Fundraising by SMEs in Malaysia
Hanita Othman, Vice President, Primary Market, Listing Development, Bursa Malaysia (BM) recently took part in the WFE’s SME conference, on a panel about global perspectives and solutions, and writes here about how BM has helped fundraising efforts by SMEs.|
Based on census compiled by SME Corporation Malaysia, a government agency responsible for the policy formulation and development of SMEs in Malaysia, there are 907,065 businesses established in Malaysia in 2016, where 98.5% of them are SMEs, mostly in the services sector.
In 2016, SMEs in Malaysia expanded at a faster pace than the overall economy, despite the challenging environment facing them. In the same year, SMEs recorded real Gross Domestic Product (GDP) growth of 5.2% which outpaced national GDP growth of 4.2%, while SMEs’ contribution to national GDP was 36.6%.
The main challenges faced by SMEs are in raising funds to finance their businesses. The funding gaps are most prevalent amongst start-ups and early stage companies where there are difficulties in obtaining credit for working capital and investment in assets. It is difficult to convince financiers or new investors when the company does not possess an established track record and inadequate collateral.
Amongst the incentives introduced by the government are measures such as government guarantees and grants; some of these are targeted at specific industries e.g. technology and biotechnology. However, these are inadequate to address the funding gaps.
Bursa Malaysia (“Exchange”) launched the MESDAQ Market in 1997 to attract listings of technology-based and high growth companies. In 2009, it was transformed into the ACE Market, an alternative market for emerging companies of all sizes and sectors to raise capital. Since its launch, the ACE Market has attracted a sizeable number of companies of various sizes to list. However, it was observed that smaller SMEs, such as start-ups or developmental stage SMEs, continued to shy away from the capital markets as it still involved higher transaction costs, relatively more stringent listing requirements, and complex regulatory frameworks. For example, the average cost of raising capital for the ACE Market is RM3 million, and as such, may not be cost effective for smaller SMEs to raise funds.
Given the significance of the SME sector to the economy, in July 2017 the Exchange launched the Leading Entrepreneur Accelerator Platform or LEAP Market, the first of its kind in ASEAN, aimed at providing SMEs with an alternative and efficient fund-raising platform through the capital market. The LEAP Market was established to facilitate capacity building in SMEs by bringing together all the relevant players on one platform, and creating a conducive environment to raise funds in an efficient and transparent marketplace. For SMEs, the LEAP Market offers a cost-effective platform for fundraising and short time-to-market, while enhancing their visibility and profile through being listed. In addition, listing on the LEAP Market serves as an intermediate step in corporate governance and disclosure requirements, facilitating a path towards listing on the ACE or Main Market in the future.
Due to the risks associated with investing in companies which are at developmental stage, only sophisticated investors (being individuals and corporations that have fulfilled minimum income or net assets value threshold) can invest in companies listed on the LEAP Market. However, investors can take comfort in investing in a transparent and orderly market with easy access to information and disclosures, while also having the flexibility to divest their equity. This move is part of our commitment to Goal 8 of the Sustainable Development Goals to encourage the formalisation and growth of SMEs, including through access to financial services, and is also in line with the WFE’s recommendation to enhance SME access to equity market finance.
To enable wider access to the market, we have also introduced an additional pool of advisers to act for LEAP Market applicants. This allows more players to participate in the capital market which we expect will contribute to a more vibrant marketplace. In tandem with the launch, we embarked on initiatives to build awareness among interested companies through mass marketing in collaboration with government agencies as well as private sectors that are involved in the development of SMEs and entrepreneurs in Malaysia.
Other regulated alternative fund-raising platforms are fintech-based Equity Crowdfunding and Peer-to-Peer lending, both regulated by the Malaysian Securities Commission. The platforms were launched in 2015 and 2017 respectively, and are open to all Malaysian private companies, operated by qualified entities that are registered with the Securities Commission.
Our goal is to help spur the growth of SMEs by providing a platform for equity financing at the early stage of business. With the addition of the LEAP Market to the existing ACE and Main Market, Bursa Malaysia’s multi-tier platforms for fund-raisings can now cater for companies at various growth stages to realise their potential, while offering a complete range of investment and trading opportunities.