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Trends in Public Markets – The right market at the right time
March 16, 2023

The post-COVID economic recovery is slow work for many sectors. According to EY’s IPO Trends Report, global IPO volumes dropped by as much as 45% in 2022 - with a dismal handful of IPOs on the NZX over the last two years.

An IPO, or Initial Public Offering, is the first sale of a company’s shares to the public when they initially list on a public stock exchange. The number of IPOs is often used as a gauge for the health of a market – investors love to see exciting new companies coming to the market, with the potential for new growth and higher returns in their portfolios. But what influences a business’ decision to come to the public markets and what are the changing trends?

Smaller companies new to public listing requirements can find the compliance obligations difficult, and in the current market conditions, some are deciding that the benefits of a traditional public listing aren’t sufficient to justify the additional costs. The additional obligations, which are designed to protect investors and ensure a fair market, usually include a requirement for continuous disclosure, which means the business must constantly monitor for material changes of information that need to be immediately reported to the market.

Undoubtably, access to capital and liquidity are the two main drivers for listing a business on public markets. Capital is vital for business growth and consideration must be given to the best capital pathway. A public listing can make it easier and quicker to raise capital when needed. Liquidity, which is the ease with which investors can buy and sell investments already made, is also a necessity to attract many larger investors. No investor wants to get stuck in an investment that’s no longer suitable for their needs, and businesses don’t want those investors on their shareholder register either, as they are less likely to be supportive when the business next needs capital.

A continuously traded market like the NZX, or ASX in Australia, means that buyers and sellers can trade at any time while the market is open, which many businesses incorrectly assume that always maximizes liquidity. This is true for our largest businesses that have sufficient trading demand so that recent prices are always visible to investors. However, if trading is light, the lack of recent prices tends to disincentivise new orders, and this is where markets have moved towards alternative solutions for smaller businesses.

A licensed market with continuous trading must necessarily impose continuous disclosure requirements on listed businesses because fair markets need to give investors protection whenever they trade. The cost and resources required to make sure the business continuously discloses all material information can, even with a dedicated Investor Relations team, take the focus away from running the business.

Indeed, the shareholders of LayBuy Group Holdings (LBY) recently voted to delist from the ASX and the LBY directors have publicly stated they will save NZ$480,000 annually in reduced administration and compliance costs. They claim that delisting will also free up management time, which could be better spent on other matters for the benefit of the company and its shareholders. They believe the move should enable them to increase shareholder value as the current share price doesn’t reflect the true value of the business.

Catalist’s Public Market is different from traditional stock exchanges, in that it is designed for investments where trading is expected to be relatively light. We are increasingly seeing our markets, both public and private, being utilised by Venture Capital (VC) funds and growth businesses that expect lower volumes of trading. These businesses, and their investors, gain the benefits associated with a traditional listing, but with much lighter compliance cost or burden. LayBuy Group Holdings expects to list on the Catalist Public Market toward the end of March 2023, to continue to give its investors access to a licensed and regulated market that will be more suitable than its current ASX listing.

How is Catalist different?

Catalist’s Public Market acts like a traditional stock market, but the use of periodic auctions is designed to lessen the cost and regulatory burden for growth businesses. Listed companies can raise up to $20 million per year from the public without needing to complete a costly ‘regulated offer’. Yet investors still get protections equivalent to a traditional stock market, as the businesses release full information at the times of the periodic trading. For these reasons, Catalist is considered a ‘stepping stone market’, where businesses can transition to a more traditional stock exchange, such as the NZX, as they grow.

Catalist offers periodic (or “call”) auctions, a widely accepted method for transparently and fairly defining the market price for less-traded financial products. Similar auctions are used at each end of the trading day on traditional markets, such as NZX and ASX to determine opening and closing prices. Generally targeted at less frequently traded shares, all orders are ‘batched’ together for simultaneous trading, at a single price, when the auction closes. The single price is determined by the value that maximises the volume traded, based on the total of all buy and sell orders.

Buyers can place an order stating the maximum price they’re willing to pay. Sellers state the minimum price they’re willing to accept. The trades will happen at a single price that remains fair for everyone and where the most shares can be traded. Buyers are generally successful if they have agreed to that price or a higher, as well as sellers, if they agreed to that price or lower. By bringing all willing buyers and sellers together at one time, periodic auctions can generate sufficient trading volumes that encourage more investors to trade.

The Opportunity

Growth companies considering their capital raising strategy should investigate their options, including looking at investor expectations for future liquidity. Register your interest for information on how Catalist’s markets could work for your company. Investors can also sign up for a Catalist account to ensure you don’t miss out on upcoming investment opportunities.

By Michelle Polglase