Alternative Assets – New, Different and Democratic Ways of Raising Money
The market regulator, the Securities Commission Malaysia (SC), is also looking at alternative ways of providing financing in addition to the conventional equity and fixed income markets. Some of these are rather new but growth can be phenomenal and eventually they are likely to be significant sources of funding.
Among these is equity crowdfunding (ECF). It is a growing market segment which democratises the financing process by using technology to provide small participants and entrepreneurs with cheap access to seed capital that would not otherwise be available to them.
Malaysia became the first ASEAN country to introduce ECF earlier this year in 2016 and is among the first in the Asia-Pacific region. Six platform operators have been approved who will vet the applications, take the ventures to market and eventually provide a window for trading from time-to-time.
It is anticipated that ECF will become a significant source of funding for small businesses. Azhar Zabidi, the CEO of Capital Markets Malaysia (CMM), said there was however a need to build greater awareness of what can be done through ECF. “A lot of people still don’t understand it as it is new. It will take time to develop but it will offer opportunities for those entrepreneurs who want to raise small amounts with little expense.”
“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 platform operators are Alix Global, Ata Plus, Crowdo, CrowdPlus.asia, Eureeca 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.
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.”
A company can raise up to RM3 million over a 12-month period while the lifetime limit is set at RM5 million. While shares are not traded on a normal exchange like Bursa Malaysia Bhd, it is envisaged that share trading will be opened up periodically by platform operators to provide opportunities for buying and selling on the secondary market.
Following on from the moves to set up ECF in Malaysia, the SC has plans to introduce peer-to-pear financing (P2P financing) in Malaysia and has called for applications from firms to set up platforms. P2P financing helps businesses to raise funds from both retail and sophisticated investors through an online platform. Individuals seeking personal financing will not be allowed to use a P2P financing platform.
Effectively, 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.
A P2P financing operator must have a minimum paid-up capital of RM5 million, be able to show that it can operate the business, and is able to manage risks associated with its business and operations. These include having processes and contingency arrangements in the event it is unable to carry out its operations.
Among others, a P2P financing operator must be able to determine the suitability of issuers to be hosted on the platform. This includes conducting background checks on the prospective issuers to ensure its fit and properness, verify its business proposition and carry out assessment on its creditworthiness.
In addition, a P2P financing operator must ensure that monies obtained from investors are placed in a trust account until the minimum target amount is met. There is no limit on funds that can be raised.
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. The CEO of CMM, Azhar Zabidi, said that there were plenty of opportunities to invest money in these areas, some of which are high-growth areas.
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.
“Most start-ups are digital or tech-oriented and there is a lot of growth in Malaysia. Malaysian-based companies last year raised over US$5 billion in private equity, the second highest in ASEAN,” he added.
Malaysia’s VC industry recorded total committed funds under management of RM7.15 billion in 2015, which grew by 15% from RM6.2 billion in 2014.
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 also offers the 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.
The SC’s equity fundraising framework also allows for the listing of special purpose acquisition companies (SPAC), which provides another vehicle for capital raising by VC companies 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.
There are a number of derivatives available in the Malaysian market. Malaysia is the world’s second largest crude palm oil producer and exporter and serves as the global centre for price discovery for crude palm oil (CPO). Understandably, the Malaysian derivatives market is dominated by CPO futures contracts.
Bursa Malaysia operates the most liquid and successful crude palm oil futures contract in the world. Driven by this, Malaysia’s derivatives market has seen the notional value of derivatives traded at RM858.6 billion in 2015, a growth of 6.4% from 2014. The derivatives market is projected to have a CAGR of 23.3% over the next few years with notional value traded to reach RM4.2 trillion (US$1.4 trillion) by 2020.
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