Plans are underway for a new technology board to foster investment in Australian companies. While such talk is encouraging, many funds managers say they’ve heard it all before. STEPHEN SHORE investigates the viability of the Asia Pacific Technology Exchange.
Last month the Newcastle-based National Stock Exchange and Enterprise Pacific announced a bold joint-venture to launch a technology board in Sydney’s north. Touted as the Australian version of the Nasdaq, the Asia Pacific Technology Exchange (Aptex) will ostensibly be a new home and source of capital for local technology companies, while also playing a part in a broader plan to stimulate the “innovation economy” in Australia.
Enterprise Pacific, a not-for-profit company, was formed to create and promote the ‘Pacific Technology Corridor’, literally the cluster of technology companies running from Macquarie Park to North Sydney. According to Enterprise’s chairman, Geoff Mullins, the future of national wealth must come from intellectual capital, and it needs to be established now.
In its first few months, the Government has also emphasised the theme of “nation building”; supporting investment initiatives that contribute to Australia’s growth and development. Parliamentary secretary for early childhood education and child care, Maxine McKew, in whose electorate Aptex will be located, says the technology exchange is an example of what is needed to attract investment that will promote Australian innovation and technology.
While supportive of initiatives to boost the profile of Australia as a technology hub, many investors are sceptical about the practicality of a technology board on the NSX. Beyond the ideals, what Aptex essentially offers to technology companies is a platform that is cheaper, with less stringent listing requirements than the Australian Stock Exchange. A host of small and micro-cap managers, some of whom specialise in technology stocks, told Investment & Technology that they have no plans to look beyond the ASX, whose listing requirements they say “are not that onerous”, in the words of small cap manager Brian Eley from Eley Griffiths.
Managers say they are wary of companies that are unable to meet the ASX’s requirements. Small caps have already been hit hard by the liquidity crisis, and the appetite for “concept stocks” that draw on resources for years before delivering returns is at an all time low.
Such companies are typically the domain of venture capital. Katherine Woodthorpe, chief executive of the Australian Private Equity and Venture Capital Association (AVCAL) says that raising capital isn’t necessarily the biggest challenge that early-stage technology companies face. “Venture capital acts with a company to provide management expertise, bring experienced people onto the board, and get a company ready for public listing or a trade sale,” she says. “If a company can’t get venture capital, there is a reasonable chance it doesn’t have a strong enough business proposition. The NSX may allow smaller companies to list earlier, but some of these companies probably aren’t appropriate for capital markets.”
Lachlan Douglas, director of private equity placement agency Principle Advisory Services, says the problem with early-stage tech companies in Australia is not the technology, the availability of capital, or the lack of markets to exploit. It is the “paucity of entrepreneurship”. There aren’t many mangers with a track record of bringing these kind of companies to commercialisation, he says. “I don’t think creating a technology board on a second exchange addresses that challenge.” Mullins of Enterprise Pacific, however, says the initial 20 companies planning to launch on Aptex are hardly start-ups. “They are emerging,” he says. “They are one step past the traditional angel investor and at the commercial stage.”
Mullins estimates the initial companies will be capitalised at between $12 million and $70 million, making the total size of the exchange between $350 million and $650 million. Woodthorpe says at the $12 million end, companies are still well inside venture capital territory. At the $70 million end, they could be looking at listing on the ASX where there is more exposure. “For the companies in the middle, listing on Aptex might be feasible. But it makes for a small market raison d’etre.” Peter Mouatt, managing director of Adam Smith Asset Management, says “we want companies that we invest in to be listed on markets with deep and recurrent interest, so they have liquidity. If the Aptex can achieve that it would be great, but at the moment there are plenty of small companies on the ASX.” Richard Symon, chief executive of the NSX, argues there is less exposure when a small company lists on the ASX. “There is much more interest when a small company lists on our exchange,” he says. While he acknowledges there is less trading, Symon says the NSX is there for companies that want investors rather than punters, and less speculating actually reduces the volatility.
“We have a pipeline that is approaching that of the ASX. Singapore has three exchanges, and London has three. Australia is unique in having only one dominant player,” Symon says. At the time of interviewing, Symon was in London to discuss cross-promoting NSX listed companies on the Alternative Investments Market (AIM), which has recently outgrown the main market on the London Stock Exchange. “This is one of the ways we are planning to increase liquidity,” he says.
“Companies, brokers and investors are all saying Australia desperately needs something like this,” according to Enterprise’s Mullins. “It is about efficiency. There are a certain group of investors who focus on that area, and the board will make it easier for them. Companies will be able to access the right sort of stickier investor.” While increasing investment in Australian technology is an admirable aim, some fund managers argue that it is not practical. “Realistically, Australia is not about to become the knowledge base of the world,” says one small-cap manager, who invests primarily in US technology companies. “The Pacific Technology Corridor is not about to become the next Silicon Valley. Australian technology companies are too risky.”
But Mullins says there is much more focus coming into Asia. “We can’t keep clinging to the US,” he says. “Attitudes are changing.” Alan Beasley, managing director at Ascend Asset Management, says formulaic and quantitative strategies have taken the art out of investing. “The markets are full of activity, but not much action,” he says. “Institutions trade among themselves without creating any real wealth. With seed capital and direction, Australia has demonstrated time and time again it can produce successful companies, especially in the bio-tech and medical industries. If Aptex can generate enough interest to help these companies raise capital, I think it’s a great initiative.”
Attempts to create a technology board in the past have failed, but Mullins says the NSX and Enterprise Pacific are building upon the mistakes of the past. “We are engaging a group of knowledgeable stakeholders: major broking groups; major accounting houses; lawyers; business associations such as the Ryde business forum; angel investors; and tertiary research groups. We are looking to actively engage financial planning groups, brokering houses, and launch marketing and education campaigns.
“On day one all the pieces won’t be there, but the plan to build upon them will be more robust than it has been in the past.” Mullins says the board will be ready to launch by the end of the year. Whether the markets will be ready for a technology exchange by then is another story. “We are preparing now, and companies can organise their compliance. When the market stabilises we will be ready.”
