Alternative Assets – New, Different and Democratic Ways of Raising Money
As market regulator, Securities Commission Malaysia (SC) constantly looks at alternative ways and means for companies to raise capital. This is in addition to conventional equity and fixed income markets or debt. Many of these so called means are new to our market but given the right level of awareness and education, growth can be phenomenal and eventually they are likely to become significant sources of funding.
Equity crowdfunding (ECF) is a growing market segment which democratises the financing process by using technology to provide small participants and entrepreneurs with easy access to seed capital that would not otherwise be available to them.
Malaysia’s SC became the first regulator in ASEAN to introduce a regulatory framework for ECF in 2016 and is among the first in the Asia-Pacific region. The Small and medium enterprises (SMEs) contribute to and make up a large part of the Malaysian economy; SMEs are a major part of the engine for growth. Hence, providing multiple and easier access to capital fundraising will not only help SMEs with access to capital but also boost job creation, raise income, increase investment in human capital which will contribute to improving the economy overall.
It is anticipated that ECF will become a significant source of funding for small businesses. Azhar Zabidi, CEO of Capital Markets Malaysia (CMM), said there needs to be greater awareness around ECF. “A lot of people still do not understand it and more needs to be done to develop an understanding of how ECF works and how ECF can help both entrepreneurs who need capital and investors who want to invest in small businesses or even start-ups.
“Entrepreneurs do not need to go through an expensive IPO (initial public offering) exercise to raise funds and they only have to pay if a funding exercise is successful,” he explained.
The six registered platform operators are Ata Plus, Crowdo, CrowdPlus.asia, Eureeca, FundedbyMe and pitchIN. In essence, they vet ECF proposals for viability and then promote them on their websites and in other ways to investors who can range from retail investors to sophisticated investors.
These ECF platforms have seen notable successes. As at end of December 2016, Kakitangan.com holds the record as the fastest to meet its minimum funding target. Parenthood under Crowdo’s platform, raised RM 2.65 million, surpassing its minimum threshold of RM 1.05 million by 251% which was also among the largest amount raised through the ECF platform in Malaysia. Through the FundedbyMe platform, Halal Speed Dating managed to attract the largest investment by foreign investors that amounted to 25% in a particular deal.
Thus far, the Malaysian ECF market has managed to attract foreign investors from Australia, Finland, Germany, Singapore, Sweden and Turkey. In 2016, a total of RM 10.41 million was raised by 14 issuers in the ECF market in less than one year and for first half of 2017, RM 5.91 million has already been raised.
SC chairman Tan Sri Dato’ Seri Ranjit Ajit Singh described the ECF framework as an important milestone for inclusivity in the Malaysian capital market. “The establishment of the ECF is a component of SC’s strategy to democratise finance. Over the years, Malaysia has developed a diversified and well-established RM2.8 trillion capital market, helping businesses to grow as well as financing long-term investments in the economy.”
From the early successes experienced by ECF platforms, it is expected that there will be continued growth as the investing public and potential SMEs in need of capital can become more aware of this innovating financing option.
Following on from the moves to set up ECF in Malaysia, SC introduced peer-to-peer financing (P2P financing), a form of digital innovation which broadens the ability of entrepreneurs and small business owners to unlock capital from a pool of individual lenders in small amounts. Unlike in the case of ECF, P2P financing is more akin to lending money to businesses.
As of first half 2017, two P2P operators have gone live with a total of RM2.5 million raised. The first P2P operator went live in February 2017 and the second operator went live in June 2017.
P2P has a quick turnaround time to obtain financing which better suit the needs of SMEs. The P2P financing market is targeted at more mature investors who have a better understanding of their own risk portfolio and are looking to diversify their investments. Individuals seeking personal financing will not be allowed to use a P2P financing platform. A P2P financing operator must have a minimum paid-up capital of RM5 million and there is no limit on funds that can be raised.
Effectively for P2P, investors are buying securities in the form of an investment note which will be issued by the businesses or companies. The issuer of the investment note repays the investors over a time period, with interest or profit.
Venture Capital and Private Equity
Venture capital (VC) and private equity (PE) are becoming an increasingly important source of financing with both international and domestic firms operating in these segments. Azhar said that there were plenty of opportunities to invest money in these areas, some of which are high-growth areas. Number of VC and PE registered with the SC increased from 91 in 2006 to 109 in 2016.
While they may not strictly be considered as part of the capital market, very often the exit strategy is via an IPO. Thus, PE also plays a key role in the development of capital markets in Malaysia, he said. Although investments require longer time to develop and hit specific targets, companies backed by PEs are a major feeder to the public markets.
Malaysia’s VC industry recorded total committed funds under management in 2016 of RM 6.5 billion, nearly double the figure from a decade ago with RM 3.3 billion recorded in2006.
The government has provided significant funding and tax incentives to promote the industry. For example, qualifying VC companies investing in venture companies are given full tax exemption on all sources of income for up to 10 years of assessment.
Steps have also been taken to expand the participation of investment management firms in VC and PE by giving them the flexibility to invest in unlisted securities and wholesale funds that invest in VC funds.
Other measures include allowing collective investment schemes like unit trust funds and closed-end funds to invest up to 10% of their net asset value (NAV) in unlisted securities.
In addition, Bursa Malaysia Bhd also offers ACE Market for companies to raise equity capital without the usual requirement of a profit track record. The sponsor-driven ACE Market has proven to be an ideal platform to nurture high-growth companies.
SC’s equity fundraising framework also allows for the listing of special purpose acquisition companies (SPAC). This provides companies an avenue for capital raising to identify and acquire assets usually in specific segments. Most notably, many SPACs are involved in the oil and gas sector. SPACs are also supported by VC and PE firms.
To help the industry achieve sufficient critical mass to generate self-sustaining growth, national initiatives have been streamlined to ensure more coordinated and effective public sector funding of the VC industry.
In tandem with this, greater public-private sector collaboration has been promoted in critical areas such as at the start-up stage or in nurturing patents to commercialisation. Initiatives such as angel networks will assist in seeding the formation of innovation-based companies. Our doors are open to VC companies to capitalise on all the facilitative measures put in place and to leverage on the opportunities that ensue.
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