South Africa knows a good idea when it sees one. When JSE Securities Exchange South Africa wanted to create a junior exchange for small and medium-sized companies, it looked to the London Stock Exchange’s spectacularly successful Alternative Investment Market (Aim) as a model for AltX.
But this young alternative market has a long way to go to match Aim’s more than 1,300 listings. Just eleven companies have listed since AltX was launched in October 2003, a number kept low by the refusal of companies on the JSE’s Development Capital Market (DCM) and Venture Capital Market (VCM) to migrate over. Still, the pace has picked up this year and, according to AltX, the pipeline is fat with future listings.
The basic requirements for AltX are not difficult to meet – R2 mn ($330,000) share capital and no profit history necessary, for example – but listing is nonetheless ‘onerous’, says at least one participant. Why make it tough? According to Noah Greenhill, AltX manager and manager of business development for the JSE, it’s because ‘our mantra is quality.’
There is a three-step quality control process. A prospective AltX company must first secure the services of a ‘designated adviser’, which is much like a sponsor for a main board company but the adviser has to be ‘intimately involved’ in the business, attending board meetings and approving a financial director. Later the adviser becomes a guardian of compliance while continuing to advise the client, in some ways like a corporate broker in the UK.
Next a business plan is written and presented to an AltX advisory committee of external experts by the company management and its adviser. The committee makes a recommendation to the JSE, which then decides whether to let the listing go ahead or not. One reason for this step is to contain costs: a company can wait for the nod before starting a prospectus or a pre-listing statement.
The third and final step is a directors’ induction program, a four-day course for executive and non-executive directors alike, no matter what their previous experience. Greenhill admits that some directors attend grudgingly. ‘One, a practicing attorney, came pretty much under duress,’ he says. ‘But by the end he wanted to recommend it to all of his friends. In fact, nine out of ten AltX directors say the course should be a requirement for main board companies, too.’
After running the listing gauntlet, life gets easier. Like main board companies, AltX companies publish announcements via the Securities Exchange News Service (Sens) and on the exchange’s web site. Unlike main board companies, AltX listings don’t have to publish announcements in newspapers. AltX wants to help in other ways, too, such as organizing an investor conference at a local brokerage house, something it did for the first time in May.
AltX was launched mainly to provide a home for black economic empowerment (BEE) and junior mining companies, and Greenhill says that is still the focus. ‘Empowerment is not a listing requirement, but it’s certainly an imperative of doing business in South Africa,’ he notes. ‘And small and medium-sized enterprises can more easily incorporate it now rather than wait until they get bigger.’ As for the junior mining industry, Greenhill hints that some new rules and regulations can be expected later this year.
One of the feathers in the AltX cap is Arch Equity, an investment company focusing on private equity investments, especially BEE transactions. The company listed in December 2004. ‘We looked at AltX and the main board when we listed,’ says Desmond Lockey, CEO of Arch Equity and a former member of parliament. ‘The problem with the main board is the high cost attached to any activity – circulars sent to shareholders and ads in all the major newspapers for any meaningful transaction, for example.’
For a small-cap finance company planning several ‘meaningful transactions’, that was a daunting and expensive prospect. ‘We would rather spend our money on investments than on circulars, so AltX was a more viable alternative,’ Lockey adds. He confesses that it wasn’t easy going through AltX’s screening process, but views that as a bonus. ‘The last thing we wanted was to be listed alongside all sorts of companies that could bugger up the process,’ he says, pointing out that AltX’s stringent corporate governance requirements protect and, thus, reassure investors. Plus, as the largest company on AltX, Arch Equity gets a lot more attention than it would on the main board.
Lockey says Arch Equity will consider moving up to the main board when it reaches ‘critical mass’ and eases off on its hectic schedule of new transactions. The company doesn’t have a dedicated IRO, and Lockey dismisses the idea as an unneeded luxury. Arch Equity was put together through a series of private placements to 500-600 investors who were familiar with management’s track record, and they make for a stable share register. ‘We’re bootstrapping here,’ Lockey says. ‘We’re not going to appoint all sorts of fancy people.’
Not a junkyard
Alongside the listed companies and the exchange itself, the third leg of the stool is the designated adviser. Wessel van der Merwe is executive director of Exchange Sponsors, designated adviser to four current and three future AltX companies. The firm also sponsors companies on the JSE’s main board.
‘It’s more onerous taking companies to AltX,’ Van der Merwe explains, ‘but it’s also advantageous because the process demonstrates that corporate issues are being taken care of properly.’ For example, a designated adviser is considered an insider, like directors, and has to publicly announce any trades it makes.
AltX companies have been performing well; Greenhill says stocks that have switched to the new market have gone up ‘thousands of percent’. One reason may be their impressive liquidity, which Van der Merwe says may be chalked up to AltX’s appeal among retail investors, who typically own just 20 percent of a South African blue chip. ‘The risk with small caps is that an institution buys a share, puts it in the bottom drawer and never trades it,’ he says. ‘But on AltX we see institutions owning just 20 percent to 30 percent of a company with the public owning the rest, and that drastically increases liquidity.’
Yet AltX has not been without growing pains. That the JSE was forced to keep the DCM and VCM open was a blow. In March junior mining company Yomhlaba Resources, one of AltX’s top two companies, was suspended from trading after a key contract was cancelled. In April Insurance Outsourcing Managers Holdings (Insure), the second company to list on AltX, declared its intention to de-list because it has been unable to raise capital. It’s been a bumpy ride but participants insist the higher standard of governance guarantees more ups than downs. As Van der Merwe says, AltX is ‘not a junkyard.’
