Alternative exits

Written on 01 April, 2007 by Jonathan Crossfield
Categories Small Business

‘Going Public’ means different things to different people. For the entrepreneur it’s the capital injection to take the business to dizzy heights. To investors it’s the pot of gold at the end of the rainbow. While the big players strut their stuff on the ASX, the alternative investments markets offer middle market businesses big opportunities to raise awareness and capital for growth. Sid Subbrahmanyam reports.

In 1996 Sigma Company Limited, one of Australia’s leading pharmaceutical companies, was caught in a bind. It wanted to raise capital, but listing on the Australian Stock Exchange (ASX) would mean a loss of control by the current owners, a co-operative of pharmacists, under the ASX ‘one share, one vote’ rule.

Martin Ryan, founder of Austock Brokers, resolved the catch-22. He created a structure where Sigma could issue non-voting ‘investor shares’ to external investors. That way, Sigma would get the capital, the pharmacists retained control of the business and the market could trade investor shares, albeit outside the conventional trading environment of the ASX.

Such was the beginning of Australia’s first ‘exempt market’, a low-volume financial market exempt from the licensing rules otherwise required by the government.

Austock went on to become the most successful exempt market operator in Australia, listing 22 companies with a total turnover of $500 million, and has since transformed the structure into the Australian Pacific Exchange (APX).

Growing Pains

Raising capital is the bugbear of many growing businesses. Local enterprises conventionally use debt rather than equity to raise capital. However, debt capital comes with high risks attached, such as the possibility of losing pledged assets like the family home or the business itself.

Equity capital has fewer penalties for failure, although it requires a higher investment resource. The most common method of gaining equity capital is to list with a stock exchange. Public listing not only raises capital for the business, but also increases the profile of the company.

Listing on a stock exchange is traditionally associated with larger corporations seeking to extend their market profile. But, does size really matter? Not anymore. Alternative stock exchange markets have been designed to enable small-to-medium enterprises (SME) to raise equity via a public company listing. These markets recognise the fact that SMEs drive a huge portion of economic growth and require a platform for strategic investment opportunities. The Bendigo Stock Exchange (BSX), Stock Exchange of Newcastle Limited (SENL), both operated by the Newcastle Stock Exchange Limited (NSX), and the APX are alternative markets tailored to address the needs of SMEs.

To list on the ASX, a company must satisfy a number of regulatory requirements, including either a $10 million market capitalisation, $2 million in net tangible assets or $1 million in profits. Moreover, a minimum spread of security holders must be achieved; significant hurdles for an SME seeking an initial public offering (IPO) on the ASX.

Martin Ryan, now Managing Director of APX, says the APX was specifically designed to accommodate the various needs of different companies.

“Whether it’s dairy companies or wheat companies, we offer co-operative style businesses a listing on our exchange, where maybe only members can buy or sell shares. The ASX does not allow that,” he says.

Richard Symon, CEO of NSX Limited, has a similar view. He adds that the Newcastle and Bendigo stock exchanges are nurturing grounds for SMEs, where the main goal for listed companies is to eventually join the big players on the ASX.

“We have rules that are probably more suitable for SMEs. The rules are less restrictive than the ASX. They’re designed to incubate companies that show an intention to migrate to the ASX in the future,” says Symon.

Guiding Light

The problem many companies face is the lack of knowledge of the capital market. Alternative capital markets provide a greater level of guidance in achieving the fundamental goal of raising capital. According to Ryan, alternative markets like the APX have a greater interest in companies having assisted with their initial capital raising.

“The key is companies have to come with an advisor or a broker who can hold their hand and help them with the process, rather than going to the ASX and getting abandoned. The smaller companies need an advisor to help inform the market. Assisting with an initial capital raising allows us to identify with that company and help it to become successful,” says Ryan.

Australia’s rural regions are alive with innovative enterprise, however there seems to be a lack of capital to support regional businesses. These are not enterprises backed by large corporations. Nor do they attract huge interest from venture capitalists. As such, public listing becomes a lucrative option. NSX Ltd’s Richard Symon believes that the historical link between rural communities and the BSX and SENL is key to getting these regional businesses on the market.

“Regional communities should be promoting the concept of a regional exchange to foster their local businesses, where we can create marketing opportunities for them,” says Symon. He adds that the BSX has a better understanding of traditional businesses in rural areas, allowing for greater assistance to be provided.

“Not only is the cost of compliance removed from the exchange itself, it is actually put in the hands of the people who know the businesses, and respective current advisors of those businesses. That’s the part of the model that we really love.”

Other Alternatives

There are alternative markets that provide an avenue of capital investment for smaller companies. One such market is Melbourne-based BizExchange, which provides an environment for the full or partial sale of businesses to potential investors.

According to Andrew Kent of BizExchange, it is an independent market that facilitates buyers, sellers and investors without actually taking part in the transaction itself.

“The dilemma that most growing businesses face is gaining awareness in the market. BizExchange facilitates this process using its network of contacts,” says Kent.

BizExchange acknowledges that business advisors are key partners in the process of selling, buying or expanding a business, so it is designed to meet their exclusive needs in conveying professional advice and effective assistance to their clients.

It is no secret that the key to successful business growth and development is the ability to obtain and secure appropriate financing. Raising capital is one of the most fundamental business activities, with many entrepreneurial success stories beginning with a successful capital-raising tale. Venture capital is not appropriate for every business, and most businesses in Australia are not large enough to list on the ASX. The multi-platform alternative capital markets provide a realistic means for companies to raise capital without losing complete control of their businesses. Just ask Sigma.

The Global Business Nursery

Over the past couple of years, a front runner has emerged in the battle to be the exchange of choice for local companies seeking to gain global recognition.

With more companies in Australia seeking alternative stock exchanges, the London Stock Exchange’s Alternative Investment Market (AIM), has become an appealing option for local businesses seeking finance.

Launched in 1995, AIM is the London Stock Exchange’s international market for smaller, fast-growing companies. Despite being in business for 11 years, AIM has flourished in recent times and is becoming globally recognised as a leading ‘business nursery’ for the European market.

AIM’s simple regulatory regime is its main asset for attracting smaller companies. It is designed to be a flexible trading environment for SMEs, forgoing minimum requirements regarding a company’s track record, size or the percentage of shares in public hands. AIM has become a chief competitor in the UK to venture capital (VC), while at the same time offering a way out for earlier stage VCs.

More Australian companies are listing with AIM, says Martin Ryan of Australian Pacific Exchange.

“The rationale for Australian companies listing on AIM is the tax benefits for investors. Companies that have genuine off-shore operations also list on AIM, as they are better looked after there,” he says.

The Newcastle Stock Exchange (NSX) Limited is also watching AIM closely.

“A number of initiatives that are being taken by NSX and BSX have followed the AIM role model,” says NSX CEO, Richard Symon.

To date there are 47 Australian companies listed on AIM.

Article courtesy of Australian Anthill Magazine.

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