#85 Private markets, real liquidity: raising capital when the exit door is narrow with Samuel Mokorosi, Head of Origination and Deals, JSE

TRANSCRIPT: THE bizval PODCAST
Guest: Sam Mokorosi, Head of Origination and Deals — Johannesburg Stock Exchange (JSE) | JSE Private Placements
Host: Graham Stephen, CEO and Co-Founder, bizval
LinkedIn: https://www.linkedin.com/in/sam-mokorosi/
Company: https://jseprivateplacements.co.za

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[00:00:10] Graham Stephen: Hello and welcome back to the bizval Podcast. This is a show where we sit down with the people building, funding, and advising real businesses, and we talk honestly about what they are worth, how that value changes over time, and how it changes hands. I am Graham Stephen, the CEO of bizval. And today we are getting into something that quietly touches on almost every business owner I speak to, even the ones who do not realise it yet. Most companies in South Africa will probably never list on a stock exchange. But nearly all of them will at some point need to raise capital, bring in a new shareholder, or give an existing shareholder a way out. That space, which is broadly referred to as the private market, is where a lot of the real action sits and where some of the hardest problems live. So to help me unpack it, I am delighted to have somebody who sits right at the centre of the Johannesburg Stock Exchange. Sam Mokorosi is the head of origination and deals at the JSE. Sam, welcome to the show. Can you just give our guests a quick introduction and then we will dive right in?

[00:01:19] Sam Mokorosi: Thanks, Graham. I look after origination and deals at the Johannesburg Stock Exchange, which includes sales for new listings across equities, bonds, and specialist securities. But more relevant for this conversation is JSE Private Placements, which is our platform for raising capital in the unlisted space, that private market space, where we help unlisted companies raise both debt and equity.

[00:01:55] Graham Stephen: Fantastic. And Sam, at a personal level, you spent almost 20 years in corporate finance, private equity, and the bond market. What drew you to the JSE?

[00:02:07] Sam Mokorosi: Yeah, so interestingly enough, it was the first part of my title, deals and origination. A lot of people do not realise that the JSE is a private company. We are listed on our own exchange, and so that means we have got shareholders looking for growing returns and profitability, and some of that has come through acquisitions. We bought Link Market Services in 2020, which is a transfer secretary business, now called JSE Investor Services. We have also done a bolt-on acquisition into JSE Investor Services, a share plans business. So from time to time we do look at companies to acquire, and it was really great to come in and do some of that buy-side M&A from the centre of the South African capital markets.

[00:03:15] Graham Stephen: Fantastic. But before we go deep, just a quick question. You have been involved for a while now. In a single sentence, what do you think is the biggest thing that has changed about raising private capital in South Africa since you started?

[00:03:44] Sam Mokorosi: Yeah, so I will even take it a bit further than that. With my listings hat on, one of the big challenges we are having as an ecosystem is that back in the day, a new listing would come out and the prospectus would be available through the post, or you would pick up the application forms through the newspapers. A lot has changed. Things like FICA coming in and some of the regulation have kind of swung the pendulum too far, which has made it difficult for small companies to raise equity in the public markets. The other thing is that asset managers have become more and more concentrated. We have probably about ten houses that control 90% of the trillion-rand savings industry in South Africa. And so it has become harder for smaller companies to raise capital in the listed market. What has then happened is we have seen a growth in the unlisted market for capital raising. We have seen a growth in private equity, a growth in venture capital, and also platforms like ourselves to assist companies to raise capital in this new environment where raising capital as a small cap, so we are talking a billion rand and below, has become harder in the listed market. And this is not just a South African phenomenon. You see these mega IPOs in the US. We have just had SpaceX, now Anthropic, OpenAI. Everybody gets excited about these mega listings. But to raise capital as a small cap has become harder, especially on the equity side.

