Why responsible disrupting capital raising matters
INCREASINGLY, initial public offerings (IPOs) are becoming more scarce. And when they do take place, they are less attractive. One obvious reason is the preponderance of private capital in the market.
Across the causeway, the Singapore Stock Exchange has for some time been seeing a significant decline in new issuances on its bourse, save for a few real estate investment trusts (REITs). As Lee Meixian of Singapore Business Times explained in a recent article, the culprits are deep-pocketed private institutional investors seeking investments, which have accounted for a good number of Singapore take-privates last year.
Then in the United States, a slew of technology firms led by Uber are aiming to make it to the public markets. Some commentators are already betting that 2019 will become some kind of blockbuster year for tech IPOs.
But the problem with these listings is that they are structured for the earlier investors to exit.
What that means is that buyers of the public share issuance are coming in later after the first round of profits have been reaped by the big early investors though the listings. In many cases, the valuations of these tech IPOs or other private equity (PE) backed IPOs are going to be stretched, to cater to the early investors’ exit.
In the life cycle of investments, private equity and venture capitalists have played the role of taking on more riskier capital and hence being allowed to enjoy higher returns when their bets turn out well.
The investing public is then offered such stock in companies which have gone through the rigours of financial discipline, acute strategic direction and suitable management, all helped by the experts sitting in the private equity firms.
But increasingly, the public is disillusioned with this model.
For one, some companies coming to market after all that help from the PE firms, still do not perform well. In some cases, the companies are ladened with too much debt.
But perhaps more importantly, part of the investing public reckons that they are able to assess risk property and should be given a chance to back companies in their earlier stages.
That had given birth to the concept of crowd-funding, initially in the United States.
And now in countries like Malaysia, the good news is that licensed platforms are affording the public to participate in equity crowd-funding and peer-to-peer lending options.
There is also the Leap Market in which companies not quite ready for a full blown listing are able to get listed.
Many stock market investors remain unfamiliar or unconvinced of these investment opportunities. And in the case of Leap Market, getting deemed to be an accredited investor is a cumbersome task that many don’t want to be troubled with.
Another problem is the offerings and the size of their issuances are small, so it does not cater to the investing public entirely.
That though is a function of the market. The regulators have done what they can by including these capital raising innovations into their rules.
Another area of innovative funding is that of cryptocurrencies and their initial coin offerings or ICOs. We all know how many ICOs have turned out to be scams and the rest have failed to deliver on their great promises.
While most of the first level of projects trying to raise funds through ICOs are not to be touched, the concept is growing into something more fundamentally sound.
This will be when regulators get into action and lay down strict rules of how these blockchain-based projects can raise funds. Just as important is the subsequent scrutiny that the project owners should be subject to.
In many of the fund raising instances done by ICOs, the project owners have quickly cashed out their cryptocurrencies into fiat money and used it willy nilly.
In the regulated IPO scenario, companies are bound by strict rules of how they spend funds raised, subsequent accounting rules and disclosures and even within such tight rules, some have managed to squander and steal money.
On the positive side, the token economy makes many promises of how capital raising can be democratised. It is the innovation in that space that is much needed. And regulators in Malaysia ought to embrace it and regulate the space, lest we lose out on this.