SE Asia tech IPOs: Loosening up

Until recently, public markets mostly inspired little but indifference among Southeast Asian technology start-ups, who saw in them no chance to get the kind of assistance they needed.

"They were mainly looking for money with added value," says Michael Lints, a venture partner at Golden Gate Ventures. "Every investment they were searching for, the question was, ‘Can we find an investor who is able, for instance, to help us expand into our next market. That's something you won't find on the stock exchange."

However, with these companies growing in maturity and the private markets increasingly stretched, the notion of going public is becoming more and more appealing - which raises the question of where to conduct one's offering. The Singapore Exchange (SGX) would seem to appeal based on its location and familiarity with the region, but so far it has not found favor.

As Southeast Asia's start-ups reach the next stage of their development and their initial investors begin looking for exit opportunities, interest in SGX may grow. But market players say it must understand the reasons for its current unpopularity and take the necessary corrective action.

Fundamental mismatch

Start-ups' reticence to list in Singapore has several causes, chief among them being the market's perceived indifference to their strengths. Many entrepreneurs believe that the orientation of local institutional investors toward consistent prevents them from understanding the true potential of the internet industry.

"Singapore is a yield-play market; people prefer products that give you yield. It's not that big on growth capital," says Sandeep Uberoi, an investment banker at Bank of America Merrill Lynch (BAML) who covers equity capital market transactions. "A lot of tech companies are all about growth capital, as opposed to yield-play."

This mismatch between companies' needs and investor interest is reflected in the listing requirements for the SGX main board. Applicants must come equipped with three years of financial records, one year of profitability and a market capitalization of S$150 million ($112 million) - a threshold difficult for most start-ups to meet.

It is acknowledged that there are good reasons for these stringent requirements, which were tightened following accounting scandals involving several companies from mainland China in 2009. However, they have resulted in an environment that many entrepreneurs feel pushes them to look elsewhere when they reach maturity.

One of the strongest competitors to Singapore as a listing destination has turned out to be Australia. A report by Golden Gate Ventures earlier this year found that of 11 Southeast Asian technology companies to achieve an IPO since 2001, five of them listed on the Australian Securities Exchange (ASX).

The market's appeal rests in part on the relatively open attitude of the investor community toward companies that have not established the profit and operating history that SGX requires. Industry participants say that investors' historical familiarity with companies that can demonstrate growth despite lacking a prior track record makes them more accepting of the particular needs of tech businesses.

"Australia comes from a heritage of mining listings, and so there's never been a focus on profitability so much as excitement and good stories and forward-looking numbers," says Shane Chesson, founding partner at NSI Ventures. "So as mining IPOs have become quiet over the last few years, you saw quite a lot of tech IPOs, from Australia-based companies as well as the occasional Southeast Asia or global company."

In addition to its more accommodating listing requirements, Australia can offer start-ups a leg up into the international ecosystem while remaining close to their home markets. With time, an ASX listing can build a company's visibility and help it achieve global recognition.

"I think a lot of companies will use it as, potentially, a stepping stone to something like NASDAQ," says Mark Robinson, a partner at Herbert Smith Freehills. "They can show the ability to get listed, they have access to capital from funds and corporates, and then potentially in due course they can look at other markets as well."

American prestige

Of course, start-ups with truly global ambitions can look to New York directly. While listing requirements on the New York Stock Exchange (NYSE) and NASDAQ are stricter than in Australia, all three exchanges are seen as more welcoming to tech companies and understanding of their situations than SGX. Companies that are able to join US bourses also gain a place in the world's biggest tech market and access to the most powerful institutional investors.

Investors caution, however, that a New York listing may turn out not to be the springboard one would assume. Although investors targeting NYSE and NASDAQ have deep pockets, they are often unfamiliar with Southeast Asia and with the stat-up business models prevalent there, resulting in a reluctance to invest in a company whose growth prospects are mostly on the other side of the world. Entrepreneurs have found in the past that their share of the pie turns out too small to be worth the effort.

"Leaving aside that it's a matter of prestige or pride that you can get a New York listing, from a realistic perspective you've seen a number of Chinese companies go down that route, and now are delisting and coming back to China because they're getting better valuations there," says BAML's Uberoi.

SGX is not unaware of the concerns expressed by tech start-ups and investors, and has taken steps to address them. The Catalist board, launched in 2008, was meant to offer overseas companies the less stringent listing requirements of its predecessor SASDAQ, which was only open to Singapore-based companies. A business can list on Catalist as long as it has been accepted by one of SGX's approved sponsors, of which there are now more than 10.

The exchange points to Catalist as a success story in attracting more companies to list in Singapore; of the 15 IPOs so far this year, 10 of them were on the board. But investors identify Catalist's relatively low profile as a weakness.

"The problem that people face once they're listed on Catalist is that it's not a particularly liquid exchange," says Chesson. "Only a limited selection of companies get institutional notice, so that constrains liquidity and ultimately means that valuations, exits, and the utility of Catalist-listed stock as an acquisition currency is a bit of an uncertainty."

SGX hopes that the growing popularity of Catalist and its companies will produce a broader understanding of its strengths among skeptical investors and start-ups. It highlights Procurri, an IT services subsidiary of Catalist-listed DeClout, that trades on the main board of SGX - the first technology company and the first spin-out of a Catalist-listed firm to do so.

For those companies that still find Catalist too limited for their tastes, the exchange is also trying to increase the flexibility of main board listing requirements. One major initiative is the establishment of an alternative to the traditional financial track record and profitability test. Under the new framework, a company may apply to list and the only requirement is a minimum market cap of S$300 million, which officials believe is within the scope of successful tech companies.

"Most of these companies would have already received multiple rounds of private financing from PE and VC backers, and I would imagine that typically most of their valuations are already above S$300 million, even before they apply for an IPO," says Simon Lim, the head of equity markets at SGX.

Future prospects

Despite the difficulty that start-ups face when dealing with the exchange, investors still believe it holds great promise. With its location in the center of Southeast Asia and its highly international community, Singapore is perfectly situated to serve as a hub for companies seeking capital and those willing to provide it.

To capitalize on these fundamental advantages, investors note that the exchange needs to move quickly to implement the needed reforms, since other bourses have already spotted the opportunity building in the region. If SGX cannot make its case to local stakeholders, it may find the most promising prospects scooped up by its peers.

"NYSE has done a roadshow in Southeast Asia, basically looking for companies to list on the New York Stock Exchange," says Golden Gate's Lints. "So as the ecosystem in the region here matures, it will get more competitive in Southeast Asia to find out who gets to list the best companies."

Another potential source of competition for SGX in listings could come from other regional bourses, such as Jakarta. While these currently have limited appeal due to lack of investor participation and listing requirements similar to Singapore in stringency, market players say these too are beginning to catch on to the promise of the region's start-ups. Indeed, government officials have raised the prospect of a technology board and reached out to potential candidates.

"Today they're mostly driven by profitability and traditional listing requirements, which I suppose have protected them from some of the more volatile listing trends in the past," says Chesson. "Hopefully they can work with sponsors and show some flexibility for some of the best tech companies that are going to start coming through."

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• Topics
• Southeast Asia
• IPO
• Technology
• Venture
• Singapore
• IPO
• TMT
• Golden Gate Ventures
• NSI Ventures