Why re­spon­si­ble dis­rupt­ing cap­i­tal rais­ing mat­ters

The Star Malaysia - StarBiz - - News - Fil­ter­ing fin­tech RISEN JAYASEELAN star­[email protected]­tar.com.my

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.

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