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Mar 19, 2014

An eye on growth markets

Checking in on five of the dozens of markets that cater to small, growing companies

Watching growth markets – those second boards, junior markets, alternative stock exchanges and other trading platforms for small and micro-cap companies – is like listening to indie music stations instead of Top 40 radio: new names with big dreams and always a whiff of risk. Even new industries: legal marijuana stocks anyone?

The last five years have been especially feverish for growth markets. Small caps were slammed by the global financial crisis starting in 2008 as investors shrank from risky asset classes, and junior mining companies were left scrabbling after commodity prices ended their long bull run in 2011. But even as gold was dropping, IPOs were flowing fast, and 2013 was declared the best year for new issuance since 2007.

Adding to the fizz, whole new growth markets keep popping up. In 2012 new segments were created on India’s two main exchanges: National Stock Exchange of India’s Emerge and the Bombay Stock Exchange’s SME Platform. In 2013 the London Stock Exchange (LSE) launched its High Growth Segment as a NASDAQ alternative for tech companies. This year New Zealand exchange operator NZX hopes to launch a new alternative market that would improve on the existing NZAX. And those are just a few additions to upwards of 40 growth markets worldwide, including around 18 in Europe alone, and 15 in Asia-Pacific.

For this small cap-focused issue of IR Magazine, we decided to take a temperature check from five growth markets, including three junior markets – and two entirely original beasts.

Alternative Investment Market

The world’s biggest growth market – and the most successful, according to its tagline – is the LSE’s Alternative Investment Market (AIM). After suffering in the wake of the financial crisis, AIM had a banner year in 2013, certainly its busiest year for new issuance since 2007, with more than 60 IPOs.

The UK government also improved the picture by allowing Individual Savings Accounts – which are similar to 401Ks or individual retirement accounts in the US – to invest in AIM-listed securities. In the six months after the change took effect, from August to January, the AIM All-Share average daily trading value was up 28.5 percent on the preceding 12 months.

AIM has been undergoing a shift that has affected growth markets in general, notably TSX Venture Exchange and Brazil’s BM&F Bovespa. ‘It’s a broadening of issuer type, both by geography and industry,’ describes Alex Lehmann, the LSE’s head of primary markets for the Americas, who is based in New York. ‘AIM is not just a UK domestic issuer market now and, while it started out focused on North Sea oil & gas companies, it has broadened to include consumer and healthcare companies, and even some sectors you wouldn’t associate with the word growth.’

Indeed, around 227 of AIM’s 1,092 companies are based outside the UK, and 455 have their primary business outside the country, while 132 of the total are in oil & gas, accounting for only 16 percent of the exchange’s total market cap. The heaviest sector on AIM today is industrial goods and services.

Lehmann cites another trend benefiting growth markets worldwide: investors hungry for returns and not shy about risk increasingly want to invest in early-stage companies. ‘These are growth companies, which means higher volatility in their businesses and, by corollary, their stock prices,’ he cautions. ‘That said, as investor appetite toward global growth assets increases, demand for AIM securities will likely increase, both on IPOs and in the secondary trading markets.’

TSX Venture Exchange

When John McCoach, president of Canada’s TSX Venture Exchange, summons up the main measure of his market’s success, it’s how well it has ‘incubated’ small companies. Over the last decade around 600 companies have graduated from the junior market to Toronto Stock Exchange (TSX), and around 20 percent of those have gone on to become part of the S&P TSX Composite Index, in the company of the country’s most liquid stocks.

TSX Venture Exchange, which was born as the Canadian Venture Exchange when the Alberta, Winnipeg and Vancouver exchanges combined in 1999 and was later bought by TSX, was and still is heavily tilted toward British Columbia and mining stocks, either of which can account for more than half of the market’s 2,133 issuers. That has meant a bad couple of years with the fall in metal prices. The bright spot is clean technology, with Canada now the listing home of more small clean-tech companies than any other market.

Considering Canada’s slim slice of the world’s capital market, the international contingent of issuers is critical to TSX Venture Exchange as well as TSX. They have around 310 foreign companies between them, and in recent years have vied with the Hong Kong Stock Exchange and NASDAQ as magnets for non-domestic companies.

TSX Venture Exchange has added a lot of assurance to small-cap investing. ‘Looking back to the beginning of last decade, a lot of institutional investors used to say they wouldn’t look at a firm until it was listed on TSX,’ McCoach recounts. ‘We don’t hear that anymore. Most portfolio managers take comfort from the governance and disclosure standards of both our markets.’

In a big contrast to AIM, which relies on its network of nominated advisers to vet companies, TSX Venture Exchange does it in-house. A team of 20 does nothing but vet the backgrounds of market participants. ‘It’s the most important thing we can do for market integrity,’ McCoach says.


Just what was a growing company to do in the great IPO drought of 2008-2012? OTCQX and OTCQB may well have been a godsend. ‘There hasn’t been tremendous support for IPOs unless you’re a Twitter or a Spotify, so a lot of firms needing a liquidity event for their early-stage investors have used our marketplace,’ says Tim Ryan, vice president and managing director at OTC Markets Group.

