This time last year, South Africa’s first new stock exchange in several decades got underway. The brainchild of Etienne Nel, Geoff Cook and Graeme Wellsted, ZAR X has given the industry a huge shake up, though it hasn’t all been smooth sailing. CEO, Etienne Nel, spoke to CFO South Africa about the highs and lows, what they’ve learnt and what they’ve accomplished, in the year that’s passed since they set up shop.
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"Quite simply, this time last year we were on the edge of our seats awaiting the outcome of the licencing process. We were awarded the first new stock exchange licence in almost six decades," says Nel, when asked how the past year has been for him. "That was the highlight, without a shadow of a doubt. A close second was the go-live of our first listing," he adds. Nel says the past year has been particularly rewarding in the sense that, once the licence and application process was dealt with, the team could get down to "actually operating the business, which was great".
Indeed, it was a year fraught with difficulties and Nel says that challenges came in many different forms. "The biggest for us was breaking the mould because, having had an exchange like the JSE operating a monopoly for 60-odd years, people didn't really understand the impact that has. For us, one of biggest challenges was the educational aspect of what we are trying to do here, to get people to the point where they understood that this was different and could actually work. I'm talking here about the market - investors, the banks, the brokers, asset management firms - everyone was asking if this was possible."
"This is why our first listing, Senwes, was such a big milestone for us, because seeing is believing. People saw that we could onboard a listing and settle a trade within ten seconds. But, the educational component is playing a significant role and, I must confess, I underestimated the enormity of that role in our operational life."
Getting going
The new exchange's first listing was agricultural company Senwes. Nel explains how this process went: "With Senwes, we engaged with them and presented to the board, and met their executive team. I don't think that's something which the current exchange has ever done - pitched for business. If you think about it carefully, the assumption when people spoke about listing was listing on the JSE, because there was only one exchange. But now there's a second exchange and companies suddenly have to consider where to list, and what they wish to achieve with their listing."
"Senwes was quite comfortable. The company's ethos is breaking new ground, and, as a large agri-business, they are very innovative and open to new ways of doing things. There was almost a meeting of cultures because, at ZAR X, we always ask why not, and it's these sorts of things that put a solution on the table for Senwes. Senwes' share register was already in an electronic format and they were already reporting in IFRS, so we were able to do all the paperwork, onboard the register and have everything up and running in under a month. This shows you the speed at which we can move. Once we receive a listing prospectus, we can onboard a listing in four to six weeks. That's a big differentiator, especially if you consider that a listing on the JSE can take upwards of nine months."
Swing of things
To date, ZAR X has listed three companies - Senwes, Senwesbel and TWK Investments, with discussions currently underway with several more. Nel says things are going really well for the recently listed entities.
"Since Senwes listed in March, their share price has gone up 14 percent. Its holding company, Senwes Beleggings (Senwesbel), is a restricted share - something ZAR X pioneered - and its share price is up around 5.5 percent. TWK, also an agri-business, which listed in June, is also up 5.5 percent on some fairly robust volumes."
ZAR X also breaks new ground by operating a 'restricted market', Nel explains, in which holders of B-BBEE shares can realise value after participation in empowerment structures. "Until now, B-BBEE structures set up by, particularly, large corporates, have been debt-financed and have limited lifespans (five to seven years), during which BEE shareholders gain no economic benefit," he says. "At the end of the period, shareholders are paid a once-off dividend based on the growth of the value of the parent company's shares. Their participation in ownership of the company ends when the structure is discontinued."
There is no opportunity for the BEE beneficiaries to actually buy shares in the structure in their own right - on a retail basis, Nel says. ZAR X's founders pioneered the concept of BEE in perpetuity, which now makes this possible, along with making it affordable for brokers to do the small transactions that would be involved. "Transformed companies are therefore able to retain or enhance their empowerment profile in perpetuity. The restricted market can also be used by other types of businesses that wish to apply particular criteria to share ownership," Nel says.
