The “alternative” stock exchange announced in Johannesburg last week could prove to be a damp squib unless the JSE Securities Exchange reaches deep into its pockets, analysts have cautioned.
The AltX, which is modelled on the London Stock Exchange’s Alternative Market (AIM), aims to entice small enterprises to join Africa’s largest bourse.
Announced by JSE CEO Russell Loubser last Monday, it is expected to start trading in October. It is widely touted as an important ingredient in any recipe for tackling South Africa’s economic stagnation and lack of employment growth. It is seen as having a particular role to play in spurring black economic empowerment (BEE).
Conventional wisdom is that the short cut to job creation lies through establishing new enterprises rather than waiting for current employers to prosper.
Getting the start-up capital from banks has already proved cumbersome, if not impossible, for black entrepreneurs. Going to the market via the existing stock exchange would be laughed right off the table, considering the costs and requirements involved.
AltX will boast reduced listing fees and require no profit history to list. Companies seeking a listing will need a share capital base of no more than R2-million.
Noah Greenhill, manager of the new market, said AltX would be keen to target BEE organisations.
The most successful parallel market has been AIM in the United Kingdom, which has admitted more than 850 companies since it opened in 1995. Collectively, these companies have raised more than $10-billion.
In South Africa, this market could include some of those companies already listed on the venture capital and development capital market boards, although they would have to apply for a listing on AltX.
More important, though, is attracting fund managers to back AltX- listed companies. Greenhill claimed this would be accomplished by arranging forums throughout the country where AltX-listed companies would be introduced to fund managers.
This is a crucial strategy, as the Top40, mid-cap and small-cap indices on the JSE account for 99% of the exchange’s market capitalisation. The remaining 1% of market cap is contained in a so-called “fledgling index” of penny stocks.
Some of the market players interviewed by the Mail & Guardian were sceptical that merely introducing companies seeking a listing on AltX to fund managers would be sufficient.
David Shapiro, a director of Barnard Jacobs Mellet Private Clients Services — South Africa’s largest independent stockbroker — said the JSE would have to pump money into the project. It would be naive to think the forums would be sufficient to market these companies, he added.
Loubser countered that the JSE could not be expected to “get this right on its own”. The responsibility rested with the whole country and all its stakeholders, he said, adding that “whatever is commercially viable, will be done”. Loubser would not be drawn on how much the exchange was planning to spend on the exercise.
Department of Trade and Industry Director General Alistair Ruiters is also committed to marketing the exchange. However, he too would not comment on the costs of the marketing.
Also clouding the prospects for AltX is the fact that the JSE is a shrinking environment. An ominous cloud started forming in 2001 when 61 companies, or 10%, disappeared from the exchange in that year alone. Since the beginning of this year 20 companies have delisted.
The solution for Loubser is to strike a balance between making it easy for companies to come to the market and enforcing good corporate governance when they do so.
“The JSE doesn’t make a commercial call — the sponsor must analyse the business plan,” Loubser said, adding the caveat that “capitalists must have the right to fail”.
The severe downturn in the global economy, and particularly the fallout in the equity markets partly explain the JSE’s predicament.
On the positive side, Africa’s largest exchange is already in line with the global trend of greater transparency and lower risk in equity investment. It is ranked among the top 20 exchanges in the world.
This was helped by switching to the world’s oldest bourse, the London Stock Exchange’s Sets trading system and the adoption of the FTSE/JSE Africa indices last year.
Then again, seekers of capital do have other options — the most promising being private equity sponsors.
According to a joint survey by the South African Venture Capital and Private Equity Association (Sacva) and KPMG, private equity investments in portfolio companies increased from R2,4-billion in 795 companies in 2001 to R3,9-billion in 670 companies last year.
The number of new investments made decreased from 534 in 2001 to 433 last year although the average new deal size has increased from R3,8-million to R5,2-million, reflecting an increase in the number and value of larger transactions.
Good news on the BEE front last year was the private equity market’s realisation that BEE investments are an increasingly important element of the South African economy.
In contrast, a study by the BusinessMap Foundation showed that direct black holding of JSE shares was less than 1% towards the end of last year.
According to the Sacva/KPMG survey, the average BEE deal size last year was R3-million compared to R800 000 in 2001. The bulk of BEE private equity funding went to the IT, services, retail and manufacturing sectors last year.
The survey notes that the mining sector has not been attractive for private equity players, but the advent of the Mining Charter “may make this sector an attractive investment for BEE private equity funds”.
On the other hand, the JSE’s AltX specifically targets junior mining enterprises.
Sacva chairperson Malcolm Segal denied that his association and the JSE were at odds.
Segal believes private equity has a role in providing a “feeder stream” to AltX. “We envisage a number of companies in private equity port- folios would have been groomed and schooled to step into the public domain,” he added.