From Investors Monthly
Life beyond the JSE
We’ll see in 2018 whether alternative exchanges are viable, writes Johann Barnard
It seems that hardly a day goes by without an announcement of a new listing or another broker joining any one of SA’s four operational stock exchanges.
Twelve short months ago, there was one. And by this time next year we might see the recently approved Equity Express Securities Exchange (EESE) already operational.
There has been a long run-up for them to gain regulatory approval — and in the case of ZAR X, legal challenges by the JSE — so their presence in the market is hardly surprising. But 2018 will be the first extended glimpse into what they offer investors and whether these are viable ventures.
ZAR X went live in February this year, followed in September by 4 Africa Exchange (4AX) and a month later A2X Markets. They are dwarfed by the 100-year-old-plus JSE, but they offer a compelling alternative for companies looking for specific or merely alternative sources of capital.
And if companies, their sponsors and stockbrokers see an opportunity in these new exchanges, then surely there’s an opportunity for investors.
That opportunity is presented in many different forms, depending on the exchange and the types of companies that are listing.
ZAR X, for instance, is positioned as a primary exchange that is able to accommodate smaller securities such as BEE vehicles in which majority or exclusively black ownership needs to be retained. A2X aims to attract secondary listings of JSE listed companies that can be traded much cheaper than on the JSE, while A4X is more closely modelled on the ZAR X approach.
"We looked at various exchanges and we got quite excited about the opportunities ZAR X presented," says BayHill Capital CEO Geoff Blount.
The company is planning to list Transformational Investment Portfolio (TIP) on the new exchange next year and required a platform that accommodates its need to retain at least a 51% black-owned majority in real-time while providing liquidity.
The ability to do so, while leveraging off ZAR X’s other technology-driven benefits, made this choice an obvious one for Blount and his team. And this emphasis on technological advantages is likely to be further accentuated as the industry is exposed to tech-driven innovation.
Blount says the greater simplicity is evident in the 70-odd pages that make up the ZAR X listing application, compared to the 500+ pages for the JSE application. In addition, the exchange has introduced real-time settlement compared to the JSE T+3 cycle. This is partly due to technological solutions, but also by operating on a pre-funded account model that lends itself to immediate settlement of transactions.
"What this means is that it’s incredibly simple from an administration perspective if you’re a stockbroker," Blount says. "If you’re not giving credit or not having to trade through nominee accounts, the complexity and settlement burden falls away."
With this increased simplicity, the trading fees can be much lower while also allowing investors to buy in tranches as small as R100. In contrast, the minimum fee alone that is charged by the JSE could easily be that much.
The attraction for companies looking to list is equally strong, and should open the field to many more who would like to access markets to fund more aggressive growth plans.
"So, the new exchanges will have a competitive advantage. I don’t think that means they’re better, but it should allow more companies to access capital via listings," Blount says.
The rapid pace at which brokers and companies are flocking to or planning listings on these new exchanges bears out this positive viewpoint.
By early November, the likes of African Rainbow Capital Investments, Peregrine Holdings and Coronation Fund Managers had completed a secondary listing onto A2X, while stockbrokers RMB Morgan Stanley, Peregrine Securities, Investec Securities, Avior Capital Markets and SBG Securities had been approved.
By the same time, ZAR X had approved brokers including Anchor Securities, Afrifocus Securities, Consilium Securities, EasyEquities, FNB Securities, and Saxo Capital Markets. Listed counters include Senwes, Senwesbel and TWK Investments.
Given Bayhill Capital’s intention to list the TIP stock on ZAR X in 2018, it is clearly convinced of the case for these new opportunities for business owners and investors. But Blount acknowledges they will still need to demonstrate their value if they’re to be viable.
"I don’t think there’s enough space in SA for a lot of exchanges. Our markets aren’t deep enough. The competition will be good for investors because the JSE will have to become more investor friendly.
"Second, with technology and fintech coming in, this will allow more companies to enter the markets and offer a lot more investment opportunities. I hope that in a few years’ time we’ll have lots of companies, lots of investment opportunities and greater depth to the capital markets."