[00:06:03] Graham Stephen: 100%. And you are seeing it globally. If you look in the United Kingdom with PISCES and the likes of JP Jenkins and others, you are also playing in that space. But before we go further, let us build on some of the foundations for anyone listening who does not live in this world. We throw around words like public and private as though everybody knows the difference. In plain language, what genuinely changes the day a company goes from being private to being public?

[00:06:49] Sam Mokorosi: Yeah, so here at the JSE, we do not ring a bell. We blow the kudu horn in true African style. So when we blow the kudu horn on a brand new listing, a whole lot of things change. Suddenly you become a public company, and so your disclosure becomes more public, but also your profile becomes more public. When your results come out, the newspapers talk about them. They talk about management changes. So it is an important profile raise for you as a private company, and that is a definite big benefit. But it does not come for free. Your compliance typically goes up. You start having to apply King V from a corporate governance perspective. You have to have the right kind of board, an independent board. All of those exciting things change when you become a listed company.

[00:08:09] Graham Stephen: Yeah, so there is profile, there is access to funding, there is liquidity, but there is also a higher compliance and governance cost and you are in the public eye. On the other hand, companies choose to stay private. We have seen globally a wave of delistings. What does a company actually give up by choosing to stay private?

[00:08:43] Sam Mokorosi: Yeah, so one of the things you mentioned is capital raising. A slight nuance on the capital raising you lose when you do not list is that you can even use your shares as currency. A lot of fast-growing listed companies can say, instead of writing you a cheque if they want to do an acquisition, I am going to issue you new shares. You can have my listed company shares instead of cash. And it is important to remember that you do not only raise capital when you list, but you can do ongoing capital raises. We have had a really fantastic capital raise season in the first half of this year. Just looking at our results to 30 June, we have had about 8 billion rand worth of capital raised in the equity market, which is already double what we had seen this time last year. We are seeing that as companies go through different phases of their evolution, they can choose to raise capital. The REITs in particular are coming to market as that market has recovered in the long post-COVID recovery. They are now ready to start building their portfolios again, using their shares to raise cash in order to buy properties.

[00:10:49] Graham Stephen: Yeah. And it is not just about that once-off liquidity event that a lot of private people think about. It is about an ongoing platform when you are public, and the liquidity and the profile and the opportunities that brings. And if you choose to stay private, it is sometimes a lot harder because the banks and institutional funds do not recognise it in the same way. From a valuation perspective, the moment there is a screen price it changes everything. You think about Elon Musk and SpaceX. From one day to the next, what actually changed? Suddenly everyone knows he is the world’s first trillionaire. Well, the day before, was he not also the world’s first trillionaire? Just nobody knew about it. So let us dive into JSE Private Placements and how it is different from the JSE main board. Can you explain this as a founder of a business? Let us say I am in mid-market, so in South African terms somewhere between 200 and 500 million rand. What is JSE Private Placements and what does it actually do for my company?

[00:12:38] Sam Mokorosi: Yes. So JSE Private Placements is a 100% owned subsidiary of JSE Limited. We are an FSP, a financial services provider. We have a Cat 1 licence that allows us to act as an intermediary. And so that is really what we do. We intermediate capital raising. So if you are a founder raising growth capital, maybe you want to build a new factory or expand geographically, you would come to us. We would assess your transaction, get a good sense of the investors on our platform, and whether you fit into their mandate. We have certainly the large majority of the institutional investors in the private market. So all of the guys that are on SAVCA, from venture capital to private equity, private credit type institutions. But we also have debt funders, your traditional banks, business banking folks who have signed up to our platform, as well as non-bank lenders who do procurement-based financing. So we would sit with you as a founder, understand your funding need, go through our list of investors, see who of those meet your particular transaction, and if we are confident you meet our criteria, we can then go out and start engaging with our investors to put your deal on our platform, invite investors to look at your transaction, and start engaging with your business to ascertain appetite.

