Revised regulations leading to creation of new products in South Africa

The South Africa initial public offering (IPO) market was booming at the start of 2015. In the first quarter of the year, three companies listed on the exchange, more than in any first quarter since the global financial crisis of 2008-09. The combination of a strong market and innovation in regulations and listing rules attracted companies to list. However one highly anticipated offering was cancelled in May 2015 and the number of new listings slowed, suggesting that the burst of activity at the start of 2015 may have been more of a blip than a trend. More generally, the South African markets have had trouble keeping the overall number of companies growing, as delistings have outpaced new additions at the time of printing.

In the first three quarters of 2015, a total of nine companies were listed. This includes five on the main board and four on the Alternative Exchange (AltX). This is compared to 2014, when the total was 24, while in 2013, 13 companies listed. In 2012 there were 14 listings, and in 2011, a total of 16. While 2015 got off to a strong start, no new listings were introduced after June.

New Structures

A good deal of the activity in early 2015 was the result of new rules and revised regulations. In 2013, South African real estate investment trusts (REITs) were introduced with a number of advantages to make them attractive internationally. Under the rules, distributions are deductible as expenses, while capital gains are not taxed when a property is sold. To qualify for these benefits, debt must be kept below 60%, while at least 75% of income must come from rentals.

In February 2015, Lodestone REIT listed on the AltX exchange. The company invests in commercial, retail and industrial properties, and currently has 22 assets in South Africa. In June, Indluplace Properties listed on the Johannesburg Stock Exchange (JSE) as the exchange’s first residential REIT, holding 95 properties and a total of over 3600 units. It will use the funds that it raises to invest in the affordable and student housing subsectors.

SPACS

The other major regulatory change occurred in 2014, which saw the introduction of special purpose acquisition vehicles (SPACs). A SPAC raises funds before it has assets, with the intention of using those funds to buy a business or businesses to run. The rules provide considerable protection for the investors. A SPAC must acquire operating assets within 24 months of listing, and money raised must be placed in trust until invested. Money not invested within the time limit must be returned to the investors, minus some allowable expenses. Directors must have an interest in the company, and all acquisitions must be approved by the majority of the shareholders.

In September 2014, the first SPAC was listed on the AltX. The new SPAC, Sacoven, was already trading on the Alternative Investment Market in London and was formed to acquire assets in the natural resources and consumer goods sectors in Europe and developing markets, including South Africa. RENERGEN, an alternative energy SPAC, listed on the main board in June 2015. The company hopes to use the funds raised to invest in hydro and natural gas projects. By August, it had made its first investment, in a natural gas and helium company. Another SPAC is set for listing; called Capital Appreciation, the new SPAC is planning to raise at least R500m ($43.2m) at the end of 2015.

Other Companies 

A number of other companies listed in 2015 in transactions that were unrelated to the rules changes. At the end of March, Novus Holdings listed on the main board. The company, formed in 2001, sells products related to printing and intends to use the funds raised to expand into other African markets. In May 2015, a long list of deals came in to the market. Zambezi Platinum listed preferred shares, and Group South32 conducted an offering. Group South32 is a mining company that was spun off from BHP Billiton in early 2015 and has a primary listing in Australia. Choppies, a food retailer trading in Botswana, listed in May as well, as did NV est Financial (on the AltX exchange). NV est is a financial services holding company with a property company, a trust company, a securities brokerage, a wealth management company and an insurance brokerage.

IPO Cancelled 

One IPO halted it’s listing in 2015. Virgin Active, a company with more than 250 health clubs worldwide and more than 100 in South Africa, was set to list in June. The transaction was considered a loss for London, and a major gain for the JSE, but in the end the deal was scrapped and the asset was bought in a private purchase.

Second Player

In 2015, a conglomerate announced that it planned to set up a second exchange within South Africa. The new board will be called the 4 Africa Exchange, or 4AX, and an application was lodged with the Financial Services Board (FSB). This effort is being led by Bravura, an independent investment bank, and is being supported by a number of other partners, including Trifecta Capital, Intercontinental Trust, Capital Markets Brokers, NWK and Global Environmental Markets, with the later being an international developer of trading platforms.

OTC Orphans

The growth of 4AX is largely being driven by regulatory pressures. In 2014, the FSB said that all over-the-counter (OTC) platforms currently in operation would need to be licensed or would have to obtain an exemption from licensing requirements. According to 4AX, this directive would require some companies to become exchanges or have their shares listed on a licensed exchange. 4AX hopes to meet this sudden demand for an appropriate platform. Many companies in South Africa have unlisted stock that trades outside the JSE, and early indications are that the regulators will continue to push them toward a formal exchange. New exemptions will not be offered and the existing ones will not be extended. MTN Zakhele was denied an extension of its exemption and was thus forced to halt OTC trading as of March 31, 2015. It opted for a JSE listing, but its predicament, and the lack of flexibility on the part of the regulators, demonstrates the potential for an exchange built to provide a home for OTC companies.

Other Selling Points 

For many companies, being on a platform such as 4AX will be far better than trading OTC. Liquidity will be higher and investors will be able to pledge their shares as collateral. The exchange will be particularly attractive to companies with restricted shares. 4AX will be structured specifically to support these firms, building in solutions that allow for the trading of stock that is limited to predetermined groups. This greatly contrasts the legacy player in the market. Companies with restricted shares are often discouraged from JSE listing, while 4AX will welcome them and be structured to meet their requirements.

In addition to attracting OTC companies, 4AX will also be working to draw IPOs in direct competition with the JSE. The exchange hopes to be more than simply a home for those companies that lack other options. It is seeking to establish itself as a legitimate competitor to the JSE, providing a marketable, and possibly superior, service.

The exchange is being designed from the ground up to be attractive to issuers. Its listing rules will be written in a way that make them simple and straightforward for perspective companies. The new floor will be free of legacy technology issues and will be able to utilise modern systems and solutions to keep the cost of trading low and boost efficiency and transparency. An algorithm will be used to match buy and sell orders fairly and an integrated clearing and settlement system is being developed. A news services will be rolled out to provide information and pricing, while investors will be able to access the exchange in a variety of ways, including via traditional brokers. 4AX says that the structure of the exchange will be similar in many ways to existing platforms, but that it will also provide “a higher level of integration, efficiency and effectiveness”. The market infrastructure will in part use existing entities by leveraging off of what is already available, and create new links in the value chain. Strate will act as the central securities depository (CSD), Société Genéralé Security Services will be the single CSD participant for 4AX, and Trifecta Capital will operate the registry.

Significant headway was made in developing the 4AX in 2015. A number of key appointments were announced in June, and an application was lodged with the FSB later in the same month. Early in the year, news reports stated that the exchange may be up and running by the end of 2015.