Venture capital (VC) is burning bright again, and a spate of deal-making in recent weeks suggests a strong spirit of entrepreneurship is still prevalent in SA.
Could this activity breathe some new life into the JSE — and specifically its depleted AltX?
Knife Capital, co-founded by VC doyen Keet van Zyl, announced it was raising a not insubstantial $50m for its latest Africa Series B Expansion Fund. This fund will invest in the "aggressive expansion" of African innovation-driven companies and play a follow-on funding role as well.
Significantly, Knife has already pulled in $10m (R145m) in investment from the Mineworkers Investment Co (MIC) — making this well-established empowerment investment company an anchor investor.
Whether the MIC can be considered a real "institutional" investor might be debatable, but the commitment is significant for an investment niche that is still largely regarded as left field.
If fully invested, Knife’s fund will be worth about R725m.
To contextualise this, it would be bigger than the current market values for niche technology JSE listings like Mustek and Adapt IT.
In January, five-year-old VC firm Empowerment Capital Investment Partners hit its deal-making straps, announcing over R160m in approved and placed funding for local start-ups since July 2019, with another R32m approved for placement in the coming weeks.
Though no figures have been provided, it is well documented that Invenfin, Remgro’s venture capital arm, has also made new investments in health care (the National HealthCare Group) and cannabis products business (Releaf), as well as adding more money to existing investments like BOS Brands.
These are significant sums by only a few entities if you consider that, according to the Southern African Venture Capital & Private Equity Association (Savca), the VC deals in 2019 only topped R1.2bn.
Savca CEO Tanya van Lill says the 2020 statistics will only be published in May.
However, she believes deal-making was robust, despite a Covid-induced lull in the early parts of the year. While there was an initial focus on ensuring that investee companies pulled through the Covid-19 crisis, there was a strong ramp-up in deal-making activity after the middle of the year — especially in logistics, e-commerce and fintech solutions.
There might be hopes that this spike in VC activity, which has been steadily growing since 2015, will ultimately filter through to the JSE, where an increasing number of companies are delisting and there has been scant new listing activity.
The JSE is often viewed as a platform for more mature companies. However, it should not be forgotten that it has provided a useful platform for entrepreneurial groups in recent years, such as Cartrack, Transaction Capital, Renergen, Montauk Energy and Capital Appreciation.
What is clear, though, is that very little VC activity does wend its way onto the bourse.
According to Savca, there were 38 exits reported for 2019. (As with a private equity firm, a VC company needs to be mindful of when to sell out of a company, as much as when to buy.) Though this was more than double the previous record for annual exit activity, the FM wonders how many of these even contemplated using the JSE as a means to cash out.
Of those sales, 19 were profitable with a total amount of R831m returned to investors.
Van Lill believes there is a huge gap in the VC funding chain. Technically speaking, a start-up company should move from angel funders to multiple rounds of VC funding before looking at private equity investors or a listing.
Van Lill suggests that local VC companies seeking fresh capital are usually too early for private equity backers and too small for the JSE. What transpires is that other international VC companies then tend to co-invest with local companies, or a larger trade buyer emerges.
Still, the increased deal-making activity must bode well for the bourse — especially if the JSE makes it easier for smaller enterprises to raise funding.
Knife’s Van Zyl believes VC deal-making activity should speed up.
"It’s looking positive for the next 10 years … There is the culmination of Africa as a genuine emerging market and not a place where investment money goes to die."
But Van Zyl cautions investors not to expect more mature VC companies to fundraise by floating on the JSE. "In terms of a pipeline to the JSE, we would love to have the IPO tick in the portfolio box."
He argues, though, that an IPO on the JSE is not a natural progression for VC companies. "There are costs that are prohibitive, and there are disclosure requirements that don’t sit well with companies with intellectual property to protect."
Van Zyl also notes that there are several layers of funding to consider before a VC would contemplate a JSE listing.
"There is a tendency to jump to other funding ecosystems before looking at the JSE, and there is the chance of being acquired … especially if the original owners are too scared to swing through."
Meanwhile, Empowerment Capital is seeking aggressive growth as it enters the next phase of its business, says co-founder Mark Fitzjohn. It will be looking to raise funding with institutional investors for further support of the SMME sector. "The focus of the next 24-month growth phase is a second raise of third-party institutional investment into a portfolio of derisked investment assets backed by strong listed corporate partners."
Fitzjohn says 2020 was a pivotal year for Empowerment Capital in showcasing the value offered by corporate venture capital. The next big step could be a JSE listing.
He says that would form part of an aggressive growth plan, though he points out that such an event may still be three years off.
In the meantime, the JSE appears to be taking steps to attract smaller and more entrepreneurial ventures — something that might resuscitate the flagging AltX.
One idea seems to be to capitalise on the tax-efficient 12J investment schemes that have grown in popularity since 2015 after more favourable legislation was introduced for investors. For the most part, 12J has been an important conduit for VC projects.
The AltX, which was launched in 2003, has lost relevance in recent years, with the number of listings dwindling to fewer than 40, holding a collective market capitalisation of less than R16bn.
At its peak after the 2007/2008 listings boom, the AltX had a cool 140 listings. Over the years 62 companies have — for various reasons — delisted. But one overlooked statistic is that 40 companies migrated to the JSE’s main board, and over R65bn in fresh capital was raised.
At the moment the AltX is a considerably more cost-effective option for small companies, with an annual listing fee set at less than R40,000, though it does not offer the same allure as the JSE’s main board.
Qualification for the AltX is also less strenuous. The qualifying share capital is reduced to R2m, compared with the R50m for the main board.
Regulation is less onerous too.
For instance, corporate actions for acquisitions only need shareholder approval at a higher threshold — which the JSE believes offers more deal-making agility.
No profit history is required, and the shareholder spread only needs to be 10%.
Recently the JSE made specific recommendations for 12J listing requirements to allow such companies to list on either the main board or AltX.
The key initiative is allowing flexibility for 12J companies with regard to the appointment of a designated adviser. The proposal is that 12J companies can opt to rather appoint a VC company adviser.
At the moment there is some agonising over whether the government will grant the section 12J sector a lifeline beyond 2022. This prickly sunset clause matter is likely to be addressed in the upcoming budget speech.
Still, there is a considerable pool for the JSE to tap. The 12J Association of SA discloses that in the five years to end-February 2020, the total assets under 12J management was more than R9bn in more than 360 SMMEs.
That represents about 60% of the AltX’s collective value.
Late last year the JSE also tied up with UK fintech company Globacap Technology, to push for a digital private placements platform and registry services. This will have the JSE collaborate with Globacap to launch a private placements platform to digitalise capital raising for infrastructure finance and SMEs. This seems like a smart way to potentially lock smaller ventures into the JSE, even if a listing plan is some way off.
Of course, the overriding consideration will remain the perceived value of listing. The local market has already shown its disregard for small-cap listings, with some profitable counters trading on low single-digit multiples.
The point is: why would a maturing VC look at listing when a private equity transaction can be clinched at multiples of six or seven versus the four and five slapped on listed small-cap shares?
Still, there has, in recent weeks, been a discernible change in the market perception for small caps on the back of resilient profit performances (ARB, Kaap Agri, Bowler Metcalf), as well as corporate action (Adapt IT/Huge and Wescoal).
While it’s probably premature to proclaim small caps are back in fashion, the FM believes even a gradual swing in such sentiment might woo venture capitalists to the JSE in numbers.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.