[00:14:46] Graham Stephen: So it is almost, in lay person’s terms, like a vetted private club. You are putting quality control both on the investors and on the investees, but governance-light compared to a listed company. You do not come with the same reporting requirements and fiduciary challenges. That is an important point to double-click on.

[00:15:11] Sam Mokorosi: That is an important point. So as I mentioned, the majority of the investors on our platform that have money to deploy are actually institutional investors. And so from a governance perspective on JSE Private Placements, the governance checks are done by the investor through their due diligence process, because that is what those guys are paid for. As officials in that venture capital or private equity business, they have parameters, processes, and procedures to actually do that checking. Whereas if you list bizval on the JSE, any member of the public can literally go on their app and start buying bizval shares, so we take on a much higher governance framework for listed companies because it is really open to the public. But on JSE Private Placements, a lot of that work is done by the institutional investors who have the training, the capacity, and the skill to do it.

[00:16:49] Graham Stephen: Yeah. So on the listed market you almost have to idiot-proof it, because you are dealing with people who are not necessarily sophisticated investors. So the controls and checks and balances are a lot more rigorous. Whereas on the private side you are dealing with qualified institutional buyers and professionals who, if they miss a trick, it is on them. Sam, just from a strategic point of view, JSE Private Placements has been going since December 2021, so it has been almost five years now. Why did the JSE build this at all? What was the gap you were actually looking to fill?

[00:17:33] Sam Mokorosi: So we recognised both the need and the opportunity. From a need perspective, capital raising in the public listed markets has tended to favour larger companies over time, and so we saw that need for smaller companies from a capital raise perspective. And I think the opportunity is that we are seeing a lot more activity in the private markets, and so for us as a business, we saw the opportunity to capture some of that flow and generate revenue in terms of what we are seeing.

[00:18:18] Graham Stephen: Fantastic. So I want to move on a little bit. You spoke about it earlier, but there is pressure on public markets. You cannot really discuss private markets without discussing that. If we look at the number of listings on the JSE, and not just the JSE but the New York Stock Exchange and London Stock Exchange, they have all fallen a long way from their peaks. What is actually driving that in your opinion, and how much of that do you think is a South African story versus a global one?

[00:18:54] Sam Mokorosi: Yeah, so let us take the US for example. I think about 20 years ago they peaked at around 7,000 listed companies. Can you imagine the JSE at that level? But they have now dropped and the JSE peaked at about 700 funny enough. And now the US is down to somewhere between 3,500 and 4,000 listed companies. It does go in waves. We have dropped from around 700 companies in probably the late 90s or early 2000s to now around 250 companies. What is interesting is that Allan Gray actually put out a paper on this a few years ago to say for them, the number of counters is not as important as the number of investable counters. So if you are a large asset manager, someone listing a 50 million rand business does not really help you in terms of broadening your universe of investable companies. And so we have seen that market caps have grown. The average size of a listed company has grown over the last 20 to 30 years, which has actually given institutional investors more opportunities to invest. And that is driven by asset managers becoming larger and larger, but also companies becoming larger and larger. We are seeing this trend where a Standard Bank buys out Liberty, large companies swallowing up smaller companies, Walmart buying Massmart. But you have also seen the growth of private capital. Private equity and venture capital assets under management have been growing globally and locally. And so you see somebody like DP World coming to South Africa and buying Imperial Logistics as an example.

[00:21:35] Sam Mokorosi: I do think that in every healthy market there will be a certain number of delistings. The real problem is when the delistings are so many more than your listings. And so the low number of listings is really what we are looking to change. We are doing that through various means, giving small caps a lot more exposure through online shows and television, really pushing the research narrative. And we are starting to see those small caps come back to market. We have had a few smaller guys in mining, financial services, even in the crypto space and the cannabis space. We are also conversing with government around policy interventions. We like the Australian model where if you are a sophisticated enough investor, you can use your pension money to do some stock picking. We have also seen other markets with much higher tax-free savings account limits that are allowed to invest in specific stocks. And in Canada, if you invest in an exploration company, you as the investor get a tax credit. So we are having all of those conversations with government to help increase capital raising in the small cap space and stem the number of delistings.

