Wednesday, January 19

JSE AltX offers some benefits, but it is not a magic wand

South Africa is home to the largest stock exchange in Africa and the 20th on the word by market capitalization. The Johannesburg Stock Exchange (JSE) was established in 1887, during the country’s gold rush.

Well-functioning markets are considered preconditions for the financial development of economies. While many African equity markets remain small in terms of market capitalization, traded value, and turnover, the JSE is an exception. That is not to say that he did not have a good amount of scandals over the years they have undermined its credibility.

In 2003, the JSE established the JSE AltX, a division for small and medium-sized enterprises (SMEs) with high growth potential. The aim was to provide them with a platform to access public financing with less strict criteria than banks and the main board of JSE. It was conceived to help SMEs improve liquidity and access capital markets.

However, in my investigation, many of these promises are not kept.

I looked at three categories of companies: those that had been delisted, those that are currently listed, and those that have migrated to the main board from 2008 to 2018.

The results paint a not-so-compelling picture for growth and sustainability in the alternative stock market.

For example, analysis of various indices that measure growth and sustainability in publicly traded companies shows a weak relationship with better market capitalization and liquidity. For many delisted, listed and migrated companies, the improvement in liquidity, growth, profitability, improved leverage, and sustainability was minimal.

I used these measures because they allowed us to assess whether the JSE AltX platform is a catalyst for growth. I found that there was only a 50/50 chance that the JSE AltX would play this role.

For sustainability, the results present a dark picture of participation in the stock market. JSE AltX offers different benefits for various groups of companies. But it should not be considered a magic wand.

The insights should be useful to investors evaluating their investment decisions. And to policy makers trying to find ways to support initiatives that benefit SMEs with high growth potential. Lastly, it could help JSE AltX think about how to resurrect the stock market.

Stock exchanges and SMEs

Common themes around SMEs (job creation, innovation, economic growth) have attracted a great deal of research. The role of stock exchanges in SME performance has been less explored.

Ideally, stock exchanges provide continuous trading markets, thus creating investment liquidity and growth opportunities. Such a platform could potentially improve the performance and sustainability of SMEs, as liquidity is seen as a prominent factor in business failure.

The JSE AltX is based on the model used for the London Alternative Investment Market (AIM) in the UK. It is considered the most successful alternative exchange in the world. Its listing requirements are less onerous than the main exchange. And there is no minimum number of shares required to be in public hands. It is also not a business record.

To be listed on the JSE companies have to have Share capital of at least R25 million, three-year earnings history, and a minimum pre-tax profit of R15 million. For JSE AltX listings, companies simply require R2 million of share capital, no earnings history, and no pre-tax limits. These requirements have been was further alleviated during Covid-19.

Since its inception, the JSE AltX has had its fair share of successes and failures.

Its weaknesses include the fact that 40% of the companies that had migrated to the main board in 2019 were trading in red.

In addition, the exchange is characterized by the inability to convert securities into “cash” without affecting its market price, and investors perceive it as high risk.

Importance of SMEs

South Africa suffers from very high levels of unemployment. Many argue that this can be solved promote and support SMEs because they are more likely to create jobs.

But research suggests that not all SMEs contribute equally to job creation and economic growth. And that, specifically the SMEs with the greatest potential for macroeconomic benefits, including job creation, are those that would be listed on the stock market. For example, high-growth SMEs created about 86% of new jobs through companies less than four years old.

However, 75% of SMEs still fail. This can be attributed to a number of reasons, ranging from talent, skills, and inability to secure the funds necessary for growth.

Therefore, it is important to understand what makes SMEs achieve sustainable growth. And then the necessary enabling conditions will be created to enable high-potential SMEs to realize their potential need.

While various efforts are made to encourage SME start-ups, sustainability and growth are often limited by funding. This remains a major limitation to survival. Factors affecting financing needs can include where an SME is in the life cycle, as well as the rate at which the business grows.

High-growth SMEs are likely to have higher expansion capital requirements and can obtain financing in the form of equity capital or loans. However, funding is often biased against SMEs. Ideally, capital should flow from investors to SMEs.

This is where a platform like AltX can play a role.

So why hasn’t it worked?

For many investors, JSE AltX’s less burdensome listing requirements have created a perception of risk. This has put off potential investors.

Second, many of the best JSE AltX models have migrated to the main board. This has left the platform struggling with companies that are not performing well.

Third, relaxed listing requirements do not adequately prepare SMEs for the challenges of a stock market environment. They may also not be considered transparent enough for investors.

Whats Next?

To enhance its attractiveness, it could be helpful for the exchange to focus on areas such as listing requirements and efforts to enhance the reputation of JSE AltX.

In the future, the JSE AltX assessment could benefit from the expertise of the CEOs of publicly traded entities. These would provide insider insights related to your experience in the stock market. This would allow researchers, companies, JSE AltX and other relevant stakeholders to gain a better understanding of JSE AltX performance and performance expectations, as well as help make decisions about inclusion on the platform.

What we do know so far is that the numbers don’t lie.The conversation

Nthabeleng Mmako, Senior Lecturer in Entrepreneurship, University of South Africa

This article is republished from The conversation under a Creative Commons license. Read the Original article.

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