This article first appeared in The Edge Financial Daily on March 26, 2018

KUALA LUMPUR: It has been eight months since the launch of the Leading Entrepreneur Accelerator Platform (LEAP) market on Bursa Malaysia, but the new qualified market, which offers an alternative for small and medium enterprises (SMEs) to tap the local capital market, remains relatively quiet, in terms of trading volume among the counters.

At the launch, the stock exchange announced that 11 SMEs had engaged with LEAP’s approved advisers for assistance on the listing process; so far five of them have been listed. In comparison, there were a total of 13 new listings on both the Main Market and the ACE Market in 2017.

Some quarters expected a higher number of new listings on the LEAP market considering the more relaxed listing requirements on this new board.

According to Bursa Malaysia, there is a “strong and healthy pipeline of listing candidates for the LEAP market” based on the “encouraging interests” shown by the SMEs. “Last year, we had 138 one-on-one consultation meetings with potential listing candidates for the Main, ACE and LEAP Markets,” said the stock exchange in an email response.

Still, there are concerns over the low liquidity in the LEAP market.

If we take a look at the 30-day average daily volume of 6,155 shares for all the five companies listed on the LEAP market, the thin trading volume is an evidence of low liquidity currently.

The low liquidity is partly attributed to the fact that investments in LEAP-listed shares are only restricted to sophisticated investors.

Such a restriction serves as a risk management measure to safeguard investors’ interest. Nonetheless, on the flip side, it also deters investing interest in the LEAP market.

MainStreet Advisers Sdn Bhd chairman Datuk Siow Kim Lun pointed out that the lack of liquidity is due to the low floating shares on the open market, in addition to the restriction in participation to only sophisticated investors.

“The trading for the LEAP market counters is only open to sophisticated investors. As such, retail investors are not eligible to trade in this market. Moreover, institutional investors and fund managers do not generally participate in this market in view of the low liquidity.

“Companies listed on the LEAP market are generally much smaller and tend to have a shorter history than the companies listed on the ACE Market and the Main Market.

“Their public spread is also smaller in size as LEAP Market companies are only required to offer a minimum of 10% of the enlarged share capital to public investors,” said Siow.

The LEAP market only requires companies to offer a minimum of 10% of the enlarged share capital to public investors compared with the minimum 25% public spread requirement (excluding treasury shares) for listings on the ACE Market and Main Market.

Another corporate adviser, who requested to speak on anonymity, concurs that the issue of liquidity will remain so long as the restriction on who to invest is there.

Furthermore, he commented that many sophisticated investors might opt for other alternative investment channels, such as venture capital, that do not require them to disclose their net worth.

Public participation is needed

Astramina Advisory Sdn Bhd managing director Wong Muh Rong believes that the removal of the restriction to “sophisticated investors only” could be one way to boost the liquidity in the LEAP Market.

“Instead of limiting participants in the market, regulation on the limit of allowable investment such as, say, up to RM10,000 on the companies in the LEAP Market for ordinary investors could be introduced to reduce investment risks and provide better protection for ordinary shareholders.

“With this control measurement in place, both sophisticated and ordinary investors can participate based on their own risk appetite. If this can be implemented, it will certainly enhance market liquidity and yet limit the exposure of ordinary investors for better risk mitigation,” Wong said.

According to Wong, more importantly, ordinary investors will be given the chance to invest in the LEAP Market should the restriction be removed, creating a “win-win” scenario for all participants in the capital market.

Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia agreed that the liquidity concern should be addressed but not the rush to allow the participation of the investing public. He believes that it will take a while for the LEAP Market to gain traction in the investing fraternity.

“In a few years down the road, investors could look at the track record of these first five companies [and others that are listed] on the LEAP Market, and when they see the survival rate is high with the companies either graduate to the ACE Market or Main Market or remain in the LEAP Market, confidence will grow.

“I think when the confidence is strong, then we can consider opening it for other investors to participate in it as well,” Chia said.

It is worth noting that on other comparable alternative investment platforms, such as the equity crowdfunding platform, the investment opportunity is open for all type of investors but limited to a maximum of RM500,000 for angel investors within a 12-month period and a maximum of RM5,000 per issuer with a total amount of not more than RM50,000 within a 12-month period for retail investors. Only the sophisticated investors are not restricted in their amount of investment.

Bursa Malaysia, however, begs to differ over the liquidity on the LEAP Market.

The exchange stressed that liquidity is not the key focus of the LEAP Market. Its main objective is to groom these companies to become future large companies by providing assistance at an early stage of their business.

“After listing on the LEAP Market and having successfully implemented their expansion plans, we envisage that these companies may subsequently graduate to the ACE Market or the Main Market,” said Bursa, pointing out that the platform provides SMEs the visibility of being a listed entity and pave a path for these companies towards listing on the ACE Market or the Main Market in the future.

The exchange highlighted that only sophisticated investors are allowed to trade in the LEAP Market due to the risks associated with investments in early-stage companies.

LEAP Market remains a good alternative platform

All said, boutique advisers remain positive about the prospect of the platform to help SMEs raise the much-needed fresh capital.

In 2016, there were 907,065 SMEs with 20,612 under the medium size, indicating the huge potential gap for the LEAP Market.

“There have been quite some enquiries [for a listing on the LEAP Market]. However, we are not at liberty to disclose the number, but are looking at companies with a few years of operating history and good potential to scale up their business operations,” Siow said.

He explained there is a lack of promotional activities for the LEAP Market by the bigger investment banks.

“Generally, the bigger investment banks would not look at the LEAP Market as they are targeting large companies for listings. Smaller firms like us do promote the LEAP Market and we approach companies which plan to raise some capital and their corporate profile through a LEAP Market listing.

“We advise them on the costs and benefits of and the requirements for undertaking the LEAP Market listing,” Siow added.

His view was also echoed by the local investment bank’s head of equity capital market, who said that the size of the funds raised through the LEAP Market is usually much smaller compared with the usual initial public offerings. Given the size, it might not be the target clients for the investment banks.

He, however, said that the LEAP Market could also provide potential candidates that could graduate to the ACE Market and Main Market eventually.

For MainStreet, which is the adviser for JM Education Group Bhd, which was listed on the LEAP Market in February this year, it is looking at a few more potential listings on the LEAP Market but noting that the talks are still at an exploratory stage at the moment.

Similarly, for Wong with Astramina, she said that there are about two or three which are expected to be listed on the LEAP Market by the second half of this year or early 2019.

It is also worth noting that the average return of the five listed companies has been rather impressive at about 49.6%, with Cloudaron Group Bhd being the top gainer in the LEAP Market with a 218% gain since its listing on Oct 3, 2017. Cloudaron was also the first company to be listed on the new platform.