Exchanges looking to private arena as capital markets evolve

Singapore

STOCK exchange operators around the world are increasingly looking beyond their traditional business to tap into the domain of private and early stage companies, as capital markets evolve with larger deals done outside the public markets.

The London Stock Exchange (LSEG) group announced last month a strategic investment in Floww, a platform that connects investors with privately held companies seeking funding. LSEG will work with Floww to launch a private primary capital raising facility, and explore liquidity and secondary market options as part of its move "to modernise the capital markets and further build its presence in the private markets".

Similar moves have been made by exchange operators elsewhere.

Nasdaq in 2014 launched the Nasdaq Private Market platform as a liquidity provider for private companies. It spun the platform off last year into a joint venture with leading US banks to boost activity.

Closer to home, the Singapore Exchange (SGX) is a shareholder of private markets platforms ADDX and CapBridge.

Experts told The Business Times that such trends are likely to persist, with the growing size of private markets and exchanges looking to stay relevant as more companies opt to stay private longer.

Andrew Thompson, head of deal advisory and private equity, Asia Pacific at KPMG in Singapore said: "Getting involved in (private) exchanges - either investing or through some sort of strategic alliance - is fundamentally a defensive measure because as the private capital markets are expanding, it's happening at the expense of public markets."

He noted that there has been an "explosion in private markets funds under management", driven by superior returns compared to public markets on a 10-year basis.

Data from Cambridge Associates as of June 2021 showed its US private equity index had notched annualised 10-year returns of 16.7 per cent, outperforming the 12.5 per cent from the Russell 2000 index over the same period.

Investor interest in the asset class is also likely to rise, with data from Preqin estimating private equity assets under management to more than double to over US$11.1 trillion by 2026, from around US$5.3 trillion as at end-2021.

Given the ample capital available in private markets, companies are choosing to stay private for longer, without having to go through the costly and cumbersome process of an initial public offering (IPO).

Thompson said: "If you're a high growth company trying to grow and take advantage of your markets, being listed is very distracting and costly - both in terms of time and money."

Tay Hwee Ling, disruptive events advisory leader, Deloitte Southeast Asia and Singapore, observed that the capital markets have evolved in the past 2 years amid the Covid-19 pandemic.

"A lot of startups are raising millions and hundreds of millions of (dollars) from private equity," she said, noting this was a break from past trends when companies looked to banks or the public markets instead.

Exchanges are simply responding to the trend in the market, while corporates and investors who invest in private companies are looking for platforms to trade their interest in unlisted companies, Tay added.

She said: "I will see this as… a necessary trend because there is a demand in the market."

Exchanges can play a key role in the private arena by enabling investors to gain access to deals.

Thompson noted that generally, major deal flows would go to the well-established and known investors, such as large private equity firms, family offices or sovereign wealth funds.

However, individual investors have a growing appetite for such investments, as they seek to tap growth opportunities that can come with earlier stage companies. With companies staying private for longer, investors would naturally be keen on opportunities before the IPO stage.

Thompson, however, cautioned that early access comes with risks, unlike listed companies which are subject to rigorous due diligence and scrutiny.

Apart from tapping investor demand as the capital markets landscape evolves, the private arena is also a growth opportunity for stock exchanges.

Tay said: "To (the public exchanges), it is also a pathway for them. If you enter into this market early enough, while these companies are growing and raising private funds, one day it will be your pipe for the IPO."

Thompson noted that every exchange faces this strategic problem with the rise of private markets. "I think most exchanges are having thoughts in this direction about how they partner with some of the private capital community," he said.

While working with private exchanges has been a strategy for some, other possible measures being taken by exchanges include having lighter-touch regulations with lower costs and regulatory supervision, he added.

Regional bourses have taken various steps to tap on a wider pool of companies.

The Stock Exchange of Thailand (SET) is launching a third board known as the LiVE Exchange to serve small and medium enterprises (SMEs) and startups, with the listing criteria taking effect last month. The new exchange - which has more relaxed listing criteria, and is open only to qualified investors - could provide smaller companies with flexibility to raise capital and allow them to be groomed for future listing on SET's main board or Market for Alternative Investment (MAI).

The Indonesia Stock Exchange has an Acceleration board since 2019, with more lenient criteria for smaller companies, compared to its main board or development board.

Bursa Malaysia is working on a tokenised debt market targeting SMEs that are large enough to go public, but have not sought listings.

Bursa chief executive Umar Swift told BT in a previous interview that the move could give the exchange a larger "share of wallet" among investors, while the SMEs could be coached and brought to the public markets eventually.

Deloitte's Tay noted: "All the exchanges are looking at what is the market demand? What is the trend?"

She added: "Everyone is innovating, looking beyond what they have now to see what else they can add on, continue to stay relevant, and in a way, fulfil the demand from the market."