Bridging the funding gap
Stephanie Jacob 
Lam says the suitability of an investment will be down to the company’s investment profile and the strategy of the individual fund, with Srividya adding that private equity is restricted to fast-growing companies in certain sectors
BURSA Malaysia’s newly-launched Leading Entrepreneur Accelerator Platform (LEAP) market for small and medium enterprises (SMEs) has seen good response as more than 40 companies are said to be eyeing a listing on it.

SMEs seem to welcome the prospect of tapping into capital market funding as previously they turned to banks.

However, other players are more circumspect and have raised concerns. A recurring question seems to be whether there is adequate liquidity in the market for the LEAP candidate companies to raise funds from. This is largely due to the rule that only sophisticated investors may invest in the LEAP market.

Potential investments

The qualified investors are individuals with more than RM3 mil in assets or earn a yearly individual income of more than RM300,000 or RM400,000 in the case of husband and wife combined. Elsewhere, corporate investors, partnerships and trusts are required to have net assets of RM10 mil or more to buy stakes in these newly-listed entities.

Such “demanding” conditions gives rise to concerns that liquidity may ultimately become an issue, given the seemingly smaller pool of available investors.

However, KPMG Malaysia audit partner Lam Shuh Siang believes the new market has the ability to attract deep pocket investors given it is perceived as a new investment opportunity with access to a wider pool of potential investments.

“The LEAP market provides investors with more options as well as allows for further diversification of their investment portfolios, something which I believe is always welcomed,” Lam tells FocusM.

Furthermore, investing in this board comes with the ability to trade on their investment (although momentum trading is forbidden). This in turn offers investors a clear divestment option which is usually less readily available when investing in these types of companies through other means such as private-equity or venture capitalist investments.

Duff & Phelps managing director Srividya Gopalakrishnan believes that the usefulness of the LEAP market should not just be viewed from the lens of investors. She stresses the need to consider the interests of issuers which in this case are the SMEs.

“While it is important to understand the needs of investors and the liquidity factor before introducing a new market, it is also critical to look at the needs of the issuers who constitute 96% of the businesses in Malaysia,” she argues.

Srividya points out that SMEs often struggle to raise funds to fulfil their capital requirements. “While bank financing is available only for property-heavy companies, private equity is restricted to fast-growing companies in certain sectors and comes with its own expectations from investors” she asserts.

Hence, the LEAP market is an ideal platform to satisfy the capital requirements of the large group of currently underserved companies which are not large enough to tap the Main Market and other modes of financing.

According to Bursa Malaysia, the primary aim of this new market is to address the long-standing funding gap faced by the SME community by opening up an avenue for them to raise funds on the capital market.

In the past, the SME market has been dependent on financial institutions for almost 96% of all their fundings.

Such a concept is not new given similar boards exist in several Asian bourses, including South Korea’s Konex (Korea New Exchange) which is what LEAP is modelled on.

Srividya acknowledges that based on the experiences of other mid-markets globally, investor demand and liquidity are usually not high at the beginning. Nonetheless, in many instances both factors tend to pick up over time.

“There has been a significant increase in both the demand for and the liquidity of markets like the UK’s Alternative Investment Market or Singapore’s Catalist market over the last few years,” she observes.

Alternative investment

Restricting access to this board to sophisticated investors have led some to view it as an alternative investment class. This has given rise to suggestions that it will be out of bounds for many funds given many have mandates that restrict or limit their risk exposure.

Srividya, however, doubts that all issuers on LEAP will be new economy or start-up businesses as the board is open to companies at various life stages.

KPMG’s Lam concurs, saying that the suitability of an investment will be down to the company’s investment profile and the strategy of the individual fund.

“[An investment] will be subject to the fund’s own assessment and analysis, regardless of whether the investee company is listed on the LEAP market or not,” he points out.

Less onerous

Another major selling point of the LEAP market is the less onerous listing processes and reporting requirements which helps reduce listing costs.

For example, an issuer is not required to produce a prospectus but an information memorandum. It will also only need to report financials semi-annually and issue annual audited accounts rather than a full annual report.

This has led to suggestions that investors may be inadequately protected or not receiving timely information. This will then affect their ability to make sound investment decisions.

However, a commercial law expert says such concerns are somewhat assuaged by the fact that companies are still required to disclose anything material to investors.

“Listed companies will still have to issue announcements on anything that is material information and this will allow investors to make a judgement on their investments,” says the lawyer who declined to be named.

“Furthermore, companies will have to ensure that their accounts conform to the Malaysian Financial Reporting Standards and that they are audited by an Audit Oversight Board-approved auditor,” he added.

An adviser- driven market

THE Leading Entrepreneur Accelerator Platform (LEAP) market will be what is called an adviser-driven market. This means that the adviser primarily assesses the suitability of an applicant seeking to list.

Potential issuers are required to engage a Bursa Malaysia-approved adviser which will vet their suitability and guide them through both the listing process and for a period of three years post-listing.

The approved adviser will also be responsible for conducting due diligence and guiding and helping prepare listing documents for the prospective issuer.

Bursa Malaysia recently expanded its approved advisers list for this new market to include corporate financial advisers. Six new advisers have recently joined the 14 existing principal advisers and sponsors which already serve the Main Market and ACE Market.

Following LEAP’s official launch at last month’s Invest Malaysia 2017, it has been announced that 11 hopefuls have engaged advisers to assess their suitability and assist them with the listing process.

The hopeful issuers are Cloudaron Pte Ltd, Agrofresh International Group Sdn Bhd, Red Ideas Holdings Sdn Bhd, Polymer Link Sdn Bhd, Trustgate Bhd, Accent Wellness Global Sdn Bhd, East West One Group Sdn Bhd, Macfeam Sdn Bhd, Upstream Downstream Process & Services Sdn Bhd, ProEight Sdn Bhd and Safetyware Sdn Bhd.

It is understood that Bursa Malaysia are hoping to see a few companies listed before this year-end.

This article first appeared in Focus Malaysia Issue 245.