Over the past few years there have been some notable delistings on the JSE. These have included hospital group Mediclinic, beverage company Distell, platinum producer Royal Bafokeng Platinum and financial services provider PSG Group. Despite some listings, including WeBuyCars, retail company Boxer and Rainbow Chicken, the investment universe has shrunk with some liquidity constraints on the smaller counters.
This does not bode well for the local economy as the JSE is a means of raising capital for companies that want to grow. Furthermore, with more than 60% of earnings on listed JSE firms being rand-hedged, there are additional limitations on the transmission mechanism between the capital markets and the local economy. The midcap space has also been moving in reverse, increasingly crowded by companies falling from grace as opposed to rising stars. As an emerging market economy with advanced capital markets, there is a high cost to these trends, with the capital-market, or economic, gap.
Funding economically connected start-ups
There has been some innovation by financial service providers to try to bridge this gap, ranging from unique investment vehicles with tax breaks to special purpose acquisition companies listed on the exchange. More recently we have seen actively managed certificates looking to meet investor demands while allocating capital on the JSE. We have launched such products and have found that they work quite well when done right.
However, a huge focus is needed on funding start-ups that are more closely interconnected to the economy. The role of banking, private credit and private equity is crucial to unlocking value in this space. These create employment opportunities, lead innovation, provide crucial products and services that further build local ecosystems, increase stability, confidence and spending levels from both consumers and businesses, as well as attract further capital — allowing full economic growth potential.
These also provide a pipeline for future listed companies that will provide a destination for capital allocators on the exchange. There needs to be a healthy flow of capital between listed and private markets, increasing the connection between markets and the economy and establishing a symbiotic relationship. This is opposed to the current frame of thinking, which looks at a one-directional flow.
In addition to capital, there is an increasing awareness of the pivotal roles of adequate infrastructure, network effects, good governance, knowledge and education in the survival and growth of companies within private markets.
— Private markets are crucial not only for economic growth but also for capital market growth, which can be further used to plough back into the economy.
Banks play a crucial role in providing access not only to capital but also to ecosystems. We are further able to create vehicles such as credit-linked notes, which allow for the pooling of investments and optimum structuring, which caters for various investor objectives while ensuring capital lands in the right hands.
From an investment management perspective, holding companies such as Remgro, which we hold in our listed equity portfolio, provides our investors access to nonlisted private companies, allowing for diversification and the potential of enhanced returns.
They have seen strong performance from their underlying holdings, whose net asset values have increased, doubling their net income, increasing their earnings per share more than 30%. This has allowed them to increase ordinary dividends and declare a special dividend to investors. From a valuation perspective, their discount to net asset value has widened, giving upside potential to their share price.
Private markets are crucial not only for economic growth but also for capital market growth, which can be further used to plough back into the economy. Private markets are the ideal space to close the gap between listed markets and the local economy in the long term, ensuring that when local markets hit record highs the same can be said about the economy.
• Smith is chief investment officer at Absa Investments.
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