After a difficult birth, the JSE's new small-cap market is beginning to show signs of being able to deliver what was always expected of it. The JSE launched its market for small to medium-sized companies - AltX - in June 2003, about four months before it opened officially in October 2003.
Sceptics at the time said that whoever was to manage AltX would be accepting a poisoned chalice because pessimism among investors and the media was rife. But Noah Greenhill, the JSE's business development manager, who oversees AltX, is made of sterner stuff, and his enthusiasm has proved to be justified during the past couple of years. In terms of its market capitalisation, AltX has grown by 85% since January last year and is now just more than R2bn. There are 15 companies listed on AltX, with another five or so in the pipeline.
At the time of launching, Greenhill said that AltX wanted small to medium-sized mining companies and black economic empowerment corporates to list on it. "We researched parallel exchanges internationally and have incorporated their best practice into AltX."
AltX is an integral part of the JSE. Though it deals exclusively in small-cap stocks, many of its requirements - especially those relating to corporate governance - are tougher than those of the JSE's main board.
Greenhill draws parallels with London's Alternative Investment Market (Aim), which has admitted about 1 900 companies since it opened in 1995. Collectively, these companies have raised more than US$30bn while on Aim. And it's growing rapidly - this year alone, Aim has admitted 320 new companies, raising almost $5bn in the process. Aim has a voracious appetite for new listings and isn't afraid to trample on the toes of other exchanges to find more. A large delegation from Aim as well as associated advisers, accountants and lawyers toured SA late last year, looking for new entrants.
Aim has been successful in attracting foreign companies to its market, notably from English-speaking countries such as Australia and Canada. Two problems for foreign companies seeking listings in the US are the exorbitant costs and, more importantly, the requirement to comply with the onerous Sarbanes-Oxley Act.
Many investors in the UK, tired of getting low returns on cash in the money markets, have turned to Aim for better rewards, albeit with a higher degree of risk. The rest is history.
Greenhill believes that the success of AltX can be measured by three factors: the number of companies listed, the liquidity of the exchange and a growing combined market capitalisation. "Any small-cap stock will tend to have a naturally lower liquidity than its mid- or large-cap counterpart," he says.
S ome of the shares listed on AltX, such as Milkworx and Beige, have average monthly share turnovers of more than R10m, which would be respectable figures on the main board itself. However, many of the shares listed on AltX would be classified as "penny stocks" and thus the value of the turnover is considerably less.
Greenhill's vision is to have more companies listed on AltX than on the JSE main board within five years. "This would reflect our underlying economy, and would be a feature of the demographics of SA."
Between a third and a half of companies listed on AltX have raised capital on the exchange, a good recent example being pharmaceutical manufacturer Enaleni. "Enaleni raised R30m and the offer was three times oversubscribed. Money is not the problem."
So, what is the catalyst going to be to encourage more companies to list on AltX? "Often, companies wait for certain things to happen - if there's value in the company to be listed, it's compelling to list now," says Greenhill. "But if you're looking to make a fast buck, AltX is not the place to come."
Greenhill believes the private equity industry has done an excellent job in incubating small companies and instilling good business disciplines into them. And there are many companies in the private equity arena that would fit the bill for admission to AltX.
A challenge facing AltX is to attract black entrepreneurs to list on the exchange. "To do that, we'll need further economic transformation and to change the perception that the JSE/AltX is mainly white and full of big companies," says Greenhill.
