Reshaping Malaysia's Capital Markets for the Tech Era - A Summary of Session D

Updated: Dec 12, 2019



PERDANA LEADERSHIP FOUNDATION CEO FORUM 2019

SESSION D: Reshaping Malaysia's Capital Markets for the Tech Era


Panellists:

  • Mr Chin Wei Min, ED and Head of Digital & Innovation, Securities Commission, Malaysia

  • Ms Juliana Jan, CIO, Cradle Development Fund

  • Ms Biruntha Mooruthi, VP, Head of Intellectual Property & Commercialisation Specialist, PlaTCOM Ventures Sdn Bhd

  • Ms Elain Lockman, Partnerships, Deal Flow Screening & Risk Management ATA Plus

  • Dato Sulaiman Mohd Tahir, Group CEO, AmBank

  • Datuk Muhamad Umar Swift, CEO, Bursa Malaysia Berhad

  • (Moderator) Mr Liew Nam Soon, Asean Markets Managing Partner, Ernst & Young Advisory Pte Ltd


Summary


This panel discusses how different stakeholders view the evolution of the capital market to adapt to changing needs. EY surveyed 1,200 SMEs and discovered a funding gap; while the majority of SMEs still go to traditional banks or finance houses for funding, many are open to alternative financing such as Venture Capital, Equity Crowdfunding (ECF), and Peer-to-Peer (P2P).


Appraisal Model. In the SME space, there are retailers on one side, and corporations on the other. In the middle is a grey area. Banks are good at appraising retailers and corporates, but there is no suitable model yet for appraising SMEs that do not strictly belong to either category.


Track Record. Some SMEs and many start-ups do not have a track record. The risk of doing business is high – 80% of businesses fail. Banks charge via interest rates but does this adequately compensate for losses? The answer is usually no, and for this reason, banks are cautious and selective about lending to SMEs and start-ups. But this has to change.


Proper information. A great idea for a business is not enough. There need to be systems, processes, persistence, and know-how. This is necessary to limit the chances of failure. As SMEs are not so digitalised, information is not easy to obtain. The digitalisation of processes, including payroll and suppliers, as well as the front-desk experience, ie: payments and customer service, is lacking even though this is essential in terms of the information it can yield.



SUMMARISED POINTS BY PANELLIST



Mr Liew Nam Soon

MR LIEW NAM SOON


  1. Last year, EY approached 1,200 SMEs across ASEAN, and Malaysia is a big part of the industries. Notably, 73% of the SMEs said that they still go to traditional banks or finance houses to obtain financing, 65% still have challenges in getting funding, and 58% are very open to alternative financing.

  2. From our experience in dealing with SMEs, a lot of them say that funding is the first requirement. Singapore is a very government-backed economy. With all the funds coming in, people apply for those funds. Typically, the first question is “How much am I getting?” as opposed to “What do I do with that money?”


DATO SULAIMAN MOHD TAHIR

Dato Sulaiman Mohd Tahir
  1. The SME space consists of retailers and corporations, with many segments in between. The way that banks appraise does not fit the grey area.

  2. If you have a viable business, a good track record, and good numbers, you should be able to obtain financing, secured and unsecured. So it is not a problem for SMEs with a track record of 15 years and above because they have the financials, cash flows, and bank statements. The problem is with some other SMEs and start-ups that are new in the business, as they do not have a track record.

  3. The risk of doing business is high. We hear of many new business successes, but we don’t hear about the 80% of business that fail. The question is whether the amount that banks charge compensates for the losses. Because of this, we become selective in terms of lending to new entrepreneurs, but that has to change.

  4. Whether businesses fail has a lot to do with how well they can execute a business idea. You may have a fantastic idea, but it’s only as good as how well you execute it. Managing a business involves many different factors. You have to have systems, processes, persistence, and the know-how. You’ve got to match your patents, products, and customer experience. If you have a great idea but don’t have these, you won't be able to deliver.

  5. With small and start-up businesses, the issue is always about when to invest. Gestation can take some time and during that time, businesses can bleed funds before they can pay.

  6. AmBank is looking into the value-chain space. When we started, we had support from CGC. We need a lot more opportunities in this space, even to the extent of building the business itself.

  7. Recently, we hosted 3,000 SMEs to talk to them about best practices and the pitching of business ideas, among others, so that the ideas can be formulated to be more robust and execution can be facilitated. As a result of that, we have more depositors.

  8. It’s a question of how we monitor SMEs, but since they are not as digitalised as bigger companies, information is not easy to obtain.

Whether businesses succeed or fail has a lot to do with how well they can execute a business idea.

MS JULIANA JAN

Ms Juliana Jan
  1. Cradle funds companies and even groups of individuals who have ideas, who want to make it into the prototype stage. Although our funding is conditional, there is no equity and payback, except in the case of default.

  2. We help start-ups to digitalise and put in place all the necessary processes.

  3. We take equity after a certain hurdle level is passed through another division under Cradle. Since it is developmental equity, we do take a higher risk. The funding is up to RM3 million.