[00:24:04] Graham Stephen: I guess if you rewind 30 or 40 years, maybe I am oversimplifying it, but it was kind of binary. You were listed and you had access to liquidity, or you were not and you did not. But markets have matured and you now have more choices in that bridge and intermediary space. And actually, if we get to the heart of the problem, it is around liquidity. If you are a founder or a shareholder, one of the reasons you want access to markets is not just to raise funding to grow, but also liquidity. If you have got a minority shareholder that wants to step out, who is there to buy them out? You do not want to have to go through a massive process every time. So how does the liquidity problem actually show up for shareholders and founders, and what does being stuck with no liquidity actually look like?

[00:25:39] Sam Mokorosi: 100%. So once you have invested in a company, how do you get out if that company is unlisted? We had the Section 12J instrument that had the tax deduction. We have seen how a lot of investors have struggled to get out of that. We have even seen attempts at democratising private equity and venture capital where someone will set up a fund with a lower threshold for new investors, maybe a million rand or half a million rand. What then happens is you write that cheque as an individual and then your money is stuck there for years in terms of that liquidity lock-in. So that liquidity constraint is a real problem. There are two ways to tackle it. One is you can treat the opportunity to exit as just another primary market capital raise. So if you and I are shareholders in a private company and you want to exit, if I am the majority shareholder, I could go to the market and engage in these sometimes month-long, sometimes year-long conversations, NDAs, due diligence packs back and forth, and hopefully get another shareholder to buy you out. The other way, and I know you are involved with PISCES in the UK, is to really try and figure out how to look at liquidity specific to the secondary market. What that means is periodically providing information to investors, always a closed pool of both current shareholders and those that may want to come in, sharing half-year results, the way the market is looking, expectations going forward. And this is the price we set as a company for the shares. Who is in? Who is out? Let us try and match those up. A matched bargain platform, I think, is the word they use.

[00:28:36] Graham Stephen: 100%. And look, it cannot be fully automated, at least in the South African space, because if you automate those buy and sell orders you are suddenly running the work of an exchange and then you have to have all the listings requirements and all that infrastructure, and then you are back in a public market anyway. So those are the kinds of opportunities you are looking to introduce in the JSE Private Placements space. Sam, just drilling down a bit, one of the things with an unlisted investment or private placement is that without a market price, how do a buyer and seller even agree on what a share is worth? And how much of this deadlock is a valuation problem versus a buyer shortage problem versus an information problem?

[00:29:34] Sam Mokorosi: Yeah, I think it is all of the above. And what is important is the quality of the information. And also what you always want to try and avoid in these situations is having more sellers than buyers. So everyone is trying to exit through this thin door, and that can create a crisis of confidence. So quality is always going to be an important point. If your company is profitable and growing nicely and the prospects for growth are strong, then you are going to have buyer interest. And even going all the way back to our conversation about public markets, there is only so much you can solve for in the structure of markets if your economy is weak and not growing and you are not getting really high quality companies being born on a daily basis. That is a macro challenge for South Africa. But you bring that down to a micro challenge in liquidity. If you have been posting years of continuous losses and revenues going down, and you try to do a liquidity round to say some of my shareholders want to exit, the quality of that business is questionable. And so you are going to struggle with everybody rushing out the door and nobody coming in. Even if you have a perfect market structure, your liquidity round in that scenario is going to be very difficult.

[00:31:38] Graham Stephen: 100%. Yeah. I mean, going back half a step, we spoke about PISCES in the UK. As you explained, it is a regulated market for private company shares. PISCES stands for Private Intermittent Securities and Capital Exchange System. It is a periodic event as opposed to the JSE or listed markets which are live tickers. What do you think is significant about that model? Why is that intermittent window so important in the private space?

