Speak to executives at small- or even mid-cap JSE companies and they will all say that being listed doesn’t guarantee access to capital. This partially explains the strong and concerning trend of de-listings.
The situation is made worse by the dearth of new listings. Private companies that need capital are choosing to attract private equity investors rather than executing initial public offerings (IPO) on the JSE. This is especially thanks to a new breed of investors in the market who’ve recognised that the traditional private equity model of a five- to seven-year holding period combined with an extraordinary amount of debt has been too daunting for many founders. Instead, these players offer a “permanent capital” solution.
This long-term approach is far more appealing to founders, as it avoids the pressure of extreme leverage and a defined time horizon for the next exit. When the right partner is found, it negates the need to jump through the JSE’s hoops to raise capital.
There are many examples of companies trading at mid-single digit multiples on the JSE, which is no better than the valuation that would be achieved in a private equity deal
Even for those who go through the extensive and expensive process of coming to market, being able to raise capital at a decent valuation is far from assured. There are many examples of companies trading at mid-single digit multiples on the JSE, which is no better than the valuation that would be achieved in a private equity deal.
Another critical difference in a private equity transaction is that the founders can exit in full, whereas this simply doesn’t happen in the listed space. Local investors won’t touch an IPO that looks like an attempt to offload stock by the founders, as there isn’t “alignment” among the parties. Once listed, any selling from the directors will trigger director dealings announcements, sending a negative signal to the market and crashing the share price. This is especially true for smaller companies, resulting in the founders being trapped and unable to exit at a decent valuation.
Guess what happens? An opportunistic investor comes along and makes an offer for the entire company at a multiple way below where it listed, picking up the business at a bargain price and with lower risk than buying a private company, as the listed environment requires solid financial processes and extensive reporting. This makes the due diligence easier than in a private deal.
This problem isn’t going to magically go away. With private equity growing in popularity and more wealthy investors including a healthy percentage of permanent assets in their portfolios, it may even accelerate. That’s not good for retail investors, as the universe of local opportunities is shrinking rather than growing.
It’s not all doom and gloom. In the past week, we’ve had two excellent examples of companies tapping the market for capital. Admittedly, they certainly aren’t small caps. I hold both as core longs in my portfolio.
Transaction Capital has a great reputation as a solid allocator of capital. The push into WeBuyCars has been so significant that the business now contributes nearly half of group headline earnings. It’s an incredible story, and has all happened in the space of just two years.
Transaction Capital swooped on the asset in September 2020 after a bid by Naspers for WeBuyCars was blocked by the Competition Commission. The initial stake was 49.9%, as Transaction Capital came on board as a supportive shareholder alongside the founders of the business. Through various further deals, Transaction Capital got to a 74.9% stake and is now buying another 15%. This leaves just 10% in the hands of the founders, a perfect example of how they managed to exit through the private market rather than by listing WeBuyCars separately.
It’s interesting to note that Transcap’s share price closed higher after the capital raise. This is most unusual
To pay for the latest tranche, Transaction Capital raised R1.28bn in an oversubscribed bookbuild. Though the price of R35.50 was at a discount of 4.7% to the closing share price on the day of the bookbuild, it’s interesting to note that the share price closed higher after the capital raise. This is most unusual and shows the level of support from the market for this story.
Investors tend to forget about the debt market on the JSE, as this is reserved for institutional investors. Here, MTN has been reshaping its debt profile towards more rand-denominated debt, so a planned raise of R2bn was an important test of investor appetite. With buyers applying for more than R5.4bn of the corporate notes at attractive pricing for MTN, those investors were clearly starving.
For the right assets, there is no shortage of capital on the JSE. Too often, sadly, smaller companies just don’t make the cut.
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