A complex listings picture

The National Treasury does have concerns that the number of listings of smaller businesses on public exchanges is not growing.

However, this isn’t a uniquely South African issue. Primary listings are declining in many jurisdictions, notably in Europe. The only region that has had an increase in listings is Asia.

The factors driving JSE listings include:

● Transaction costs both the legislative and regulatory costs of being a public company. They include annual listing fees, listing requirements and the additional governance costs of complying with regulations that are not imposed on private companies;

● Financial visibility the cost of capital and lower valuations arising from a lack of interest by investors, particularly financial institutions, are reflected in a lack of market liquidity in the company’s shares;

● Agency problems these arise from the dispersed shareholding of a public company, leading to management and investors having divergent interests, which adversely affects the performance and valuation of a company;

● Financial performance this can affect the benefits of being listed. For example, low growth prospects reduce the need to raise capital, which is one of the reasons for listing on an exchange;

● Macroeconomic factors such as economic growth, the level of interest rates and corporate taxation and other environmental factors can affect a company’s decision to go private;

● Regulatory environment while the regulatory environment is a factor in overall transaction costs, in our view this is not driving the change in the number of listings. Regulatory requirements are a critical aspect of ensuring confidence in exchanges, which can drive listings.

There is a clear case to consolidate the number of retirement funds to reduce administrative costs for members and improve retirement outcomes. Larger retirement funds, with a broader distribution of members, would also be able to increase risk in their portfolios, which could lead to larger investments in small caps and their shares. Similarly, collective investment schemes can offer higher-risk small-cap funds (which are diversified) where there is sufficient retail appetite to invest in them. There is no regulatory barrier to those types of investments.

A global trend, from which South Africa has not been immune, is the shift to passive investment strategies, with larger numbers of asset managers (through mandates) adopting passive strategies (buying the indices) which does concentrate investment in a limited number of stocks (the top 40). While we have a lot of active asset managers in South Africa, the biggest asset manager, in the form of the Public Investment Corp, has a largely passive strategy. This means that liquidity is in a small number of shares.

In our cover story of April 6, we suggested that the shrinking JSE isn’t the fault of the exchange alone, and argued for regulatory changes to drive funds into the small cap sector. Treasury says otherwise

Macro environment

Generally, a low interest rate environment has favoured alternative forms of capital raising, including private equity and bank finance (debt at or near 0%, with the tax advantages vs equity). This can be seen in the structurally lower level of listings in the low interest rate period after the global financial crisis. For listed firms, many have chosen to reduce the number of shares through share buybacks, which boost prices, making them larger in indices and driving liquidity to these stocks.

The area in which there has been a strong increase in listings is the highgrowth tech sector, where companies prefer raising capital through private markets. The profile of South African companies doesn’t align to investor interest and growth areas.

This implies an innovation problem, not a regulatory one.