talks about SGX performance, liquidity, dual-share structure, IPO pipeline and other issues.
SGX has seen contractions and a series of delistings in the last few fiscal quarters such as Osim relisting as V3 Group in Hong Kong. It has also been criticised for its lack of liquidity. What are some measures being taken to mitigate this?
To answer that question, let’s step back and look at capital markets around the world. The trend of companies delisting when the market is in a down cycle happens not only in the SGX but on many exchanges. If you look at how many have delisted and the motivation behind those delistings, they are varied.
One should not be focused on a single reason. There can be various reasons to choose to delist; some are motivated by a need to restructure, some are unable to comply with listing requirements while others may find suitable suitors who would like to take them private. This is the natural order of a market cycle and it is fairly healthy.
We have had cases of companies that were taken private come back to the market subsequently. They come back better and stronger. It’s not something unusual or unseen and I don’t think we should make too much of it. The most important thing when you look at the capital markets is: as a platform, does the SGX Mainboard and Catalist provide companies with good access to capital? And the answer to that is a resounding yes.
Companies today that come on board our market platforms are able to fund their growth and explore new business areas and ventures.
In 2016, the Singapore Business Federation called for the SGX to form a third market board. We’ve also seen a lot of Singapore tech enterprises looking to exit on the ASX rather than list in Singapore. At the same time, we’ve seen South Korea’s Kosdaq turn to targeting tech startups to drive its IPO pipeline. With the Kosdaq, TSE and ASX being seen as IPO destinations, what is the SGX doing to build its IPO pipeline?
It has been rightly pointed out that this is a global phenomenon. These days, companies require capital far sooner than earlier when they tended to grow gradually in a more incremental fashion. These days – especially in the technology space – companies need to scale up quickly. It is not so much about driving profits but getting market share and becoming leaders in their respective segments.
And, therefore, in order to scale up and battle for market share, the need for capital becomes more urgent at an earlier stage of their development. Because the need of capital is more urgent at the early stage of development, these companies are not quite ready for a public listing, which comes with market obligations and compliance requirements.
When an enterprise is young and not so mature, having the burden of these compliance costs and obligations placed on them may not be ideal. Should we have a third board? We have the Mainboard for established companies and the Catalist for growth companies.
The primary distinction between the listing requirements for both is that for the Mainboard, you need to meet a certain size threshold or profitability threshold. For Catalist, it’s a more flexible regime whereby if you have healthy working financials, a sustainable business model and a banker that is willing to take you to market and sell you to investors, then you can list.
Therefore, that flexibility can work for smaller companies if they can attract investor interest. Obviously, companies of a certain size will attract investors. And if you’re too small, there’s less certainty and investors may not be comfortable. So you have a different category of investors that would be interested in these companies.
That is where the idea for a third board arises. There is difference between public and private market fundraising; enterprises engaged in private market fundraising come with a different risk profile and it is not advantageous for them to come into public markets and be burdened with these compliance requirements.
So what we’ve done is support an initiative led by Clearbridge Accelerator and a US private funding platform, Healthios Xchange, in the form of Capbridge. The idea is to have a platform where you can aggregate pools of investors looking for this category of investment profile and risk, and to bring great companies on this platform and match them with strategic investors. We think this is a better way forward because these companies at that stage are unburdened by public market obligations.
How long do you expect the current down cycle of the SGX to persist and when do you see a recovery of the IPO pipeline?
I’m not an economist and I can’t answer that, but the pipeline of IPOs certainly looks better than 2016. And it continues to remain strong and robust. We are cautiously optimistic that if conditions hold, the IPO pipeline will be healthy
The SGX has established partnerships with both FundedHere and Crowdo. What are the long-term objectives of these and are there possible acquisitions by the SGX in this particular space to establish a footprint in crowdfinance?
Democratising access to startup investments to the public via equity crowdfunding platforms entails dealing with companies with a different risk/return profile. And we don’t think these are the sort of companies that are ready for a public listing.
However, we do think that being part of the investment ecosystem and public market infrastructure, we should bring them closer to the more credible platforms and be useful to them as they provide access to capital to these startups.
As these startups mature and become more sustainable and larger enterprises, then we can cultivate and nurture them towards a listing. It’s about working towards helping startup ventures mature in the right way.
So that relationship is about opening a depository infrastructure whereby if investors were to invest in these companies and keep their scrip with the CDP, we would provide them support in terms of promoting an understanding of the various options for these companies to raise funds. We have a role to play in collaboration with these private market platforms.
Locally, the SGX is exploring a dual-share structure while in Jakarta and Bangkok, they are establishing startup exchanges. Looking at this, do you see a possibility of a comparable startup exchange on the SGX and how do you see the deal-share structure impacting SGX’s competitiveness?
I’ve highlighted the thinking of the SGX in terms of what we think about when a company is ready for a public market listing and how it may be disadvantageous to be straddled with a burden of costs and concerns around compliance.
From our perspective, the public fundraising option may be a better option for them and given our increasingly vibrant VC/PE and angel investor space, with growing access to accredited and institutional investors, that avenue is better placed to provide access to capital to these companies. That’s the direction SGX is headed to and other exchanges have taken a different view of that.
But that’s their solution to their market context. In our context, we are comfortable with the direction we’re headed and we’ll continue to watch and learn from informed opinions and market developments and see how things evolve.