[00:32:27] Sam Mokorosi: Yeah. So again in the private space, one of the reasons companies may want to stay listed for longer is that they want to have the space to actually run the business on a day-to-day basis without having to be interviewed by Business Day or worry about making a wrong decision. So the fact that you make it intermittent means that you as a small management team can focus on running your business for most of the year, and then whether it is semiannually, you can say, all right, we are now in a liquidity round for the next month or two. Let us focus on that. It also protects investors by giving them time to understand the latest information, to digest it, knowing that we are all seeing the same information as potential private investors coming in or going out, and then we can make informed decisions.

[00:34:03] Graham Stephen: Yeah. I think there are a couple of important things there. One, there is almost a pragmatism around a practical aspect, okay, you do not have a full team running the listed investment so you can focus on building the business. And second, one of the key things in any market is parity of information, but there is also an ability to reduce compliance costs without stripping out the governance and the transparency that is needed to make that work. Coming back to South Africa though, and before we dive into the opportunities with the JSE, what is unique about South Africa that might make that model harder to carry over here? Is it policy, concentration, the growth environment?

[00:35:01] Sam Mokorosi: Yeah. You do need policy interventions to allow for this to be more freely realised. You currently do have some platforms that are more like bulletin boards that allow for people to get in and out of their private shares, but there is a lot of friction there. And it is always great when policymakers are clear about, we want private market liquidity and we think the right way to do it is X, Y, Z. Then everybody knows what the rules of engagement are and you avoid a situation where everybody is trying to fit round pegs into square holes. I think that is what PISCES has done and what the US regulators have also done, to have clear rules of engagement around this. But it starts with that policy intention to say liquidity is important for mid-cap unlisted companies. How do we allow that to happen?

[00:36:53] Graham Stephen: Sam, we have probably got another five to ten minutes left. I want to just focus on three more questions. The first one is practical. Where do you think the demand is strongest right now? Which kinds of businesses are actually getting funded? And following on from that, where do you think the biggest structural opportunities are in terms of bringing capital into this ecosystem?

[00:37:29] Sam Mokorosi: Well, let me start by saying where I do not see demand, which is a systemic issue we need to solve. There is very little demand for startups, very little demand for turnarounds, and very little for funding micro businesses. Even if it is not a dire situation, maybe a solopreneur has been running their little business for five years and suddenly gets a big contract that needs working capital. It is difficult to find that kind of capital. You can get procurement-based financing, invoice discounting, purchase order financing, but it is often quite expensive. And if you have got a two or three-year contract to supply a corporate but it is not yet at purchase order level, it is hard to find money there. So the opposite is true in terms of where the opportunities are. If you are a growing business, 20 million rand and above is kind of the floor. Private equity is looking to talk to you. Generic private equity will say no properties, no agriculture, no mining, but they will do mining services, property services. Private equity is still active and keen there. You do need a little bit of an angle, so you should be really fast-growing or really scalable. And scalability is important for VC guys. That is why they like technology. So VC deals are being done. Apart from that, the mega deals in private markets are typically your renewable energy type transactions, and that goes up and down in terms of the renewable energy rounds the government does. But we are also seeing a lot of deals being done on the back of private power purchase agreements, where a corporate will write a PPA with a developer. And I am really curious to see how deal-making ticks up in some of the infrastructure space like ports and rail as Transnet starts to open up that market.

[00:40:30] Graham Stephen: Fantastic. So I want to give you time for two more questions. The first one is around the role of the ecosystem. The JSE and the private placements division are part of this ecosystem, but no deal just happens on its own. Just because the JSE is there and supporting this does not mean it is going to work. Who else is needed in this ecosystem to make sure it works well?