Attracting interest
The team is "delighted" with the progress they've made thus far, says Nel. "On the back of these listings we've seen the brokering fraternity starting to sign up and we've had more companies come to talk to us about wanting to list," he adds.
ZAR X has also been approached by several JSE-listed entities considering transferring their listing from that bourse to this one, which Nel calls "pretty newsworthy".
"Up until now you could only delist from the JSE. In a transfer of listing environment, investors' rights aren't being prejudiced, so you now need to set up a regime that allows for the transfer of listing. We are in discussions with the Financial Services Board (FSB) in this regard."
Asked about their strategy to grow the client base, Nel says it was almost a case of people needing to first see it, before they could believe it. "Now that people understand how we operate, and have seen that the risk in the ZAR X environment is very limited (because there's very little settlement risk), their interest is piqued," he says. "We are not listing dodgy companies. Senwes is a significant organisation - they do R10 billion revenue. Likewise with TWK, which does R6 billion in revenue. So, the markets have taken comfort in the fact that there's low settlement risk and that the listings we are doing are getting traction very quickly."
Putting up a fight
The ZAR X team has had to don the proverbial boxing gloves on several occasions over the past year, defending the company against the JSE and another new stock exchange trying to gain a foothold, 4 Africa Exchange (4AX). In June this year, 4AX filed a review application with the high court - the third time that it has attempted to press legal proceedings upon ZAR X. Its prior attempt in January this year saw the FSB Appeal Board, chaired by retired judge Louis Harmse, deliver a comprehensive judgement dismissing the allegations that 4AX is now seeking to have reconsidered by another court. Nel comments on the matter: "The legal proceedings were, in my mind, put to bed very succinctly by Judge Harmse, as we won the February judgement unequivocally and with punitive costs. The judge felt that the JSE and 4AX were wasting the appeal board's time. He also anticipated someone taking the matter on review and actually addressed this in his ruling, saying there was a slim chance of it succeeding. While 4AX took it on review, the JSE decided not to pursue it any further."
Nel says he believes the JSE was somewhat misguided because ZAR X operates on a completely different settlement regime with a different set of rules.
"While, from an industry perspective, JSE CEO Nicky Newton-King's point of saying that a proper policy framework should have been in place was valid, I think it was misguided against us. Our settlement model is so fundamentally different. We wanted to mitigate risk, not add risk."
There is some light at the end of the tunnel, at least, Nel says: "Through all the legal challenges, our processes and our listing requirements were not found wanting in any shape or form. So, this actually strengthened our resolve to say they don't understand our model and made us again realise that we needed to educate the industry."
Surging ahead
According to Nel, when the ZAR X founders first set out on this journey three years ago, they had a certain vision in mind, though he says they perhaps "underestimated the desperate need for an alternative capital raising platform in the South African market". The market has "absolutely inundated" ZAR X with requests to do new and innovative stuff, Nel says. "In many instances, some of the solutions that are being put on the table have been around for a few years on the international arena, yet for whatever reason, they haven't filtered through to the South African capital markets," he explains. "We talk to people and we're at the point where we have to sit back and say, where's the lowest hanging fruit, because it's become that overwhelming. It's been rather humbling to see the response from the capital markets and how people are embracing the openness that we have to new ideas."
Asked what the remainder of 2017 holds, Nel says new listings, and hopefully lots of them.
"We've got a financial services sector listing in the pipeline and potentially another agri listing. We've also got some preference shares in the pipeline and we're talking to two BEE structures that are doing some very interesting stuff. Hopefully those will come through during October or so. Most of these new listings will be live before the end of this year."
Nel says the number of enquiries the company is receiving for listings is doing well to energise the team. "We're going at 100 kilometres per hour. We're averaging three to four brokers a month joining us, which is driving demand," he says. "We are having a lot of conversations that are triggering some excellent ideas. It's great. Personally, I relish this challenge."
By Toni Muir
This article first appeared in CFO Magazine
