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BT EXCLUSIVE

SGX, CapBridge eye growth-stage companies

Compared to private equity networks, companies and investors will have greater access to each other on the private exchange

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Mr Chen (left) says CapBridge has seen a lot of interest from family-owned firms in the region; Mr Nasser (right) notes that firms now need to raise growth capital sooner.

Singapore

ENCOURAGED by the flush of capital in the private market, SGX-backed CapBridge has developed a licensed private stock exchange that aims to facilitate deals more efficiently, giving companies and investors greater access to each other on a single platform.

The private space is increasingly outpacing the public market in terms of investments. In 2017, private equity (PE) deal value in the Asia-Pacific was more than double the initial public offering (IPO) proceeds from stock exchanges. Just five years before, PE funds outweighed IPO proceeds by only 37 per cent.

It is an opportunity too good to miss for local startup CapBridge. In an exclusive interview with The Business Times, chief executive Johnson Chen said that the traditional private investing space is a fairly closed system where firms take a long time to seek out potential investors and close a deal. Such deals typically emerge out of the informal networks of bankers and brokers.

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"But a formal marketplace serves as an open system that reaches a far wider audience than what you would be able to achieve on your own. And by aggregating the collective demand, the price discovery mechanism is much better and more efficient," said Mr Chen.

The private exchange - called 1exchange (1X) - allows the primary and secondary trading of private companies' securities and structured products by accredited and institutional investors. CapBridge is targeting growth-stage companies - both family businesses and venture-backed firms that have more than US$5 million in revenue for the most recent 12-month period, and have raised at least US$10 million in institutional financing.

The startup was founded in 2015 as a primary capital raising platform for private companies. There are currently about US$900 million worth of deals on CapBridge available for investors to partake in, though companies looking to list on 1X are not required to do a primary capital raise on the platform first.

Last year, SGX snapped up a 10 per cent equity stake in CapBridge Platform, the CapBridge subsidiary that operates the online portal for capital raising.

The investment, which was carried out through SGX unit Asian Gateway Investments, was part of a more than S$4 million financing round that was supported by early stage investors including US-based venture capitalist Timothy Draper.

Mohamed Nasser Ismail, head of equity capital market (small and medium-sized enterprises) and capital market development at SGX, told BT that firms are needing to raise growth capital sooner than when they are ready for the public market.

"There is a fundamental change in the nature of the enterprises of the future, where they rely a lot on the scalability of their business models," said Mr Nasser, adding that high growth curve of the firms' development happens when they are still private.

He pointed out that technology has helped to fuel this change. "If you cast your mind about a decade back, it would be quite difficult to imagine a company like Grab raising so much money and not going public."

Mr Nasser said that SGX intends to tap the pool of companies to prepare some of them for an eventual listing when they are ready to go public.

1X serves as an intermediate ground for an IPO as well, said Mr Chen. Similar to public listing conditions, companies on the 1X would have to comply with certain standards of governance such as financial reporting and material disclosures.

CapBridge announced last month that Deloitte would be providing services such as audit and assurance, business consulting and risk advisory to companies listing on 1X.

SGX's investment into CapBridge to develop a seamless pathway from the private to public sphere brings to mind Nasdaq's joint venture with trading platform SharesPost in 2013, from which emerged the Nasdaq Private Market (NPM).

NPM recorded 33 liquidity programmes in the first half of this year, up from 19 in the same period in 2017. The total transaction value also spiked to US$10 billion from US$733 million a year ago, on the back of a few undisclosed large deals.

Uber is believed to have traded on NPM; the firm confidentially filed for an IPO this month.

Mr Chen said that CapBridge has seen a lot of interest from family-owned firms in the region. These companies hope to use 1X to manage their capitalisation table for succession planning, or to provide second and third-generation shareholders with a degree of liquidity for their holdings.

Current exit options are either through an IPO, or a direct secondary sale. But a company might not be ready for the former, and the latter can be time-consuming and hard to understand for investors as private shares retain complex rights and obligations, said CapBridge.

Furthermore, liquidity is limited because there is no ready market for a subsequent sale, added the firm.

Through 1X, investors can also break their stake up into smaller units for other investors, said Mr Chen.

"In the traditional fashion, the size of investments tend to be quite large. For instance, venture capital investments are typically in the millions," he said. "But with the exchange, we can actually break these chunks into smaller sizes to allow other investors to partake in the opportunity, leading to an increase in liquidity."

With companies and investors now being onboarded onto the platform, CapBridge's ultimate goal is to help companies secure their required financing and investor base.

Mr Chen said: "We designed this to be an institutional-grade aggregated private marketplace. Now that we have gotten the Recognised Market Operator (RMO) licence, we are positioning this as a choice venue for deserving companies to raise funds."