The Pink Sheets once described a US market of more than 10,000 unlisted securities with bid-ask quotes issued daily on pieces of paper. Electronic quotes and much jockeying with regulators over several years have resulted in a far more transparent and credible OTC Markets Group, encompassing the OTCQX, OTCQB and OTC Pink markets, all with different levels of disclosure and reporting rules.

It’s important to point out that the top tier, OTCQX, caters to two distinct groups. Dozens of international blue chips like Roche and Deutsche Telekom use it to access US investors without having to list on NASDAQ or the NYSE, or report to the SEC. But OTCQX is also a launch pad for small, growing US companies that do eventually want to list on a US exchange (in 2013 eight OTCQX companies moved to NASDAQ or NYSE MKT). OTCQB, hosting SEC reporting companies, can also be considered a springboard for growth companies.

The 2012 Jumpstart Our Business Startups (JOBS) Act in the US is credited with helping getting IPOs flowing again. One element of it yet to be implemented is a new Reg A+ type of offering, letting companies raise up to $50 mn a year selling unrestricted shares. ‘Reg A+ will act as a mini-IPO mechanism for companies that want to go public on our market,’ Ryan explains. ‘We’re poised for growth companies that may not be on the A-list of the venture capital world, but which are ready for the opportunity to have a liquidity event, to go public and be traded. We’re going to see a lot of very interesting early-stage firms grow up on our market.’


Lawrence Wong, executive vice president and head of listings at Singapore Exchange, is proud of how Catalist has evolved – and no wonder. Since it replaced the old SESDAQ second board in 2008, Catalist has had 68 new listings, or about one a month, during a five-and-a-half-year period that was not conducive to IPOs, least of all in Asia. What’s more, those 68 companies began with a total market cap of S$6 bn ($4.7 bn); today it’s S$9 bn. ‘Catalist has been proven as a funding platform for SMEs that can work even during difficult times,’ Wong says.

Catalist is modeled on London’s AIM, with few explicit requirements apart from one dictating that each company must have a sponsor, which must remain as its sponsor for at least three years.

Wong says the philosophy behind Catalist was not for it to be just a junior board for small companies, but instead a home for companies that need a different regulatory environment. ‘These are growth companies; they require flexibility,’ he explains. ‘They need to get to market quickly. But they need closer supervision and regulatory support through the sponsor system.’

As an example, Wong points to Rex International Holdings, an oil & gas exploration company that listed on Catalist in July 2013 whose market cap is around S$675 mn, well within the realm of the main board. ‘We never had a preconception that Catalist firms had to be a certain size,’ he says.

When looking at growth exchanges, it’s the companies, the rules and the liquidity that are the focus, while the nature of the investor audience is often overlooked. ‘Over the next five to 10 years, Catalist will be not just a Singapore platform, but also a regional or international platform,’ says Wong. He points to S$2.3 tn under management in the country, much of it from beyond Singapore and even beyond Asia, and the ASEAN trading link means retail money will increasingly flow from India and China. ‘A lot of people from overseas may not realize just how broad a base of investors we have here,’ Wong concludes.

NASDAQ Private Market

The JOBS Act is credited with helping uncork the flow of IPOs by letting small but growing firms file confidentially with the SEC, test the waters with institutional investors and duck SOX filings. But it also made it easier for fast-growing companies to stay private by raising the maximum number of shareholders they can have before filing with the SEC from 500 including employees to 2,000 excluding employees.

NASDAQ OMX Group, in a savvy-looking hedge, is hoping to play both sides. As IR Magazine went to press, NASDAQ was awaiting regulatory approval for NASDAQ Private Market (NPM), which will, as SecondMarket and SharesPost did for Facebook, trade shares of companies even before they do a public offering and list on an exchange.

Nelson Griggs, NASDAQ’s senior vice president of new listings and capital markets in the US and Asia, who is helping to lead the NPM initiative, is quick to emphasize how different the new private market will be from a traditionally public market. In other words, it won’t compete with NASDAQ itself. ‘We view NPM as a marketplace primarily for growth companies, but they would be pre-public,’ Griggs says. ‘It won’t be an alternative for small-cap companies that are already public.’

NPM will give private firms a way to offer their employees and early investors a way to cash out without waiting for an IPO or an acquisition, and it could also help firms raise capital through private placements. ‘It’s a step on the normal path to going public – or a way to extend that path,’ Griggs adds. Even if no shares change hands, NPM wants to help administer existing share ownership, which can be cumbersome.

NASDAQ aims to bring brand and scale to a market that up to now has been in the shadows. With its broker-dealer community and regulatory heritage, NASDAQ could help bring both greater liquidity and investor confidence, Griggs says. ‘Add to that investor outreach and communications,’ he notes, pointing to NASDAQ OMX Corporate Solutions, which absorbed Thomson Reuters’ investor relations business last year to become the world’s biggest provider of core public company tools like shareholder ID, IR websites and webcasting.

Griggs is venturing into novel territory here, suggesting that private companies with shares on a private market like NPM may start to use some of the same IR arsenal traditionally deployed by public companies. With the potential under the JOBS Act for more outside shareholders, and with venture capital and angel investors perhaps demanding more care and feeding, there could well be a need. He even suggests some of those IR tools, such as shareholder ID and targeting, could be used to help test the waters with institutional investors in advance of an IPO, as the JOBS Act also allows.