[00:41:10] Sam Mokorosi: Yeah, certainly. So we see advisers as an important enabler in our market. We are really a matchmaking platform. We will not do your valuation, your pitch deck, your financial model, all of that good stuff that advisers do. That is the world I came from before the JSE. So I think that is an important part. I do think that we have a lot of risk-averse capital in this country. A lot of that capital sits inside your asset manager base which then ultimately sits inside pension funds and collective investment schemes or unit trusts. I think that part of the ecosystem when it comes to private markets is still quite shy. And so unlocking higher pools of capital from those traditional sources will be really good in years to come.

[00:42:30] Graham Stephen: Yeah. It is about perception. When you are employed in corporate you think you have the safe secure job, and then when you become an entrepreneur you think your safety net is gone. But the reality is when you are in corporate you are three months away from a retrenchment. Whereas if you are an entrepreneur, you can always find another contract. And I think that is going to shift and change over time as this ecosystem matures and people realise there actually is opportunity and it is maybe not as risky as perceived. I want you to wrap up by looking into your crystal ball. Where do you see private markets going over the next five years both here and globally? And do you think public and private markets are going to start to converge or go on parallel tracks?

[00:43:39] Sam Mokorosi: Interestingly, I think private markets seemed unstoppable until the 2022 interest rate shock, preceded by the Ukraine war, and central banks started increasing rates. So we have seen a little bit of a pullback in private markets. I see that at least in the private equity space the US is starting to see more inflows. We have also had talk of a bubble in the private credit space. I think generally what is probably going to happen is that you are going to see private equity and venture capital start to rebound first in the US and Europe, and we are probably about two to three years behind. I do not think we are going to see the same kind of pain in the South African space for private credit as what happened in the US. And the other thing about being in private markets is that the pain is a little bit easier to hide and it is often easier to kick it down the road, which I think is what is happening particularly in the US private credit market. If all of that was listed, you would have a much bigger problem and a lot more noise. So I do think there is going to be more of a recovery, and in the recovery I think there is going to be more moving closer to public markets. We actually hosted an event at the JSE with a crowd called AT50, Africa Tech 50, which is the top 50 unlisted tech companies across the continent. These guys in London have created an index of these top 50 companies and are getting them listing-ready by publishing an index and having events to publicise them. And that is just another indicator of private markets starting to use some of the infrastructure and information of public markets. I think that is definitely a trend we are going to see going forward.

[00:46:32] Graham Stephen: Fantastic Sam. I wish we had more time because we could speak for days on this. Just a last question. Part of what we do at bizval is always keep the founder or the shareholder at the centre. So if you were speaking to a founder or a shareholder listening right now who feels stuck, no obvious way to raise money or realise the value of what they have built, what is the one thing you would tell them?

[00:46:58] Sam Mokorosi: Yeah. So I think the quality of your business reflected in the quality of your paperwork goes a really, really long way. We see a lot of great entrepreneurs running great businesses, but the quality of the paperwork is not always there. And so having good quality paperwork really goes a long way when you are thinking about fundraising.

[00:47:23] Graham Stephen: Absolutely. We say exit readiness. Can the business run without you? Have you got your systems and processes documented? These are actually basics. When you get to listed level it has to happen. At a private level it does not always happen. So get ready. Get somebody to help you. And with technology nowadays, it is easy just to narrate your processes and have Claude map it out for you. That is better than nothing. So the basics of getting exit-ready, do that.

[00:47:56] Graham Stephen: Sam, it has been one of those topics that quietly affects every business owner. You have made it a lot clearer. If you are listening in and you are a company or an investor wanting to find out more about JSE Private Placements, go to jseprivateplacements.co.za. And I am sure you can find Sam on LinkedIn under Samuel Mokorosi. Sam, it has been an absolute pleasure having you on the show. Any closing words before we wrap up?

[00:48:42] Sam Mokorosi: Yeah, no, thanks for the time, Graham. Really enjoyable conversation.

[00:48:46] Graham Stephen: Fantastic. Well, that is it for this episode. Thank you for tuning in. Until next time, keep building real value. Thank you, everyone.

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