The dual-class share structure is another capital structure that presents an opportunity for investors to invest in a certain type of company that has been driven by strong visionary leaders that may want to retain control of their company, while also giving investors a chance to participate in the economic upside of the company.
This is something we’ve consulted on and are soliciting advice from both sides while assessing the pros and cons. It’s not something that we have decided upon at the moment. I would not speculate on the outcome and where the SGX will land but we are studying it carefully.
Private securities exchanges are being explored at the moment. However, in North America and Europe – arguably the most mature and complex capital markets – have not seen the emergence of a workable model. Looking at the growth story of Asia, do you see this being possible here? Can Singapore support such a platform?
Every market across the world is unique in their own way, with their own set of circumstances. In the context of Singapore and Southeast Asia, if you look at the funding landscape, we have a lot of institutional support, with a lot of statutory boards providing entrepreneurs with support.
We believe the gap is in the post-Series A/Series B funding, and these are companies that have made it that far but are not ready for public markets. That gap is where a private market platform may be useful, where you can have a marketplace for investors to look at these private companies and invest in them in an organised way, where we can aggregate pools of liquidity and onboard good quality companies onto that platform.
The solution has got to be relevant to the marketplace we operate in. I can’t speak for Europe and North America, but looking at Singapore and Southeast Asia, that need is certainly there and we are working on it and looking at it to evolve a solution that stakeholders can find useful.
Top Glove completed a secondary listing on the SGX last year. Has the SGX explored facilitating secondary listings of technology majors (e.g. Facebook, IBM, etc.) on the board to serve as comparables and access Asian capital markets through here?
When you talk about technology enterprises, you have to contextualise it, especially when discussing large corporations such as Facebook and IBM or the growth companies that have gone to regional exchanges.
There are two different conversations. For those early-stage growth firms, the primary motivation is seeking access to capital to fuel their growth. For bigger tech companies listed in the US, for example, the Singapore value proposition is something they can consider because we are well-situated as a gateway to Asia and we’re a major wealth management centre with a lot of money based here.
We have a secondary listing framework that is enormously flexible to cater to a secondary listing in Singapore and a primary listing in the US, where the compliance obligations of the US are taken on fully. Singapore does not actually impose any additional compliance obligations beyond the need for that company to make announcements at the same time in both markets.
What the US company would gain from that is access to Asian investors as well as US investors, 24/7 trading and settlements on a fully fungible basis. But more importantly, non-US investors who trade in Singapore will get the benefit of not having capital gains tax imposed on them. So I think that value proposition for the company, for US investors, is all there. This is something we’re trying to promote.
The HKSE in Hong Kong (7.3 million people); the SIX Swiss Exchange in Switzerland, (8.2 million people); and the Stockholm Stock Exchange in Sweden (9.7 million people), which is part of the larger Nasdaq Nordic, are all in the Trillion Dollar Club of stock exchanges (i.e. market caps in excess of $1 trillion). Hong Kong has moved into that orbit of global exchanges. What will it take for the SGX to compete and move into that same orbit?
If you look at the SGX, the brand of the Singapore Exchange is tied to the brand of Singapore. For any company looking to list, if they look at their options in Asia and the various venues, the Singapore brand stands on par with many of them. We are a business-friendly nation with a highly-skilled and educated workforce and you have a pro-business government with a business ecosystem that works and supports enterprises.
We are an international financial centre, maintain an open economy and are a major wealth management centre. We are known for our efficiency and the exchange is known for its high regulatory standards. So if you look at the sum of all parts of a listing, beyond capital raising, Singapore has a lot going for it. A lot more than others.
We are a gateway not just to one country but to many countries. We’re a friend to many and we’re a jurisdiction for many companies to consider. That’s how I think we position ourselves and think of ourselves when you place us against regional competitors.
Pension funds support liquidity in the securities markets of bourses such as the ASX, though as at December 2015 some funds have been heading offshore, while Japan’s public sector is a substantial player in its securities market. Could a similar development happen in a Singapore context?
It’s always positive to have more funds being actively involved in the market and having benchmarks for funds that are invested in the companies listed on the SGX. But it’s also important to have a mixed investor base in the market so there is a measure of vibrancy. If you have long-only funds that dominate the market that buy and hold stocks, it won’t do much for liquidity in the marketplace. But having said that, it’s certainly a positive development to have such funds engaged in the market.
Looking at Catalist, which is developed on LSE’s AIM, we’ve spent years consolidating the brand. With the shift towards SME growth in Singapore, the Catalist board has been successful in supporting the growth of SMEs in Singapore and regionally. In terms of measuring success, we can look at valuation, liquidity and fundraising.
If you were to compare us with ASX, London, TSX or Hong Kong’s GEM, we’re comparable. But where we’re really strong is liquidity, contrary to anecdotes and public opinion. Catalist is more liquid than many platforms. Our market cap is traded more than 1.4x annually whereas with AIM it is 62 per cent, with AIM 67 per cent, with ASX it is 87 per cent, Hong Kong’s GEM is 65 per cent and TSX is 49 per cent.
The data we have also shows Catalist companies raise three times more funds after they’re listed than at listing. Which means to say that as a growth board it does provide capital. This translates to access to capital that is better than most of the other boards.