  4. Start-ups need to be innovative and tech-driven for us to consider funding. Our funding usually comes in before other capital is sought, from banks, P2P, ECF, and other venture capitalists.

  5. About 20% of the companies we invested in are at the next stage of their development. At this level, we explore VC and ECF opportunities, depending on their products, needs, market and brand awareness. We assist them to make all these considerations.

We help start-ups to digitalise and put in place all the necessary processes.


Ms Elain Lockman

MS ELAIN LOCKMAN

  1. We are looking at servicing the underserved. Looking at the data, there are many opportunities to serve the community. There is about RM21 million worth of under-served SMEs in the market place in Malaysia alone, not including the region. So the opportunity for us goes beyond the Malaysian market.

  2. In 2018, according to the SC, RM95 million worth of SMEs was already funded. For us, we look at different types of indices vis-a-vis banks and the unbankable businesses that we are able to serve.

  3. We are looking at creating more liquidity in the market place, not just from the crowd but also how to drive further the interest of leaders. The next step will be to look at the secondary market and the potential of working with Bursa Malaysia.

There is about RM21 million worth of under-served SMEs in the market place in Malaysia alone, not including the region.


Datuk Muhamad Umar Swift

DATUK MUHAMAD UMAR SWIFT

  1. While Bursa does not have enough liquidity, in some ways, it is synonymous with P2P.

  2. Technology companies do not necessarily need to have a track record to gain access to capital. However, the cost of access is too high.

  3. Moving forward, Bursa is working to facilitate the onboarding of customers for participants. To bring in investors, Bursa provides the platform. Currently, Bursa is working with the Ministry of Entrepreneur Development to bring in investors.

  4. We also have to be mindful of investor protection. It’s all about risk and risk appetite. At the next phase, we expect investors with very different risk profiles.

  5. The key area we’ll be focusing on immediately is the liberalisation of the LEAP Market. The fees paid for funds raised are probably inappropriate. We need to look at the mechanism to make it much more attractive so that people can access this market.

  6. The other aspect to look at is secondary transactions of assets.

  7. Investors want to see consistency. It’s also about addressing the governance aspects.

The key area we’ll be focusing on immediately is the liberalisation of the LEAP Market. The fees paid for funds raised are possibly inappropriate. We need to look at the mechanism to make it much more attractive so that people can access this market.


MS BIRUNTHA MOORUTHI

Ms Biruntha Mooruthi
  1. As the national technology commercialisation platform, we have funded up to RM100 million into 179 SMEs. Now, 59 companies or projects have been commercialised successfully.

  2. Although the funding and investment ecosystem is quite vibrant in Malaysia compared to that of our neighbouring countries, we lack the handholding or facilitation model.

  3. It’s not enough to provide for contingencies and leave the ventures off the hook and expect results. There are many roadblocks along the commercialisation process. We need to handhold these companies in terms of a proper facilitation model in commercialisation activities.

  4. Next is how to create the prevalent support system in terms of intellectual property rights, to protect their technologies, while still taking into account the market landscape, the business sustainability model, and certifications.

  5. PlaTCOM has a very unique entry and facilitation model under the SME Master Plan 2012–2020. We provide funding and handhold companies until the commercialisation stage from prototype development to characterisation, technical assistance, random certification, testing and validation, market intelligence, and incubation.

  6. We also open up market access. Most of these companies lease their development technologies and source funding from the government.

There are many roadblocks along the commercialisation process. We need to handhold these companies in terms of a proper facilitation model in commercialisation activities.


Mr Chin Wei Min

MR CHIN WEI MIN

  1. Capital markets have been fairly electronic and fairly high tech. In the past decade, we have had a B2C model, driven by the investment bankers and fund managers.

  2. We have seen a change towards the C2C model in the last five to ten years. Here, we see peer-to-peer, Uber, and Grab, among others.

  3. The SC is taking several initiatives to facilitate access to financing. We do a lot of investor participation, e.g. digital broker, robo-advisors, and investing.

  4. We are looking into extending our value chain in the capital markets in terms of fundraising and getting self-initiated. We extend that value chain to have more investor groups, e.g. spare change investment group. We introduced equity crowdfunding in 2015, peer-to-peer in 2016, and ICO last year. It’s a very C2C model, involving a lot of technology.

  5. In line with our access to the financing agenda, we are looking at adding new avenues for people to have access to financing, for example, the digital access space.

  6. When you don’t have cash flow, you sacrifice your equity to raise money. When you have cash flow, then ICO is a new avenue for pre-seed and early-stage financing.

  7. More than 80% of the investor base in our market place are 35 years old and below. Within the whole investor universe, the average age is 45 years, including people who have unit trust.

  8. The SC is adopting a registration model for VCs and PEs. We encourage both VC and PE to register with us as part of the broader agenda to encourage more financing. After registering with the SC, they can enjoy a 5-year tax benefit.

When you don’t have cash flow, you sacrifice your equity to raise money. When you have cash flow, then ICO is a new avenue for pre-seed and early-stage financing.

©2019 by Perdana Leadership Foundation.