Encouraging greater activity on private exchanges may help liven up Singapore's capital markets

LISTING activity in the Singapore markets has lagged regional peers in the first half of this year, and many new economy startups are choosing to look abroad when they want to go public.

But there appears to be interest in secondary shares in startups, as companies stay private for longer. Reports have suggested growing supply and investor demand for shares in privately held startups, particularly the popular names.

The market for secondary shares in private companies could be an interesting one for development in Singapore, and encouraging more of such private market activity may be one way to liven up the local capital markets.

Potential opportunity

The startup scene in South-east Asia has grown remarkably over the past decade. A report by Golden Gate Ventures noted total capital invested per annum by venture capital funds has increased from US$130 million in 2010 to US$7.7 billion in 2020.

With ample liquidity available, many startups have shunned public exchanges to stay private for longer.

But this trend has meant early stage investors or employees who were granted shares via employee stock ownership plans (ESOPs) have a longer wait to payday.

Anecdotal evidence shows employees increasingly demanding venues to monetise their ESOPs earlier, and companies may become more open to doing so in order to ensure that employee options remain attractive as remuneration.

Meanwhile, these fast-growing companies also remain inaccessible to some investor segments - smaller funds, for instance, or individual retail investors.

There may, therefore, be an opportunity to encourage greater activity on private platforms or exchanges for the secondary trading of startup shares.

Such deals can at present be struck between willing parties, or via some niche platforms. But this is inefficient and challenging for those unable to do the necessary due diligence.

Public and private efforts to boost the infrastructure for and participation in the trading of private company shares could be something for Singapore to consider as an additional element to boost the startup scene here.

Other benefits

Beyond affording liquidity opportunities to early investors and employees, a regulated private market could also help boost the overall capital markets landscape for Singapore.

In the first half of 2021, Singapore saw just three initial public offerings (IPOs). They raised around S$338 million, or about half the amount raised in the same period a year ago.

This performance lags regional markets such as Thailand and Indonesia. Meanwhile the number of listed companies on the Singapore Exchange (SGX) has fallen - to 675 as of end-July, from 707 a year ago.

One possible reason for this underperformance is Singapore's small and relatively developed economy. Our neighbouring countries are larger and more scope for development. Their pool of companies that need to raise capital would naturally be larger.

Even so, Singapore has no shortage of home-grown companies that need to tap public markets.

Grab, Sea, Carousell and Razer are names familiar to most Singaporeans. Their brands feature prominently in our everyday lives, but they are not found on the local exchange as they have listed abroad or are considering doing so.

Some reasons suggested for this unwillingness to list here are the perceived lack of liquidity in the Singapore market, and a general investor unwillingness to give higher valuations to growth counters that are not yet profitable.

Enabling and encouraging greater access in the market for pre-IPO counters may help. Giving investors opportunities to gain early exposure to tech or growth counters may reshape their attitudes towards valuations and the business models of such companies. This may pave the way for such local listings.

It is more important than ever for local investors to familiarise themselves with new economy counters, given their sheer size.

New York-listed Sea, for instance, is now part of the MSCI Singapore Index. Sea will likely be the largest index component - ahead of all the local banks - when its full weight is accounted for in February next year. Meanwhile, Grab's US$39.6 billion valuation also puts it ahead of UOB's S$44 billion market cap.

The new economy segment can no longer be left out of one's portfolio.

Efforts taken by SGX over the years to pave the way for such listings, such as allowing dual-class shares, have seen limited success. Other initiatives to push for dual listings, or the potential introduction of special purpose acquisition companies, may eventually help bring some growth players to the local market and improve investor familiarity.

But growing the private markets space for startups with a secondary market is another option worth exploration.

There are already private market platforms and exchanges in our local market.

Private investment platform Fundnel, for instance, is already helping to facilitate secondary sales.

SGX has also backed 1exchange and ADDX (formerly known as iSTOX), both private exchanges.

These have been around for a while, but remain niche platforms. Currently, they only serve accredited or institutional clients. And not all accredited investors may be willing to participate, due to a lack of understanding.

If more is done to encourage and grow the activities of such players there is a chance that our overall capital markets ecosystem could come off better from it.

Naturally, there would be challenges in striking the appropriate regulatory balance given the high-risk nature of private markets.

But as more companies stay private for longer, perhaps it is timely to consider if it would be worth the effort to widen or deepen the access for investors in such private markets to potentially benefit the overall ecosystem.

READ MORE: ESOP fables: A cautionary tale for those joining startups